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Important Information
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[John Hancock Logo]
March 12, 2007
Dear Shareholder:
I want to share with you the details of an important proxy that is enclosed and
requires your action. It is being sent to you because you own one or more of
the following funds:
o John Hancock Patriot Premium Dividend Fund I (NYSE: PDF)
o John Hancock Patriot Select Dividend Trust (NYSE: DIV)
o John Hancock Patriot Global Dividend Fund (NYSE: PGD)
o John Hancock Patriot Preferred Dividend Fund (NYSE: PPF)
Your Board of Trustees approved the reorganization of the four Patriot
closed-end funds listed above, on December 5, 2006. The funds will be
reorganized into a fifth closed-end fund: John Hancock Patriot Premium Dividend
Fund II (NYSE: PDT).
There are a couple of key benefits of the reorganization that I would like you
to know about. Shareholders will potentially benefit from Patriot Premium
Dividend Fund II's reduced annual operating expenses. In addition, certain
fixed administrative costs will be spread across the combined fund's larger
asset base, and this is designed to increase the Fund's overall efficiency.
The Patriot Premium Dividend Fund II has a history of providing solid,
long-term performance. It seeks high level of current income and modest growth
of capital by investing in a diversified portfolio of dividend paying stocks.
In addition, the Fund pursues the same or similar investment objective and has
similar investment policies as the four funds above. The same seasoned and
skilled management team that guides your current fund will guide the Patriot
Premium Dividend Fund II. Gregory Phelps has 26 years of experience and Mark
Maloney has worked in the industry for 31 years. Both have long and
accomplished tenures at John Hancock Funds.
Following the reorganizations, the substantially larger Patriot Premium
Dividend Fund II is designed to provide an additional benefit: enhanced market
liquidity. This may help reduce the extent of trading discounts that occur in a
smaller trading market.
What Happens Next?
It is expected that each fund's reorganization will qualify as a tax-free
reorganization for federal income tax purposes. Subject to certain limitations,
the funds will bear the reorganization costs. As part of the reorganization,
holders of common shares will be issued new common shares of Patriot Premium
Dividend Fund II. Please note that the total net asset value of these new
shares will equal the net asset value of your shares prior to the
reorganization, although the number of shares may be different. If you are a
holder of preferred shares of a fund, you will receive newly-issued preferred
shares of Patriot Premium Dividend Fund II, the aggregate liquidation
preference of which will equal the aggregate liquidation preference of the
preferred shares you held immediately prior to the reorganization. If
shareholders approve the reorganizations, and certain conditions are met, the
reorganizations are expected to occur in the Spring of 2007.
Your Vote Matters
You will be asked to approve these changes and your vote matters. No matter how
large or small your Fund holdings, your vote is extremely important. Please
review the enclosed proxy materials and submit your vote promptly to help us
avoid the need for additional mailings. For your convenience, you may vote one
of three ways: via telephone by calling 1-866-540-5760; via mail by returning
the enclosed voting card or via the Internet by visiting
http://www.proxyvoting.com/ (ticker symbol of the fund) and selecting the
shareholder entryway.
I am confident that the proposed change will help us better serve you and all
of the funds' shareholders. If you have questions, please call a John Hancock
service representative at (800) 843-0090 between 8:30 A.M. and 7:00 P.M.
Eastern Time. I thank you for your prompt vote on this matter.
Sincerely,
/s/ Keith F. Hartstein
Keith F. Hartstein
President and Chief Executive Officer
John Hancock Funds, 601 Congress Street, Boston, MA 02210
IMPORTANT NOTICE
TO SHAREHOLDERS OF
JOHN HANCOCK PATRIOT PREMIUM DIVIDEND FUND I
JOHN HANCOCK PATRIOT SELECT DIVIDEND TRUST
JOHN HANCOCK PATRIOT GLOBAL DIVIDEND FUND
JOHN HANCOCK PATRIOT PREFERRED DIVIDEND FUND AND
JOHN HANCOCK PATRIOT PREMIUM DIVIDEND FUND II
(each, a "Fund")
QUESTIONS & ANSWERS
Although we recommend that you read the complete Joint Proxy Statement/
Prospectus, we have provided for your convenience a brief overview of the
issues to be voted on.
APPROVAL OF REORGANIZATIONS OF THE ACQUIRED FUNDS AND ISSUANCE OF ADDITIONAL
COMMON AND PREFERRED SHARES
Q: WHAT IS BEING PROPOSED AT THE SHAREHOLDER MEETING?
A: Shareholders of John Hancock Patriot Premium Dividend Fund I, John Hancock
Patriot Select Dividend Trust, John Hancock Patriot Global Dividend Fund and
John Hancock Patriot Preferred Dividend Fund: You are being asked to vote on a
reorganization (each a "Reorganization" and collectively the "Reorganizations")
of your Fund (each such Fund being referred to herein as an "Acquired Fund" and
together as the "Acquired Funds") into John Hancock Patriot Premium Dividend
Fund II (the "Acquiring Fund"), a closed-end fund that pursues the same or a
substantially similar investment objective, has similar investment policies and
is managed by the same investment advisory personnel as the Acquired Funds.
Common Shareholders of John Hancock Patriot Premium Dividend Fund II: You are
being asked to vote on the issuance of additional common shares of the Acquiring
Fund in connection with the Reorganizations.
Holders of Preferred Shares of John Hancock Patriot Premium Dividend Fund II:
You are being asked to vote on the issuance of additional series of preferred
shares of the Acquiring Fund in connection with the Reorganizations.
Q: WHY IS EACH REORGANIZATION BEING RECOMMENDED?
A: The Board of Trustees of each Fund has determined that each Reorganization
will benefit common shareholders of the respective Acquired Fund and the
Acquiring Fund. The Acquired Funds and the Acquiring Fund are similar. Each Fund
(other than the John Hancock Patriot Preferred Dividend Fund) seeks to provide a
high level of current income, consistent with modest growth of capital for
holders of its common shares. John Hancock Patriot Preferred Dividend Fund seeks
to provide a high level of current income, consistent with preservation of
capital. Each Fund is managed by the same investment advisory personnel. After
the Reorganizations, it is anticipated that common shareholders of each Fund
will experience a reduced annual operating expense ratio, as certain fixed
administrative costs will be spread across the combined fund's larger asset
base. It is not anticipated that the Reorganizations will directly benefit
preferred shareholders of the Funds; however, the Reorganizations will not
adversely affect preferred shareholders and none of the expenses of the
Reorganizations will be borne by preferred shareholders of the Acquiring Fund.
The Joint Proxy Statement/Prospectus contains further details on the additional
reasons that the Reorganizations are being recommended by the Board of Trustees
of each Fund.
Q: HOW WILL THE REORGANIZATIONS AFFECT ME?
A: Assuming shareholders approve the Reorganizations of the Acquired Funds and
shareholders of the Acquiring Fund approve the issuance of additional common
shares and preferred shares of the Acquiring Fund, the assets and liabilities of
the Acquired Funds will be combined with those of the Acquiring Fund and the
Acquired Funds will dissolve.
Shareholders of the Acquired Funds: You will become a shareholder of the
Acquiring Fund. If you are a holder of common shares of an Acquired Fund, you
will receive newly-issued common shares of the Acquiring Fund, the aggregate net
asset value of which will equal the aggregate net asset value of the common
shares you held immediately prior to the Reorganization, less the costs of the
Reorganization (though you may receive cash for fractional shares). Of course,
the Acquiring Fund Common Shares received by common shareholders of an Acquired
Fund may trade
on the New York Stock Exchange ("NYSE") at a discount from net asset value,
which might be greater or less than the trading discount of common shares of an
Acquired Fund at the time of the relevant closing of the Reorganization. If you
are a holder of preferred shares of an Acquired Fund, you will receive
newly-issued preferred shares of the Acquiring Fund, the aggregate liquidation
preference of which will equal the aggregate liquidation preference of the
preferred shares you held immediately prior to the Reorganization. The auction
dates, rate period and dividend payment dates of the Dutch Auction Rate
Transferable Securities preferred shares of the Acquiring Fund ("Acquiring Fund
DARTS") received in the Reorganization will be the same as that of the preferred
shares held immediately prior to the Reorganization. The closings of the
Reorganizations are conditioned upon the Acquiring Fund DARTS receiving a rating
of "AA" from Standard & Poor's Rating Group and "aa2" from Moody's Investors
Service, Inc.
Shareholders of the Acquiring Fund: You will remain a shareholder of the
Acquiring Fund.
Q: WILL I HAVE TO PAY ANY SALES LOAD, COMMISSION OR OTHER SIMILAR FEE IN
CONNECTION WITH THE REORGANIZATIONS?
A: You will pay no sales loads or commissions in connection with the
Reorganizations. However, if the Reorganizations are completed, the costs
associated with the Reorganizations will be borne by common shareholders of the
Acquired Funds and the Acquiring Fund in proportion to and up to the amount of
their first year's projected annual expense savings as a result of the
Reorganizations. John Hancock Advisers, LLC, the adviser to each of the Funds,
will bear the balance of the Reorganization costs.
Q: WILL I HAVE TO PAY ANY FEDERAL TAXES AS A RESULT OF THE REORGANIZATIONS?
A: Each of the Reorganizations is intended to qualify as a "reorganization"
within the meaning of Section 368(a)(1) of the Internal Revenue Code of 1986, as
amended. If the Reorganizations so qualify, in general, shareholders of the
Acquired Funds will recognize no gain or loss upon the receipt solely of shares
of the Acquiring Fund in connection with the Reorganizations. Additionally, the
Acquired Funds will recognize no gain or loss as a result of the transfer of all
of their assets and liabilities in exchange for the shares of the Acquiring Fund
or as a result of their dissolution. Neither the Acquiring Fund nor its
shareholders will recognize any gain or loss in connection with the
Reorganizations.
Q: WHAT HAPPENS IF SHAREHOLDERS OF ONE ACQUIRED FUND DO NOT APPROVE ITS
REORGANIZATION BUT SHAREHOLDERS OF ANOTHER ACQUIRED FUND DO APPROVE ITS
REORGANIZATION?
A: An unfavorable vote on a proposed Reorganization by the shareholders of one
Acquired Fund will not affect the implementation of a Reorganization by another
Acquired Fund, if such Reorganization is approved by the shareholders of such
Acquired Fund and the issuance of additional common shares and preferred shares
is approved by the shareholders of the Acquiring Fund.
Q: WHY IS THE VOTE OF SHAREHOLDERS OF THE ACQUIRING FUND BEING SOLICITED?
A: Although the Acquiring Fund will continue its legal existence and operations
after the Reorganizations, the rules of the NYSE (on which the Acquiring Fund's
common shares are listed) require the Acquiring Fund's common shareholders to
approve the issuance of additional common shares in connection with the
Reorganizations. In addition, the By-Laws of the Acquiring Fund require the
affirmative vote of the holders of the outstanding preferred shares to issue any
additional series of preferred shares.
If the issuance of additional common shares or preferred shares of the Acquiring
Fund is not approved, none of the Reorganizations will occur.
Q: HOW DOES THE BOARD OF TRUSTEES OF MY FUND SUGGEST THAT I VOTE?
A: After careful consideration, the Board of Trustees of your Fund recommends
that you vote "FOR" the item proposed for your Fund.
ELECTION OF TRUSTEES
Q: WHY AM I BEING ASKED TO VOTE FOR BOARD MEMBERS?
A: The rules of the NYSE require all registered companies to hold an annual
shareholder meeting and elect board members. The shareholders of each Fund are
being asked to elect Trustees on the Board of Trustees to serve until their
respective successors are duly elected and qualified. Each Board of Trustees is
divided into three staggered term classes containing three Trustees. The term of
one class expires each year and no term continues for more than three years
after the applicable election.
GENERAL
Q: HOW DO I VOTE MY PROXY?
A: You may vote one of three ways: via telephone by calling the phone number on
your proxy card, via mail by returning the enclosed voting card or via the
Internet by visiting www.jhfunds.com and selecting the shareholder entryway.
Q: WHO DO I CONTACT FOR FURTHER INFORMATION?
A: You can contact your financial adviser for further information. You may also
contact a John Hancock Funds Customer Service Representative at (800) 843-0090
between 8:30 A.M. and 7:00 P.M. Eastern Time.
JOHN HANCOCK PATRIOT PREMIUM DIVIDEND FUND I
JOHN HANCOCK PATRIOT PREMIUM DIVIDEND FUND II
JOHN HANCOCK PATRIOT SELECT DIVIDEND TRUST
JOHN HANCOCK PATRIOT GLOBAL DIVIDEND FUND
JOHN HANCOCK PATRIOT PREFERRED DIVIDEND FUND
(each, a "Fund")
Notice of Annual Meeting of Shareholders
TO BE HELD APRIL 23, 2007
This is the formal agenda for your Fund's shareholder meeting. It tells you what
matters will be voted on and the time and place of the meeting in case you want
to attend in person.
To the shareholders of each Fund:
A joint shareholder meeting for your Fund(s) will be held at 601 Congress
Street, Boston, Massachusetts, on April 23, 2007, at 9:00 A.M., Eastern Time, to
consider the following:
1. For common shareholders of John Hancock Patriot Premium Dividend Fund II
(the "Acquiring Fund"), a proposal to approve the issuance of additional
common shares of the Acquiring Fund in connection with each Agreement and
Plan of Reorganization. The Board of Trustees of the Acquiring Fund
recommends that you vote FOR this proposal.
2. For holders of Dutch Auction Rate Transferable Securities preferred shares
("DARTS"), Series A and DARTS, Series B, of the Acquiring Fund, a proposal
to approve the issuance of additional series of DARTS in connection with
each Agreement and Plan of Reorganization. The Board of Trustees of the
Acquiring Fund recommends that you vote FOR this proposal.
3. For shareholders of John Hancock Patriot Premium Dividend Fund I ("Premium
Dividend Fund I"), a proposal to approve an Agreement and Plan of
Reorganization between Premium Dividend Fund I and the Acquiring Fund, the
termination of Premium Dividend Fund I's registration under the Investment
Company Act of 1940, as amended (the "1940 Act"), and the dissolution of
Premium Dividend Fund I under applicable state law. Under this Agreement,
the Acquiring Fund will acquire substantially all of the assets and assume
substantially all of the liabilities of Premium Dividend Fund I in exchange
for an equal aggregate value of newly-issued common shares of beneficial
interest of the Acquiring Fund, with no par value ("Acquiring Fund Common
Shares"), and newly-issued DARTS with no par value and a liquidation
preference of $100,000 per share ("Acquiring Fund DARTS"). Your Fund will
distribute Acquiring Fund Common Shares to common shareholders of your Fund
and Acquiring Fund DARTS to DARTS shareholders of your Fund and will then
terminate its registration under the 1940 Act and dissolve under applicable
state law. The aggregate net asset value of Acquiring Fund Common Shares
received will equal the aggregate net asset value of your common shares
held immediately prior to the Reorganization, less the costs of the
Reorganization (though common shareholders may receive cash for their
fractional shares). The aggregate liquidation preference of Acquiring Fund
DARTS received in the Reorganization will equal the aggregate liquidation
preference of DARTS of your Fund held immediately prior to the
Reorganization. The auction dates, rate period and dividend payment dates
of the Acquiring Fund DARTS received in the Reorganization will be the same
as that of the preferred shares held immediately prior to the
Reorganization. The Acquiring Fund DARTS are expected to receive a rating
of "AA" from Standard & Poor's Rating Group and "aa2" from Moody's
Investors Service, Inc. The Acquiring Fund will continue to operate after
the Reorganizations as a registered closed-end investment company with the
investment objective and policies described in this Joint Proxy
Statement/Prospectus. The Board of Trustees of Premium Dividend Fund I
recommends that you vote FOR this proposal.
4. For shareholders of John Hancock Patriot Select Dividend Trust ("Select
Dividend Trust"), a proposal to approve an Agreement and Plan of
Reorganization between Select Dividend Trust and the Acquiring Fund, the
termination of Select Dividend Trust's registration under the 1940 Act and
the dissolution of Select Dividend Trust under applicable state law. Under
this Agreement, the Acquiring Fund will acquire substantially all of the
assets and assume substantially all of the liabilities of Select Dividend
Trust in exchange for an equal aggregate value of newly-issued Acquiring
Fund Common Shares and newly-issued Acquiring Fund DARTS. Your Fund will
distribute Acquiring Fund Common Shares to common shareholders of your Fund
and Acquiring Fund DARTS to holders of Auction Market Preferred Shares
("AMPS") of your Fund and will then terminate its registration under the
1940 Act and dissolve under
applicable state law. The aggregate net asset value of Acquiring Fund
Common Shares received will equal the aggregate net asset value of your
common shares held immediately prior to the Reorganization, less the costs
of the Reorganization (though common shareholders may receive cash for
their fractional shares). The aggregate liquidation preference of Acquiring
Fund DARTS received in the Reorganization will equal the aggregate
liquidation preference of AMPS of your Fund held immediately prior the
Reorganization. The auction dates, rate period and dividend payment dates
of the Acquiring Fund DARTS received in the Reorganization will be the same
as that of the preferred shares held immediately prior to the
Reorganization. In addition, the ratings expected to be received by the
Acquiring Fund DARTS are the same as the ratings received by the DARTS of
your Fund. The Acquiring Fund will continue to operate after the
Reorganizations as a registered closed-end investment company with the
investment objective and policies described in this Joint Proxy
Statement/Prospectus. The Board of Trustees of Select Dividend Trust
recommends that you vote FOR this proposal.
5. For shareholders of John Hancock Patriot Global Dividend Fund ("Global
Dividend Fund"), a proposal to approve an Agreement and Plan of
Reorganization between Global Dividend Fund and the Acquiring Fund, the
termination of Global Dividend Fund's registration under the 1940 Act and
the dissolution of Global Dividend Fund under applicable state law. Under
this Agreement, the Acquiring Fund will acquire substantially all of the
assets and assume substantially all of the liabilities of Global Dividend
Fund in exchange for an equal aggregate value of newly-issued Acquiring
Fund Common Shares and newly-issued Acquiring Fund DARTS. Your Fund will
distribute Acquiring Fund Common Shares to common shareholders of your Fund
and Acquiring Fund DARTS to holders of DARTS of your Fund and will then
terminate its registration under the 1940 Act and dissolve under applicable
state law. The aggregate net asset value of Acquiring Fund Common Shares
received will equal the aggregate net asset value of your common shares
held immediately prior to the Reorganization, less the costs of the
Reorganization (though common shareholders may receive cash for their
fractional shares). The aggregate liquidation preference of Acquiring Fund
DARTS received in the Reorganization will equal the aggregate liquidation
preference of DARTS of your Fund held immediately prior to the
Reorganization. The auction dates, rate period and dividend payment dates
of the Acquiring Fund DARTS received in the Reorganization will be the same
as that of the preferred shares held immediately prior to the
Reorganization. In addition, the ratings expected to be received by the
Acquiring Fund DARTS are the same as the ratings received by the DARTS of
your Fund. The Acquiring Fund will continue to operate after the
Reorganizations as a registered closed-end investment company with the
investment objective and policies described in this Joint Proxy
Statement/Prospectus. The Board of Trustees of Global Dividend Fund
recommends that you vote FOR this proposal.
6. For shareholders of the John Hancock Patriot Preferred Dividend Fund
("Preferred Dividend Fund"), a proposal to approve an Agreement and Plan of
Reorganization between Preferred Dividend Fund and the Acquiring Fund, the
termination of Preferred Dividend Fund's registration under the 1940 Act
and the dissolution of Preferred Dividend Fund under applicable state law.
Under this Agreement, the Acquiring Fund will acquire substantially all of
the assets and assume substantially all of the liabilities of Preferred
Dividend Fund in exchange for an equal aggregate value of newly-issued
Acquiring Fund Common Shares and newly-issued Acquiring Fund DARTS. Your
Fund will distribute Acquiring Fund Common Shares to common shareholders of
your Fund and Acquiring Fund DARTS to holders of Auction Rate Preferred
Shares ("ARPS") of your Fund and will then terminate its registration under
the 1940 Act and dissolve under applicable state law. The aggregate net
asset value of Acquiring Fund Common Shares received will equal the
aggregate net asset value of your common shares held immediately prior to
the Reorganization, less the costs of the Reorganization (though common
shareholders may receive cash for their fractional shares). The aggregate
liquidation preference of Acquiring Fund DARTS received in the
Reorganization will equal the aggregate liquidation preference of ARPS of
your Fund held immediately prior to the Reorganization. The auction dates,
rate period and dividend payment dates of the Acquiring Fund DARTS received
in the Reorganization will be the same as that of the preferred shares held
immediately prior to the Reorganization. The Acquiring Fund DARTS are
expected to receive a rating of "AA" from Standard & Poor's Rating Group
and "aa2" from Moody's Investors Service, Inc. The Acquiring Fund will
continue to operate after the Reorganizations as a registered closed-end
investment company with the investment objective and policies described in
this Joint Proxy Statement/Prospectus. The Board of Trustees of Preferred
Dividend Fund recommends that you vote FOR this proposal.
7. For shareholders of each Fund to elect Trustees to serve until their
respective successors are duly elected and qualified. Common shareholders
of each Fund may elect two Trustees and preferred shareholders of
each Fund may elect one Trustee. The Board of Trustees of each Fund
recommends that you vote FOR this proposal.
8. Any other business that may properly come before the meeting.
Shareholders of record as of the close of business on February 12, 2007, are
entitled to vote at the meeting or any adjournment thereof.
Whether or not you expect to attend the meeting, please complete and return the
enclosed proxy card. If shareholders do not return their proxies in sufficient
numbers, it may result in additional shareholder solicitation.
By order of the Board of Trustees,
Thomas M. Kinzler
Secretary
March 12, 2007
PROXY STATEMENT of
John Hancock Patriot Premium Dividend Fund II
("Premium Dividend Fund II" or the "Acquiring Fund")
PROXY STATEMENT of
John Hancock Patriot Premium Dividend Fund I ("Premium Dividend Fund I")
John Hancock Patriot Select Dividend Trust ("Select Dividend Trust")
John Hancock Patriot Global Dividend Fund ("Global Dividend Fund")
John Hancock Patriot Preferred Dividend Fund ("Preferred Dividend Fund")
(each, an "Acquired Fund")
PROSPECTUS for
Common Shares,
Dutch Auction Rate Transferable Securities preferred shares ("DARTS"), Series C;
DARTS, Series D; DARTS, Series E; and DARTS, Series F of Premium Dividend Fund
II
* * *
ELECTION OF TRUSTEES of
the Acquiring Fund and the Acquired Funds (each, a "Fund")
The address of each of the Funds is 601 Congress Street, Boston, Massachusetts
02210 and the telephone number of each of the Funds is (800) 843-0090.
* * * * * *
This Joint Proxy Statement and Prospectus contains the information shareholders
should know before voting on the proposed reorganization (the "Reorganization").
Please read it carefully and retain it for future reference.
Shareholders Entitled to Vote
Proposal 1(a) Premium Dividend Fund II common shareholders
Proposal 1(b) Holders of DARTS, Series A and Series B of Premium Dividend Fund II
Proposal 2 Acquired Fund shareholders
Proposal 3 Shareholders of each Fund
How the Reorganization Will Work
o Each Acquired Fund will transfer all of its assets to the Acquiring
Fund. The Acquiring Fund will assume each Acquired Fund's liabilities.
o The Acquiring Fund will issue newly-issued common shares of beneficial
interest of the Acquiring Fund, with no par value ("Acquiring Fund
Common Shares"), in an amount equal to the value of each Acquired
Fund's net assets attributable to its common shares. These shares will
be distributed to each Acquired Fund's common shareholders in
proportion to their holdings immediately prior to the Reorganization,
less the costs of the Reorganization (though common shareholders may
receive cash for their fractional shares).
o The Acquiring Fund will issue an additional series of preferred shares
("Acquiring Fund DARTS, Series C") with no par value and a liquidation
preference of $100,000 per share to Premium Dividend Fund I. The
additional series of preferred shares is expected to be designated as
"Series C," but will be designated in the order that such series is
issued by the Acquiring Fund. The aggregate liquidation preference of
Acquiring Fund DARTS, Series C received in the Reorganization will
equal the aggregate liquidation preference of DARTS, Series A of
Premium Dividend Fund I held immediately prior to the Reorganization.
The Acquiring Fund DARTS, Series C will be distributed to Premium
Dividend Fund I's holders of DARTS, Series A in proportion to their
holdings immediately prior to the Reorganization. The auction dates,
rate period and dividend payment dates of the Acquiring Fund DARTS
received in the Reorganization will be the same as that of the
preferred shares held immediately prior to the Reorganization.
i
o The Acquiring Fund will issue an additional series of preferred shares
("Acquiring Fund DARTS, Series D") with no par value and a liquidation
preference of $100,000 per share to Select Dividend Trust. The
additional series of preferred shares is expected to be designated as
"Series D," but will be designated in the order that such series is
issued by the Acquiring Fund. The aggregate liquidation preference of
Acquiring Fund DARTS, Series D received in the Reorganization will
equal the aggregate liquidation preference of Auction Market Preferred
Shares Series A of Select Dividend Trust held immediately prior to the
Reorganization. The Acquiring Fund DARTS, Series D will be distributed
to holders of Auction Market Preferred Shares ("AMPS"), Series A of
Select Dividend Trust in proportion to their holdings immediately
prior to the Reorganization. The auction dates, rate period and
dividend payment dates of the Acquiring Fund DARTS received in the
Reorganization will be the same as that of the preferred shares held
immediately prior to the Reorganization.
o The Acquiring Fund will issue an additional series of preferred shares
("Acquiring Fund DARTS, Series E") with no par value and a liquidation
preference of $100,000 per share to Preferred Dividend Fund. The
additional series of preferred shares is expected to be designated as
"Series E," but will be designated in the order that such series is
issued by the Acquiring Fund. The aggregate liquidation preference of
Acquiring Fund DARTS, Series E received in the Reorganization will
equal the aggregate liquidation preference of Auction Rate Preferred
Shares of Preferred Dividend Fund held immediately prior to the
Reorganization. The Acquiring Fund DARTS, Series E will be distributed
to holders of Auction Rate Preferred Shares ("ARPS") of Preferred
Dividend Fund in proportion to their holdings immediately prior to the
Reorganization. The auction dates, rate period and dividend payment
dates of the Acquiring Fund DARTS received in the Reorganization will
be the same as that of the preferred shares held immediately prior to
the Reorganization.
o The Acquiring Fund will issue an additional series of preferred shares
("Acquiring Fund DARTS, Series F") with no par value and a liquidation
preference of $100,000 per share to Global Dividend Fund. The
additional series of preferred shares is expected to be designated as
"Series F," but will be designated in the order that such series is
issued by the Acquiring Fund. The aggregate liquidation preference of
Acquiring Fund DARTS, Series F received in the Reorganization will
equal the aggregate liquidation preference of DARTS of Global Dividend
Fund held immediately prior to the Reorganization. The Acquiring Fund
DARTS, Series F will be distributed to holders of DARTS of Global
Dividend Fund in proportion to their holdings immediately prior to the
Reorganization. The auction dates, rate period and dividend payment
dates of the Acquiring Fund DARTS received in the Reorganization will
be the same as that of the preferred shares held immediately prior to
the Reorganization.
o The Acquiring Fund's Declaration of Trust and By-Laws will be amended
upon approval of the issuance of additional series of preferred shares
to reflect such series that are created.
o Each Acquired Fund will be terminated and Acquired Fund shareholders
will become shareholders of the Acquiring Fund.
o The Reorganization of each Fund is conditioned upon the approval of
its shareholders. However, the Reorganization of a specific Acquired
Fund will proceed even if one or more of the other Reorganizations are
not approved provided that such Reorganization is approved by the
Acquired Fund's shareholders and the issuance of additional common
shares and preferred shares is approved by the shareholders of the
Acquiring Fund. In the event the Acquiring Fund common shareholders or
preferred shareholders do not approve the issuance of additional
common shares or additional series of DARTS of the Acquiring Fund,
then all of the Funds will continue to exist and the respective Board
of Trustees of each Fund (each a "Board") will consider what
additional action, if any, to take.
o Each Reorganization is intended to result in no income, gain or loss
for federal income tax purposes to the Acquiring Fund, the Acquired
Fund or the shareholders of the Acquired Fund.
Rationale for the Reorganization
The Board of your Fund believes that reorganizing your Fund into Premium
Dividend Fund II, a fund with similar investment policies, and having a combined
portfolio with greater assets offer you potential benefits. These potential
benefits and considerations include:
o Following the Reorganizations, the substantially larger trading market in
common shares of the Acquiring Fund, as compared to that of each Acquired
Fund prior to the Reorganizations, may provide for enhanced market
liquidity which may reduce the extent of trading discounts that would be
experienced in a substantially smaller trading market under otherwise
similar circumstances. Trading discounts can result from many different
factors
ii
and there is no assurance that a larger trading market for common shares
will have the effect of reducing trading discounts.
o The Reorganization would permit each Acquired Fund's shareholders to pursue
similar investment goals in a larger fund. Each Acquired Fund (other than
Preferred Dividend Fund) focuses on dividend-paying preferred and common
stocks and, in the case of Preferred Dividend Fund, preferred stocks. The
greater asset size of the combined fund may allow it, relative to each
Acquired Fund, to obtain better net prices on securities trades and achieve
greater diversification of portfolio holdings.
o Select Dividend Trust, Global Dividend Fund and Preferred Dividend Fund
will benefit from a reduction in their administration fee (i.e., from 0.15%
to 0.10%). Premium Dividend Fund I's administration fee will remain the
same at 0.10%. As a result of the Reorganization, shareholders of the
Acquired Funds will experience a reduction in the total amount of fees, as
a percentage of average net assets, that they indirectly pay. Shareholders
of each Acquired Fund other than Select Dividend Trust will also experience
lower combined total expenses and dividend payments on preferred shares as
a result of the Reorganizations. Shareholders of Select Dividend Trust will
experience somewhat higher combined total expenses and dividend payments on
preferred shares as a result of a higher dividend rate on preferred shares
borne by common shareholders. This higher historical dividend rate reflects
the more recent dividend reset by the Acquiring Fund, which reflects recent
increases in short-term interest rates.
o The annual effective rate of the combined fund's management fee is expected
to be slightly lower than the management fee rate of Select Dividend Trust,
Global Dividend Fund and Preferred Dividend Fund and, for Premium Dividend
Fund I, the management fee rate is expected to slightly increase.
o The Acquiring Fund has performed better than the other Funds for one-,
three- and ten-year periods. While past performance cannot predict future
results, the Trustees believe there are no reasons why the Acquiring Fund
will not continue to generate strong returns.
o A combined fund offers economies of scale that may lead to lower per share
expenses. Each Fund incurs NYSE listing fees, printing fees, costs for
legal, auditing, custodial and administrative services, and miscellaneous
fees. Many of these expenses are duplicative and there may be an
opportunity to reduce each Acquired Fund's expense ratio over time because
of the economies of scale if the Funds are combined.
o On the closing date of the Reorganization with respect to each Acquired
Fund, the Reorganization will result in the exchange of shares between the
Acquiring Fund and each Acquired Fund which will be based on their relative
NAVs (i.e., the Acquired Funds will get their NAV's worth of the Acquiring
Fund's common shares). However, the Acquiring Fund Common Shares received
in the Reorganizations may trade at a market discount from NAV following
the Reorganizations so that an Acquired Fund common shareholder is not able
to sell these shares for the NAV received.
Therefore, the Board of your Fund recommends that you vote FOR the
Reorganization of your Fund into Premium Dividend Fund II. For further
information, please see the individual description of the proposal affecting
your Fund contained in the Joint Proxy Statement/Prospectus.
Who Bears the Expenses Associated with the Reorganizations
If the Reorganizations are completed, the costs associated with the
Reorganizations will be borne by common shareholders of the Acquired Funds and
the Acquiring Fund in proportion to and up to the amount of their first year's
projected annual expense savings as a result of the Reorganizations. John
Hancock Advisers, LLC, the adviser to each of the Funds (the "Adviser"), will
bear the balance of the direct costs of the Reorganizations. In the event a
Reorganization is not completed, the costs associated with such Reorganization
will be borne by the Acquiring Fund and the remaining Acquired Funds whose
shareholders have approved their respective Reorganizations.
Who is Eligible to Vote
Shareholders of record on February 12, 2007, are entitled to attend and vote at
the meeting or any adjourned meeting. Each share is entitled to one vote. Shares
represented by properly executed proxies, unless revoked before or at the
meeting, will be voted according to shareholders' instructions. If you sign a
proxy but do not fill in a vote, your shares will be voted for all proposals
including those relating to the Reorganization. If any other business comes
before the meeting, your shares will be voted at the discretion of the persons
named as proxies.
iii
Shares of the Acquiring Fund are not deposits or obligations of, or guaranteed
or endorsed by, any bank or other depository institution. These shares are not
federally insured by the Federal Deposit Insurance Corporation, the Federal
Reserve Board or any other government agency.
Shares of the Acquiring Fund have not been approved or disapproved by the
Securities and Exchange Commission (the "SEC"). The SEC has not passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
The common shares of the Acquiring Fund are listed on the New York Stock
Exchange ("NYSE") under the ticker symbol "PDT" and will continue to be so
listed subsequent to the Reorganizations. The common shares of Premium Dividend
Fund I, Select Dividend Trust, Global Dividend Fund and Preferred Dividend Fund
are listed on the NYSE under the ticker symbols "PDF," "DIV," "PGD" and "PPF,"
respectively. This Reorganization is conditioned upon the Acquiring Fund DARTS
receiving a rating of "AA" from Standard & Poor's Rating Group ("S&P") and "aa2"
from Moody's Investors Service, Inc. ("Moody's") (each, a "Rating Agency").
Reports, proxy statements and other information concerning the Funds may be
inspected at the offices of the NYSE, 20 Broad Street, New York, New York 10005.
Where to Get More Information
Premium Dividend Fund II's annual report to shareholders In the same envelope as this Joint Proxy Statement/Prospectus.
dated October 31, 2006 This report is incorporated by reference into (and therefore
legally part of) this Joint Proxy Statement and Prospectus.
Premium Dividend Fund I's annual report to shareholders
dated September 30, 2006
Select Dividend Trust's annual report to shareholders dated
June 30, 2006 and semi-annual report to shareholders dated
December 31, 2006 On file with the SEC or available at no charge by calling our
toll free number: 1-800-843-0090. These documents are incorporated
Global Dividend Fund's annual report to shareholders dated by reference into (and therefore legally part of) this Joint
July 31, 2006 Proxy Statement/Prospectus.
Preferred Dividend Fund's annual report to shareholders
dated May 31, 2006 and semi-annual report to shareholders
dated November 30, 2006
A Statement of Additional Information dated March 12,
2007, which relates to this Joint Proxy Statement/Prospectus
and the Reorganizations, and contains additional information
about the Acquired Funds and the Acquiring Fund
To ask questions about this Joint Proxy Call our toll-free telephone number: 1-800-843-0090.
Statement/Prospectus
The date of this Joint Proxy Statement/Prospectus is March 12, 2007.
iv
TABLE OF CONTENTS
Page
-----
INTRODUCTION ............................................................................. 1
SUMMARY .................................................................................. 1
RISK FACTORS AND SPECIAL CONSIDERATIONS .................................................. 5
PROPOSAL 1(a): ISSUANCE OF ADDITIONAL ACQUIRING FUND COMMON SHARES ....................... 11
PROPOSAL 1(b): ISSUANCE OF ADDITIONAL ACQUIRING FUND DARTS ............................... 11
PROPOSAL 2: REORGANIZATIONS OF THE ACQUIRED FUNDS ........................................ 12
Comparison of the Funds: Investment Objectives and Policies ............................ 14
Comparison of Premium Dividend Fund I to Premium Dividend Fund II ................... 14
Comparison of Select Dividend Trust to Premium Dividend Fund II ..................... 18
Comparison of Global Dividend Fund to Premium Dividend Fund II ...................... 22
Comparison of Preferred Dividend Fund to Premium Dividend Fund II ................... 31
Fee, Expense and Distributions on Preferred Shares Table for Common Shareholders
of the Funds ........ 38
Additional Information About Common Shares of the Funds ................................ 52
General ............................................................................. 52
Outstanding Securities .............................................................. 52
Purchase and Sale ................................................................... 53
Common Share Price Data ............................................................. 53
Share Repurchases ................................................................... 55
Dividends and Distributions ......................................................... 57
Dividend Reinvestment Plan .......................................................... 58
Additional Information About Preferred Shares of the Funds ............................. 59
General ............................................................................. 59
Series .............................................................................. 59
Outstanding Securities .............................................................. 60
Purchase and Sale ................................................................... 61
Broker-Dealers ...................................................................... 61
Dividends and Distributions ......................................................... 61
Dividend Rates ...................................................................... 64
Ratings ............................................................................. 64
Redemptions ......................................................................... 65
Liquidation Rights .................................................................. 66
Additional Information .............................................................. 66
U.S. Federal Income Tax Matters ........................................................ 66
Governing Law .......................................................................... 71
Certain Provisions of the Declarations of Trust ........................................ 72
Conversion to Open-End Funds ........................................................... 73
Voting Rights .......................................................................... 73
Past Performance of Each Fund .......................................................... 75
Financial Highlights ................................................................... 76
Proposal to Approve the Agreement and Plan of Reorganization ........................... 81
Description of the Reorganizations .................................................. 81
Reasons for the Proposed Reorganizations ............................................ 82
Comparative Fees and Expense Ratios ................................................. 83
Comparative Performance ............................................................. 83
Board's Evaluation and Recommendation .................................................. 83
Further Information on the Reorganizations ............................................. 83
Tax Status of the Reorganizations ................................................... 83
Additional Terms of the Agreement and Plan of Reorganization ........................ 84
Payment of Undistributed Income in Advance of Reorganizations ....................... 85
Capitalization ......................................................................... 86
Management of the Funds ................................................................ 88
Trustees and Officers ............................................................... 88
The Adviser, Subadviser and Administrator ........................................... 88
Compensation and Expenses ........................................................... 89
v
Duration and Termination; Non-Exclusive Services .................................... 89
Portfolio Management ................................................................ 89
Portfolio Transactions with Affiliates .............................................. 90
Other Service Providers ............................................................. 90
PROPOSAL 3: ELECTION OF TRUSTEES ......................................................... 90
Information Concerning Trustees ........................................................ 92
Executive Officers ..................................................................... 94
Trustee Ownership ...................................................................... 96
Compliance with Section 16(a) Reporting Requirements ................................... 97
Remuneration of Trustees and Officers .................................................. 97
Material Relationships of the Independent Trustees ..................................... 98
Independent Public Accountants ......................................................... 98
Additional Information ................................................................. 99
Legal Proceedings ...................................................................... 99
VOTING INFORMATION AND REQUIRED VOTE ..................................................... 100
INFORMATION CONCERNING THE MEETING ....................................................... 101
Expenses and Methods of Solicitation ................................................... 101
Revoking Proxies ....................................................................... 101
Outstanding Shares and Quorum .......................................................... 101
Other Business ......................................................................... 102
Adjournments ........................................................................... 102
Telephone Voting ....................................................................... 102
Internet Voting ........................................................................ 102
Shareholders' Proposals ................................................................ 103
OWNERSHIP OF SHARES OF THE FUNDS ......................................................... 103
EXPERTS .................................................................................. 104
AVAILABLE INFORMATION .................................................................... 104
EXHIBIT A -- Form of Agreement and Plan of Reorganization ................................ A-1
vi
INTRODUCTION
This Joint Proxy Statement/Prospectus is being used by each Fund's Board to
solicit proxies to be voted at the annual meeting of each Acquired Fund's
shareholders and the Acquiring Fund's shareholders. This meeting will be held at
601 Congress Street, Boston, Massachusetts, on April 23, 2007, at 9:00 A.M.,
Eastern Time. At the meeting, the Acquired Funds will consider proposals to
approve Agreements and Plans of Reorganization providing for the Reorganization
of the Acquired Funds into the Acquiring Fund and Acquiring Fund shareholders
will consider proposals to approve the issuance of additional common shares and
DARTS of the Acquiring Fund. In addition, all shareholders will consider a
proposal to elect Trustees to each Fund's Board of Trustees. This Joint Proxy
Statement/Prospectus is being mailed to your Fund's shareholders on or about
March 12, 2007.
For each proposal, this Joint Proxy Statement/Prospectus includes information
that is specific to that proposal. A comparison summary is provided with respect
to each proposal related to the Reorganization. You should read carefully the
sections of the proxy statement related specifically to your Fund(s), the
information relevant to all proposals, as well as Exhibit A and the enclosed
materials, because they contain details that are not in the summary.
Who is Eligible to Vote?
Fund shareholders of record on February 12, 2007, are entitled to attend and
vote at the meeting or any adjourned meeting. Each share is entitled to one
vote. Shares represented by properly executed proxies, unless revoked before or
at the meeting, will be voted according to shareholders' instructions. If you
sign a proxy but do not fill in a vote, your shares will be voted for all
proposals including those relating to the Reorganization. If any other business
comes before the meeting, your shares will be voted at the discretion of the
persons named as proxies.
SUMMARY
The following is a summary of certain information contained elsewhere in this
Joint Proxy Statement/Prospectus and is qualified in its entirety by reference
to the more complete information contained in this Joint Proxy Statement/
Prospectus and in the Statement of Additional Information. Shareholders should
read the entire Joint Proxy Statement/Prospectus carefully.
PROPOSAL 1(a): ISSUANCE OF ADDITIONAL ACQUIRING FUND COMMON SHARES
In connection with each proposed Reorganization described under "Proposal 2:
Reorganization of the Acquired Funds," the Acquiring Fund will issue additional
Acquiring Fund Common Shares and list such shares on the NYSE. The Acquiring
Fund will acquire substantially all of the assets and assume substantially all
of the liabilities of each Acquired Fund in exchange for newly-issued Acquiring
Fund Common Shares and newly-issued Acquiring Fund DARTS. The Reorganizations
will result in no reduction of the net asset value ("NAV") of the Acquiring Fund
Common Shares. No gain or loss will be recognized by the Acquiring Fund or its
shareholders in connection with the Reorganization. The Acquiring Fund's Board,
based upon its evaluation of all relevant information, anticipates that each
Reorganization will benefit holders of Acquiring Fund Common Shares. In
particular, the Acquiring Fund's Board believes, based on data presented by the
Adviser, that the Acquiring Fund will experience a reduced annual operating
expense ratio as a result of the Reorganizations.
The Acquiring Fund's Board requests that common shareholders of the Acquiring
Fund approve the issuance of additional Acquiring Fund Common Shares at the
annual meeting to be held on April 23, 2007. Shareholder approval of the
issuance of additional Acquiring Fund Common Shares requires the affirmative
vote of a majority of the votes cast on the proposal, provided that total votes
cast on the proposal represent over 50% in interest of all securities entitled
to vote on the matter. Subject to the requisite approval of the shareholders of
each Fund with regard to the Reorganizations, it is expected that the closing
date of each Acquired Fund will be on the relevant dividend payment date
immediately following the shareholders' meeting. The closing date of each
proposed Reorganization will differ and the additional Acquiring Fund Common
Shares will be issued on different closing dates.
The Acquiring Fund's Board recommends that you vote FOR the issuance of
additional Acquiring Fund Common Shares in connection with the Reorganizations.
1
PROPOSAL 1(b): ISSUANCE OF ADDITIONAL ACQUIRING FUND DARTS
In connection with each proposed Reorganization described under "Proposal 2:
Reorganization of the Acquired Funds," the Acquiring Fund will issue additional
series of Acquiring Fund DARTS. The Acquiring Fund will acquire substantially
all of the assets and assume substantially all of the liabilities of each
Acquired Fund in exchange for newly-issued Acquiring Fund Common Shares and
newly-issued Acquiring Fund DARTS. It is not anticipated that the
Reorganizations will directly benefit holders of DARTS of the Acquiring Fund;
however, the Reorganizations will not adversely affect preferred shareholders
and none of the expenses of the Reorganizations will be borne by preferred
shareholders of the Acquiring Fund. In addition, no gain or loss will be
recognized by the Acquiring Fund or its shareholders in connection with the
Reorganization. The Acquiring Fund DARTS will rank pari passu with the
liquidation preference of the preferred shares of the Acquired Funds.
The Acquiring Fund's Board requests that holders of DARTS, Series A and DARTS,
Series B of the Acquiring Fund approve the issuance of additional series of
Acquiring Fund DARTS at the annual meeting to be held on April 23, 2007.
Shareholder approval of the issuance of additional series of Acquiring Fund
DARTS requires the affirmative vote of at least a majority of the shares of the
DARTS then outstanding, voting separately as a class. Subject to the requisite
approval of the shareholders of each Fund with regard to the Reorganizations, it
is expected that the closing date of each Acquired Fund will be on the relevant
dividend payment date immediately following the shareholders' meeting. The
closing date of each proposed Reorganization will differ, and the additional
Acquiring Fund DARTS will be issued on different closing dates. Upon approval of
the issuance of additional series of preferred shares, the Acquiring Fund's
Declaration of Trust and By-Laws will be amended to reflect such series that are
created.
The Acquiring Fund's Board recommends that you vote FOR the issuance of
additional Acquiring Fund DARTS in connection with the Reorganizations.
PROPOSAL 2: REORGANIZATIONS OF THE ACQUIRED FUNDS
The Proposed Reorganizations. The Board of each Fund, including the Trustees who
are not "interested persons" of each Fund (as defined in the Investment Company
Act of 1940, as amended (the "1940 Act"), has unanimously approved each
Agreement and Plan of Reorganization. If: (i) the shareholders of an Acquired
Fund approve their Agreement and Plan of Reorganization; (ii) the common
shareholders of the Acquiring Fund approve the issuance of Acquiring Fund Common
Shares (see Proposal 1(a): Issuance of Additional Acquiring Fund Common Shares);
and (iii) the holders of DARTS, Series A and DARTS, Series B approve the
issuance of Acquiring Fund DARTS (see Proposal 1(b): Issuance of Additional
Acquiring Fund DARTS), then Acquiring Fund Common Shares and Acquiring Fund
DARTS will be issued to the common shareholders and preferred shareholders of
each Acquired Fund, respectively, in exchange for substantially all of the
assets of the Acquired Fund and the assumption of substantially all of the
liabilities of the Acquired Fund. Each Acquired Fund will then terminate its
registration under the 1940 Act and dissolve under applicable state law. The
aggregate NAV of Acquiring Fund Common Shares received in the Reorganization
will equal the aggregate NAV of Acquired Fund common held immediately prior to
the Reorganization, less the costs of the Reorganization (though common
shareholders may receive cash for their fractional shares). The aggregate
liquidation preference of Acquiring Fund DARTS received in the Reorganization
will equal the aggregate liquidation preference of Acquired Fund preferred
shares held immediately prior to the Reorganization. The auction dates, rate
period and dividend payment dates of the Acquiring Fund DARTS received in the
Reorganization will be the same as that of the preferred shares held immediately
prior to the Reorganization. The ratings expected to be received by the
Acquiring Fund DARTS are "AA" from S&P and "aa2" from Moody's.
Summary of Fund Comparisons
Preferred Shares Designations. The preferred shares of the Acquiring Fund,
Premium Dividend Fund I and Global Dividend Fund are designated as "Dutch
Auction Rate Transferable Securities" ("DARTS"); the preferred shares of Select
Dividend Trust are designated as "Auction Market Preferred Shares" ("AMPS"); and
the preferred shares of Preferred Dividend Fund are designated as "Auction Rate
Preferred Shares" ("ARPS"). Although the preferred shares of Select Dividend
Trust and Preferred Dividend Fund differ in name from those of the other Funds,
there are no material differences in the securities offered by these Funds. Only
the Acquiring Fund offers two share classes, Series A and Series B. Although
each preferred share class is treated individually for the purpose of assessing
shareholder rights and dividends, they enjoy the same shareholder rights and
dividend related provisions.
Investment Objectives and Policies. Each Fund is registered as a diversified,
closed-end management investment company under the 1940 Act. The investment
objective of each Fund is similar. The Acquiring Fund, Premium Dividend Fund I,
Select Dividend Trust and Global Dividend Fund each seeks to provide common
shareholders with a high level of current income which, in the case of Premium
Dividend Fund I, qualifies for the dividends received deduction then allowed to
corporations under Section 243(a)(1) of the Internal Revenue Code of 1986, as
amended
2
(the "Code") (the "Dividends Received Deduction"), consistent with modest growth
of capital. Preferred Dividend Fund seeks to provide common shareholders with a
high level of current income, consistent with preservation of capital. Each Fund
invests at least 80% of its assets in dividend-paying securities
(dividend-paying preferred stocks, in the case of Preferred Dividend Fund) and
emphasizes investments in securities of companies in the utilities industries,
although the minimum percentage of assets dedicated to these types of
investments may differ. The quality of ratings of each Fund's portfolio
investments stipulates that preferred stocks and debt obligations in which the
Fund will invest will be investment grade at least "BBB" by S&P or "Baa" by
Moody's at the time of investment or will be preferred stocks of issuers of
investment grade senior debt, some of which may have speculative
characteristics, or, if not rated, will be of comparable quality as determined
by the Adviser. Each Fund will invest in common stocks of issuers whose senior
debt is rated investment grade or, in the case of issuers that have no rated
senior debt outstanding, whose senior debt is considered by the Adviser to be of
comparable quality.
Although the investment objective of each Fund is similar, their investment
policies and risks are different, particularly with respect to the Global
Dividend Fund and Preferred Dividend Fund. Under normal market conditions,
Global Dividend Fund invests at least 65% of its total assets in securities of
issuers located in three or more countries, including the United States, with no
more than 25% of the Fund's total assets in securities of issuers located in any
single country other than the United States. Although the Acquiring Fund is not
restricted from investing in foreign securities, the Acquiring Fund will likely
not concentrate its investments in foreign issuers. In addition, whereas the
Acquiring Fund invests at least 80% of its net assets in dividend paying
preferred and common stocks, Preferred Dividend Fund invests at least 80% of its
assets in dividend paying preferred securities. Finally, whereas the Acquiring
Fund, Premium Dividend Fund I and Select Dividend Fund normally invest more than
65% of their total assets in securities of companies in the utilities industry,
Global Dividend Fund invests at least 25% of its total assets in such securities
and also invests a portion of its assets (although less than 25% of its total
assets) in securities issued by companies in the banking industry. Preferred
Dividend Fund emphasizes investments in preferred stocks issued by corporations
in the financial services and utilities sectors, as well as other regulated
industries, but does not invest more than 25% of the value of its total assets
in the securities of issuers primarily engaged in these or any other industries.
Each of the Acquiring Fund, Premium Dividend Fund I and Select Dividend Trust
operates so that dividends paid qualify in their entirety for the Dividends
Received Deduction and each Fund does not intend to realize any net capital
gains, but there can be no assurance that this result will be achieved.
Preferred Dividend Fund is managed with a view to maximizing the portion of the
Fund's distributions to holders of the preferred shares that, under normal
market conditions, qualify for the Dividends Received Deduction. Under normal
market conditions, Global Dividend Fund anticipates that at least 50% of the
dividends paid to holders of the preferred shares as a class qualify for the
Dividends Received Deduction. The Funds are managed by the same investment
advisory personnel.
Purchase and Sale. Purchase and sale procedures for the common shares and
preferred shares of each Fund are identical. Investors typically purchase and
sell common shares of the Funds through a registered broker-dealer on the NYSE,
or may purchase or sell common shares through privately negotiated transactions
with existing shareholders. Each Fund's series of preferred shares are purchased
and sold at separate auctions conducted on a regular basis (unless a Fund
elects, subject to certain conditions, to declare a special dividend period).
Unless otherwise permitted by the Funds, existing and potential holders of
preferred shares only may participate in auctions through their broker-dealers.
Broker-dealers may maintain a secondary trading market in the preferred shares
outside of auctions; however, historically they have not done so and are not
expected to do so in the future. The broker-dealers have no obligation to make a
secondary market in the preferred shares outside of the auction and there can be
no assurance that a secondary market for the preferred shares will develop or,
if it does develop, that it will provide holders with liquidity of investment.
Redemption Procedures. Redemption procedures for the Acquired Funds and
Acquiring Fund are also similar. The common shares of each Fund have no
redemption rights. However, the Board of each Fund may consider open market
share repurchases of, or tendering for, common shares to seek to reduce or
eliminate any discount in the market place of the common shares from the NAV
thereof. Each Fund's ability to repurchase, or tender for, its common shares may
be limited by the 1940 Act asset coverage requirements and by any Rating Agency
rating the preferred shares.
Provided certain conditions are met, the preferred shares are redeemable at the
option of each Fund, as a whole or in part, on any dividend payment date with
respect to Global Dividend Fund, Select Dividend Trust and Preferred Dividend
Fund, and on the second business day preceding any dividend payment date with
respect to the Acquiring Fund and Premium Dividend Fund I, at a price equal to
$100,000 per share plus, in each case, accumulated and unpaid dividends
(including additional dividends, if any) to the redemption date. The ARPS of
Preferred Dividend Fund may not be optionally redeemed in part if, after such
partial redemption, fewer than 30 ARPS remain
3
outstanding. The DARTS of Global Dividend Fund may not be optionally redeemed in
part if, after such partial redemption fewer than 30 DARTS remain outstanding.
No other Funds have any provision for the minimum number of preferred shares
outstanding to allow the Fund to optionally redeem its shares. Each Fund (other
than Preferred Dividend Fund) provides that optional redemptions may occur with
not fewer than 30 nor more than 45 days' notice. Preferred Dividend Fund
provides that optional redemptions may occur with no fewer than 25 nor more than
30 days' notice.
The preferred shares are subject to mandatory redemption if either the 1940 Act
asset coverage requirements or the asset coverage requirements that may be
imposed by a Rating Agency in connection with any rating of the preferred shares
are not met as of an applicable cure date, in part to the extent necessary to
restore such asset coverage or, if such asset coverage cannot be so restored, as
a whole. In each case, the redemption price will be $100,000 per share plus
accumulated and unpaid dividends (including additional dividends, if any) to the
redemption date.
Dividends Received Deduction. Under current law, dividends paid by a Fund will
be taxable as ordinary income and will be eligible for the Dividends Received
Deduction to the extent that they are designated by a Fund as qualifying for
such deduction. Each of Premium Dividend Fund I, Premium Dividend Fund II and
Select Dividend Trust intends to operate so that dividends paid will qualify in
their entirety for the Dividends Received Deduction and each Fund does not
intend to realize any net capital gains, but there can be no assurance that this
result will be achieved. Preferred Dividend Fund will be managed with a view to
maximizing the portion of the Fund's distributions to holders of the preferred
shares that, under normal market conditions, will qualify for the Dividends
Received Deduction. Under normal market conditions, Global Dividend Fund
anticipates that at least 50% of the dividends paid to holders of the preferred
shares as a class will qualify for the Dividends Received Deduction.
Under Rev. Rul. 89-81, 1989-1 C.B. 226, distributions on the preferred shares
and the common shares are required to consist proportionately of each type of
income with particular tax characteristics earned by a Fund. Thus, if for a
given taxable year, a particular percentage of the total net income of a Fund
qualifies for the Dividends Received Deduction, then a uniform percentage of the
distributions on the preferred shares and on the common shares of each Fund
other than Premium Dividends Fund I will qualify for such deductions. As a Fund
established prior to the issuance of Rev. Rul 89-81, Premium Dividends Fund I is
not subject to the proportionality requirement of the ruling. Instead, in the
case of Premium Dividend Fund I, if the dividends received by the Fund that
qualify for the Dividends Received Deduction ("qualified dividends") are less
than its net income, exclusive of net capital gains, then the Fund will allocate
the qualified dividends first to the preferred shares and then to the common
shares, provided that Premium Dividend Fund I receives an opinion of counsel
that such a preferential allocation is permitted under applicable law. If such
an opinion is not received by Premium Dividend Fund I, then the Fund will
allocate the qualifying dividends ratably among the common shares and the
preferred shares, most likely ratably in proportion to the dividends paid on
shares of each. In the event that qualified dividends are allocated ratably
between the preferred shares and the common shares of a Fund, some portion of
the dividends payable on the preferred shares might not qualify for the
Dividends Received Deduction. In such event, the Fund would pay additional
dividends to maintain the Net After-Tax Return of holders of preferred shares.
Payment of any such additional dividends on the preferred shares will reduce the
amount available for payment of dividends on the common shares.
Background and Reasons for the Proposed Reorganizations. The Reorganizations
seek to combine five similar Funds to achieve certain economies of scale and
other operational efficiencies. The proposed Reorganizations will combine the
assets of these similar Funds by reorganizing the Acquired Funds into the
Acquiring Fund. The Board of each Acquired Fund, based upon its evaluation of
all relevant information, anticipates that the common shareholders of each
Acquired Fund will benefit from their Fund's respective Reorganization. The
Board of the Acquiring Fund, based upon its evaluation of all relevant
information, anticipates that each Reorganization will benefit holders of
Acquiring Fund Common Shares. Each Board believes, based on data presented by
the Adviser, that common shareholders of each Fund will experience a reduced
annual operating expense ratio as a result of their Fund's respective
Reorganization. The combined fund resulting from the Reorganizations will have a
larger asset base than any of the Funds has currently; certain fixed
administrative costs, such as costs of printing shareholder reports, legal
expenses, audit fees, mailing costs and other expenses, will be spread across
this larger asset base, thereby lowering the expense ratio for common
shareholders of the combined fund.
Further Information Regarding the Reorganizations. Each Acquired Fund's Board
has determined that each Reorganization is in the best interests of common
shareholders of the respective Acquired Fund and that the interests of such
shareholders will not be diluted as a result of their Fund's Reorganization.
Similarly, the Acquiring Fund's Board has determined that each Reorganization is
in the best interests of common shareholders of the Acquiring Fund and that the
interests of such shareholders will not be diluted as a result of any
Reorganization. It is not anticipated that the Reorganizations will directly
benefit preferred shareholders of any of the Funds; however, the Reorganizations
4
will not materially adversely affect preferred shareholders of any of the Funds
and none of the expenses of the Reorganizations will be borne by preferred
shareholders of the Acquiring Fund. As a result of the Reorganizations, however,
shareholders of each Fund will hold a reduced percentage of ownership in the
larger combined fund than they did in any of the separate Funds.
Each Reorganization is intended to qualify as a "reorganization" within the
meaning of Section 368(a)(1) of the Code. If the Reorganizations so qualify, in
general, shareholders of the Acquired Funds will recognize no gain or loss upon
the receipt of shares of the Acquiring Fund in connection with the
Reorganizations. Additionally, the Acquired Funds will recognize no gain or loss
as a result of the transfer of all their assets and liabilities in exchange for
shares of the Acquiring Fund or as a result of their dissolution. Neither the
Acquiring Fund nor its shareholders will recognize any gain or loss in
connection with the Reorganizations.
The Board of each Acquired Fund requests that shareholders of each Acquired Fund
approve their Fund's proposed Reorganization at the meeting to be held on April
23, 2007. Shareholder approval of each Reorganization requires, with respect to
each Acquired Fund, the vote of the holders of at least a majority of the
preferred shares then outstanding and the holders of at least a majority of the
common shares then outstanding, each voting as a separate class. Subject to the
requisite approval of the shareholders of each Fund with regard to the
Reorganizations, it is expected that the closing date of each Acquired Fund will
be on the relevant dividend payment date immediately following the shareholders'
meeting. The closing date of each proposed Reorganization will differ and the
additional Acquiring Fund Common Shares and Acquiring Fund DARTS will be issued
on different closing dates.
The Board of each Acquired Fund recommends that you vote FOR your Fund's
proposed Reorganization.
PROPOSAL 3: ELECTION OF TRUSTEES
Each Fund's Board of Trustees consists of nine members. Holders of each Fund's
common shares are entitled to elect seven Trustees and holders of each Fund's
preferred shares are entitled to elect two Trustees. Each Board of Trustees is
divided into three staggered term classes containing three Trustees. The term of
one class expires each year and no term continues for more than three years
after the applicable election. Each class of Trustees will stand for election at
the conclusion of its respective three-year term.
For each Fund, Messrs. Pruchansky and Boyle are the current nominees for
election by the common shareholders and Ms. McGill Peterson is the current
nominee for election by the preferred shareholders. As of the date of this
proxy, each nominee for election currently serves as Trustee of each Fund.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Because each Fund, under normal market conditions, invests a substantial amount
of its assets in dividend-paying securities, any risks inherent in such
investments are equally applicable to each Fund and will apply to the Acquiring
Fund after the Reorganizations. Risks that are unique to a particular Fund are
indicated as such below. The Reorganizations themselves are not expected to
adversely affect the right of shareholders of any of the Funds or to create
additional risks.
MARKET DISCOUNT RISK
Shares of closed-end funds frequently trade at prices lower than their NAV. This
is commonly referred to as "trading at a discount." This characteristic of
shares of closed-end funds is a risk separate and distinct from the risk that a
Fund's NAV may decrease. Investors who sell their shares within a relatively
short period after completion of the public offering are likely to be exposed to
this risk. Accordingly, each Fund is designed primarily for long-term investors
and should not be considered a vehicle for trading purposes.
EQUITY RISK
A principal risk of investing in each Fund is equity risk. Equity risk is the
risk that the value of securities held by a Fund will fluctuate or fall due to
general market or economic conditions, perceptions regarding the industries in
which the issuers of securities held by a Fund participate, and the particular
circumstances and performance of particular companies whose securities the Fund
holds. Although common stocks have historically generated higher average returns
than fixed-income securities over the long term, common stocks also have
experienced significantly more volatility in returns. An adverse event, such as
an unfavorable earnings report, may depress the value of equity securities of an
issuer held by the Fund; the price of common stock of an issuer may be
particularly sensitive to general movements in the stock market; or a drop in
the stock market may depress the price of most or all of the common stocks held
by a Fund. In addition, common stock of an issuer in a 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
5
experiences a decline in its financial condition. Common stocks in which a Fund
will invest may be structurally subordinated to preferred stocks, bonds and
other debt instruments in a company's capital structure, in terms of priority to
corporate income, and therefore may be subject to greater dividend risk than
preferred stocks or debt instruments of such issuers. Finally, common stock
prices may be sensitive to rising interest rates as the costs of capital rise
and borrowing costs increase.
INTEREST RATE RISK
Interest rate risk is the risk that fixed income securities such as preferred
securities and debt securities will decline in value because of changes in
market interest rates. When market interest rates rise, the market value of such
securities generally will fall. Each Fund's investment in preferred securities
means that the NAV and market price of the common shares will tend to decline if
market interest rates rise. Interest rates are currently low relative to
historical levels.
During periods of declining interest rates, an issuer may exercise its option to
redeem preferred securities or prepay principal of debt securities earlier than
scheduled, forcing a Fund to reinvest in lower yielding securities. This is
known as call or prepayment risk. During periods of rising interest rates, the
average life of certain types of securities may be extended because of slower
than expected principal payments. This may lock in a below market interest rate,
increase the security's duration and reduce the value of the security. This is
known as extension risk.
CREDIT RISK
Credit risk is the risk that preferred securities or debt securities in a Fund's
portfolio will decline in price or fail to make dividend payments when due
because the issuer of the security experiences a decline in its financial
status. The weighted average credit rating of each Fund's portfolio of preferred
securities and other fixed income securities will be at least investment grade.
The ratings of Moody's and S&P represent their opinions as to the quality of
those securities that they rate; ratings are relative and subjective and are not
absolute standards of quality.
SPECIAL RISKS RELATED TO PREFERRED SECURITIES
There are special risks associated with each Fund's investments in preferred
securities:
o Limited voting rights. Generally, holders of preferred securities (such as
each Fund) have no voting rights with respect to the issuing company unless
preferred dividends have been in arrears for a specified number of periods,
at which time the preferred security holders may elect a number of
directors to the issuer's board. Generally, once the issuer pays all the
arrearages, the preferred security holders no longer have voting rights.
o Special redemption rights. In certain circumstances, an issuer of preferred
securities may redeem the securities prior to a specified date. For
instance, for certain types of preferred securities, a redemption may be
triggered by a change in federal income tax or securities laws. As with
call provisions, a special redemption by the issuer may negatively impact
the return of the security held by a Fund.
o Deferral. Preferred securities may include provisions that permit the
issuer, at its discretion, to defer distributions for a stated period
without any adverse consequences to the issuer. If a Fund owns a preferred
security that is deferring its distributions, the Fund may be required to
report income for federal income tax purposes although it has not yet
received such income in cash.
o Subordination. Preferred securities are subordinated to bonds and other
debt instruments in a company's capital structure in terms of priority to
corporate income and liquidation payments and therefore will be subject to
greater credit risk than those debt instruments.
o Liquidity. Preferred securities may be substantially less liquid than many
other securities, such as common stocks or U.S. government securities.
SECTOR RISK
Under normal market conditions, each of Premium Dividend Fund II, Select
Dividend Trust and Premium Dividend Fund I invests more than 65% of its total
assets in securities of companies in the utilities industries. Global Dividend
Fund will concentrate its investments in securities of domestic and foreign
companies in the utilities industry by investing at least 25% of its total
assets in such securities. Except for the foregoing, none of the Funds will
invest more than 25% of its total assets in issuers engaged in any one industry
and Premium Dividend Fund I will not invest more than 20% of its total assets in
securities of companies in any one industry.
Global Dividend Fund will also invest a portion of its assets (although less
than 25% of its total assets) in securities issued by companies in the banking
industry. Preferred Dividend Fund emphasizes investments in preferred stocks
6
issued by corporations in the financial services and utilities sectors, as well
as other regulated industries. Preferred Dividend Fund's investments in each of
these industries will be less than 25% of its total assets.
Utilities Sector. The utilities industries in which the Funds may invest
include companies engaged in:
o the generation, transmission, sale or distribution of electric energy
o the distribution, purification and treatment of water
o the provision of sewage management, treatment or other sanitary
services
o the production, transmission or distribution of natural gas
o the provision of pollution control or abatement services
o telecommunications, including telephone, telegraph, satellite,
microwave and other communications media (but not companies engaged
primarily in the public broadcasting industry)
Each Fund's emphasis on securities of utilities issuers makes it more
susceptible to adverse conditions affecting such industries than a fund that
does not have its assets invested to a similar degree in such issuers. Issuers
in the utilities sector are subject to a variety of factors that may adversely
affect their business or operations, including:
o high interest costs in connection with capital construction programs
o governmental regulation of rates charged to customers
o costs associated with environmental and other regulations
o the effects of economic slowdowns and surplus capacity
o increased competition from other providers of utility services
o uncertainties concerning the availability of fuel at reasonable prices
o the effects of energy conservation policies
o inexperience with and potential losses resulting from a developing
deregulatory environment, including losses and regulatory issues in
connection with energy trading
Issuers in the utilities sector may also be subject to regulation by various
governmental authorities and may be affected by the imposition of special
tariffs and changes in tax laws, regulatory policies and accounting standards.
Generally, prices charged by utilities are also regulated in the United States
with the intention of protecting the public while ensuring that the rate of
return earned by such companies is sufficient to allow them to attract capital
in order to grow and continue to provide appropriate services. There can be no
assurance that such pricing policies or rates of return will continue in the
future. The nature of regulation of industries in the utilities sector is
evolving. Changes in regulation increasingly allow participants in the utilities
sector to provide services and products outside their traditional geographic
areas and lines of business, creating new areas of competition within such
industries. The emergence of competition may result in certain companies being
forced to defend their core businesses which may cause such companies to be less
profitable.
Financial Services Sector. Under normal market conditions, Global Dividend Fund
invests a portion (although less than 25%) of its total assets in securities
issued by domestic and foreign companies engaged in the banking industry,
including bank holding companies. The financial services sector in which
Preferred Dividend Fund invests includes bank holding companies, banks,
securities brokers and dealers, and life, property, casualty and multi-line
insurance companies. Due to Global Dividend Fund and Preferred Dividend Fund's
investments in these industries, these Funds will have exposure to the risk
factors which are characteristic of such investments. In particular, the value
of an investment return on their shares may be affected by economic or
regulatory developments in or related to the banking industry. Sustained
increases in interest rates can adversely affect the availability and cost of
funds for lending activities of banks and a deterioration in general economic
conditions could increase the exposure of banks to credit losses. The banking
industry is also subject to the effects of concentration of loan portfolios in
particular businesses such as real estate, energy, agriculture or high
technology-related companies, national and local regulation, and competition
within such industry. In addition, Global Dividend Fund's and Preferred Dividend
Fund's investments in commercial banks located in several foreign countries are
subject to additional risks due to the combination in such banks of commercial
banking and diversified securities activities.
The competitive position of insurance companies is increasingly affected by
their securities and claims paying ratings. Such ratings can be affected not
only by factors affecting particular issuers and the industry in general, but
also
7
regional and national economic factors. It is also possible that the federal
government will mandate significant changes in the country's health insurance
industry. The impact of a deteriorating economy or industry upon institutions
depends, in part, on the size of the institutions, the extent to which they are
involved in the type of lending or market affected, the duration of the
softening in the affected area and the managerial and capital resources of the
institutions. In addition, insurance companies are subject to catastrophic
losses and changes in morbidity and loss reserves due to adverse loss
development and legal and regulatory changes.
CONVERTIBLE SECURITIES
The preferred securities in which a Fund invests may be convertible into the
issuer's or a related party's common shares. Convertible securities generally
offer lower dividend yields or interest rates than non-convertible securities of
similar quality. As with all fixed income securities, the market values of
convertible securities tend to decline as interest rates increase and,
conversely, to increase as interest rates decline. However, when the market
price of the common stock underlying a convertible security exceeds the
conversion price, the convertible security tends to reflect the market price of
the underlying common stock. As the market price of the underlying common stock
declines, the convertible security tends to trade increasingly on a yield basis
and thus may not decline in price to the same extent as the underlying common
stock.
ILLIQUID SECURITIES
Each Fund may invest a portion of its assets in illiquid securities (20% of net
assets in the case of Premium Dividend Fund I, Premium Dividend Fund II and
Select Dividend Trust; 20% of total assets in the case of Global Dividend Fund;
and 5% of total assets in the case of Preferred Dividend Fund). Illiquid
securities may be difficult to dispose of at a fair price at the times when the
managers believe it is desirable to do so. The market price of illiquid
securities generally is more volatile than that of more liquid securities, which
may adversely affect the price that the Fund pays for or recovers upon the sale
of illiquid securities. Illiquid securities are also more difficult to value and
the managers' judgment may play a greater role in the valuation process.
Investment of a Fund's assets in illiquid securities may restrict a Fund's
ability to take advantage of market opportunities. The risks associated with
illiquid securities may be particularly acute in situations in which a Fund's
operations require cash and could result in the Fund borrowing to meet its
short-term needs or incurring losses on the sale of illiquid securities.
FOREIGN SECURITIES
Each Fund may invest in securities of non-U.S. issuers. No Fund, other than
Global Dividend Fund, will invest in Russian securities of any type. Global
Dividend Fund may invest in Russian securities with restrictions. Global
Dividend Fund and Preferred Dividend Fund will invest only in U.S. dollar
denominated securities. A Fund's investments in non-U.S. issuers may involve
unique risks compared to investing in securities of U.S. issuers. These risks
are more pronounced to the extent that a Fund invests a significant portion of
its non-U.S. investments in one region or in the securities of emerging market
issuers. These risks may include:
o less information about non-U.S. issuers or markets may be available
due to less rigorous disclosure, accounting standards or regulatory
practices
o many non-U.S. markets are smaller, less liquid and more volatile. In a
changing market, the managers may not be able to sell a Fund's
portfolio securities at times, in amounts and at prices they consider
reasonable
o currency exchange rates or controls may adversely affect the value of
the Fund's investments
o the economies of non-U.S. countries may grow at slower rates than
expected or may experience a downturn or recession
o economic, political and social developments may adversely affect the
securities markets
o withholdings and other non-U.S. taxes may decrease a Fund's return
RISKS OF OPTIONS, FUTURES AND SWAP STRATEGIES
The effective use of options, futures and swap strategies depends, among other
things, on a Fund's ability to terminate options, futures or swap positions at
times when the managers deem it desirable to do so. Although a Fund will not
enter into an option, futures or swap position unless the managers believe that
a liquid market exists for such option, futures or swap contracts, there can be
no assurance that the Fund will be able to effect closing transactions at any
particular time or at an acceptable price. Each Fund generally expects that to
the extent that it engages in options and futures transactions, such
transactions will be conducted on recognized securities exchanges. In certain
instances, however, a Fund may purchase and sell options in the over-the-counter
market. The staff of the
8
SEC considers certain over-the-counter options to be illiquid. A 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 fail to meet
their obligations to the Fund. The use of options, futures and swap contracts
involves the risk of imperfect correlation between movements in options and
futures prices and movements in the price of securities which are the subject of
the hedge. The successful use of these strategies also depends on the ability of
the managers to forecast correctly interest rate movements and general stock
market price movements. This risk increases as the composition of a Fund's
portfolio diverges from the composition of the relevant option or futures
contract. A Fund's transactions in options and futures contracts may result in
the Fund's realizing net short-term and long-term capital gains which, if
distributed, may result in the payment of additional dividends on the preferred
shares. Options and futures transactions are subject to special provisions of
the Code that, among other things, may defer the use of certain losses of a Fund
and affect the holding period of the securities held by the Fund and the
character of the gains or losses realized by the Fund. These provisions may also
require a Fund to mark-to-market some of the positions in its portfolio (i.e.,
treat them as if they were closed out), which may cause a Fund to recognize
income without receiving cash with which to make distributions in amounts
necessary to satisfy the 90% distribution requirement and the distribution
requirements for avoiding income and excise taxes. Each Fund will monitor its
transactions and may make certain tax elections in order to mitigate the effect
of these rules and prevent disqualification of the Fund as a regulated
investment company. Revenue derived from futures and options transactions will
not qualify for the Dividends Received Deduction when distributed to the holders
of the common shares and the preferred shares. Consequently, revenue derived
from such transactions could cause a Fund to become liable to pay additional
dividends on the preferred shares.
ANTI-TAKEOVER PROVISIONS
Each Fund's Agreement and Declaration of Trust and By-Laws include provisions
that could limit the ability of other entities or persons to acquire control of
the Fund or to change the composition of its Board. Such provisions could limit
the ability of holders of common shares to sell their shares at a premium over
prevailing market prices by discouraging a third-party from seeking to obtain
control of the Fund. These provisions include staggered terms of office for the
Trustees, advance notice requirements for shareholder proposals and
super-majority voting requirements for open-ending the Fund or a merger,
liquidation, asset sales and similar transactions.
MARKET DISRUPTION AND GEOPOLITICAL RISK
The war with, and the continuing occupation of, Iraq may have a substantial
impact on the U.S. and world economies and securities markets. The nature, scope
and duration of such impact cannot be predicted with any certainty. Terrorist
attacks on the World Trade Center and the Pentagon on September 11, 2001, closed
some of the U.S. securities markets for a four-day period. Similar events and
market disruptions may occur in the future. Geopolitical risks have contributed,
and may contribute in the future, to increased short-term market volatility and
may have adverse long-term effects on U.S. and world economies and markets
generally. Those events could also have an acute effect on individual issuers or
related groups of issuers.
LEVERAGE RISK
Each Fund uses financial leverage on an ongoing basis for investment purposes.
Leverage risk includes the risk associated with the issuance of preferred shares
to leverage the common shares. If the dividend rate on the preferred shares
exceeds the net rate of return on the Fund's portfolio, the leverage will result
in a lower NAV than if the Fund were not leveraged and the Fund's ability to pay
dividends and meet its asset coverage requirements on the preferred shares would
be reduced. Similarly, any decline in the NAV of the Fund's investments could
result in the Fund being in danger of failing to meet its asset coverage
requirements or of losing its rating on the preferred shares or, in an extreme
case, a Fund's current investment income might not be sufficient to meet the
dividend requirements on the preferred shares. To counteract such an event, the
Fund might need to liquidate investments in order to fund a redemption of some
or all of the preferred shares.
Each Fund's leveraged capital structure creates special risks not associated
with unleveraged funds having similar investment objectives and policies. These
include the possibility of higher volatility of the NAV of the Fund and the
preferred shares' asset coverage.
While a Fund may from time to time consider reducing leverage in response to
actual or anticipated changes in interest rates in an effort to mitigate the
increased volatility of current income and NAV associated with leverage, there
can be no assurance that the Fund will actually reduce leverage in the future or
that any reduction, if undertaken, will be effective. Changes in the future
direction of interest rates are very difficult to predict accurately. If a Fund
were to reduce leverage based on a prediction about future changes to interest
rates and that prediction turned
9
out to be incorrect, the reduction in leverage would likely operate to reduce
the Fund's NAV relative to the circumstance where the Fund had not reduced
leverage. A Fund may decide that this risk outweighs the likelihood of achieving
the desired reduction to volatility in income and NAV if the prediction were to
turn out to be correct and determine not to reduce leverage as described above.
Because the fees paid to the Adviser are calculated on the basis of each Fund's
managed assets (which equals the aggregate NAV of the common shares plus the
liquidation preference of the preferred shares), the fees are higher when
leverage is utilized, giving the Adviser an incentive to utilize leverage.
SPECIAL RISKS RELATED TO PREFERRED SHARES
The Primary Risks
o If an auction fails, you may not be able to sell some or all of your
preferred shares and a Fund is not obligated to redeem your preferred
shares if the auction fails.
o Because of the nature of the market for preferred shares, you may receive
less than the price you paid for your shares if you sell them outside the
auction, especially when market interest rates are rising.
o A Rating Agency could downgrade the rating assigned to the preferred
shares, which could affect liquidity.
o The Fund may be forced to redeem preferred shares to meet regulatory or
Rating Agency requirements or may voluntarily redeem the preferred shares
in certain circumstances.
o In certain circumstances, a Fund may not earn sufficient income from its
investments to pay dividends on the preferred shares.
o If interest rates rise, the value of a Fund's investment portfolio
generally will decline, reducing the asset coverage for the preferred
shares.
Interest Rate Risk. The preferred shares pay dividends based on short-term
interest rates. Each Fund invests a substantial amount of the proceeds from the
issuance of the preferred shares in preferred stocks and other preferred
securities, which bear intermediate to longer-term dividend or interest rates.
The yields on preferred stocks and other preferred securities are typically,
although not always, higher than shorter-term interest rates. Shorter-term
interest rates may rise so that the amount of dividends to be paid to holders of
preferred shares exceeds the income from the preferred shares and other
preferred securities and other investments purchased by a Fund with the proceeds
from the sale of the preferred shares. Because income from a Fund's entire
investment portfolio (not just the portion of the portfolio purchased with the
proceeds of the preferred shares offering) is available to pay dividends on the
preferred shares, however, dividend rates on the preferred shares would need to
exceed the rate of return on a Fund's investment portfolio by a wide margin
before the Fund's ability to pay dividends on the preferred shares would be
jeopardized. If intermediate to longer-term interest rates rise, this could
negatively impact the value of a Fund's investment portfolio, reducing the
amount of assets serving as asset coverage for the preferred shares.
Auction Risk. The dividend rate for the preferred shares normally is set through
an auction process. In the auction, holders of preferred shares may indicate the
dividend rate at which they would be willing to hold or sell their preferred
shares or purchase additional preferred shares. The auction also provides
liquidity for the sale of preferred shares. You may not be able to sell your
preferred shares at an auction if the auction fails. Also, if you place hold
orders (orders to retain shares) at an auction only at a specified dividend rate
and that rate exceeds the rate set at the auction, you will not retain your
preferred shares. Additionally, if you buy preferred shares or elect to retain
preferred shares without specifying a dividend rate below which you would not
wish to buy or continue to hold those preferred shares, you could receive a
lower rate of return on your shares than the market rate. Finally, the dividend
period for the preferred shares may be changed by a Fund, subject to certain
conditions with notice to the holders of the preferred shares, which could also
affect the liquidity of your investment.
Secondary Market Risk. If you try to sell your preferred shares between
auctions, you may not be able to sell any or all of your preferred shares, or
you may not be able to sell them for $100,000 per share or $100,000 per share
plus accumulated dividends. You may transfer preferred shares outside of
auctions only to or through a broker-dealer that has entered into an agreement
with the relevant auction agent or other person as a Fund permits.
Ratings and Asset Coverage Risk. The preferred shares of Premium Dividend Fund
II, Select Dividend Trust and Global Dividend Fund have each been rated "AA" by
S&P and "aa2" by Moody's. The preferred shares of Premium Dividend Fund I and
Preferred Dividend Fund have been rated "AA" by S&P and "aa" by Moody's,
respectively. Such ratings do not eliminate or necessarily mitigate the risks of
investing in preferred shares. Moody's or S&P could downgrade its rating of the
preferred shares or withdraw its rating at any time, which may make the
preferred
10
shares less liquid at an auction or in the secondary market. If a Fund fails to
satisfy its asset coverage ratios, it will be required to redeem a sufficient
number of preferred shares in order to return to compliance with the asset
coverage ratios. A Fund may voluntarily redeem preferred shares under certain
circumstances in order to meet asset coverage tests.
Restrictions on Dividends and Other Distributions. Restrictions imposed on the
declaration and payment of dividends or other distributions to the holders of
each Fund's common shares and the preferred shares, both by the 1940 Act and by
requirements imposed by Rating Agencies, might impair a Fund's ability to comply
with minimum distribution requirements that it must satisfy to maintain its
qualification as a regulated investment company for federal income tax purposes.
PROPOSAL 1(a): ISSUANCE OF ADDITIONAL ACQUIRING FUND COMMON SHARES
In connection with each proposed Reorganization, the Acquiring Fund will issue
additional Acquiring Fund Common Shares and list such shares on the NYSE. The
Acquiring Fund will acquire substantially all of the assets and assume
substantially all of the liabilities of each Acquired Fund in exchange for
newly-issued Acquiring Fund Common Shares and newly-issued Acquiring Fund DARTS.
Each Acquired Fund will distribute Acquiring Fund Common Shares to its common
shareholders and Acquiring Fund DARTS to its preferred shareholders and will
then terminate its registration under the 1940 Act and dissolve under applicable
state law. The Acquiring Fund's Board, based upon its evaluation of all relevant
information, anticipates that each Reorganization will benefit holders of
Acquiring Fund Common Shares.
The aggregate NAV of Acquiring Fund Common Shares received in each
Reorganization will equal the aggregate NAV of the Acquired Fund's common shares
held immediately prior to the Reorganization, less the costs of the
Reorganization (though common shareholders may receive cash for their fractional
shares). The aggregate liquidation preference of Acquiring Fund DARTS received
in the Reorganization will equal the aggregate liquidation preference of the
Acquired Fund's preferred shares held immediately prior to the Reorganization.
The Reorganization will result in no dilution of NAV of the Acquiring Fund
Common Shares, other than to reflect the costs of each Reorganization. No gain
or loss will be recognized by the Acquiring Fund or its shareholders in
connection with each Reorganization. The Acquiring Fund will continue to operate
as a registered closed-end investment company with the investment objective and
policies described in this Joint Proxy Statement/Prospectus.
In connection with the Reorganizations and as contemplated by each Agreement and
Plan of Reorganization, the Acquiring Fund will issue additional Acquiring Fund
Common Shares and list such shares on the NYSE. While applicable state and
federal law does not require the shareholders of the Acquiring Fund to approve
the Reorganizations, applicable NYSE rules require the common shareholders of
the Acquiring Fund to approve the issuance of additional Acquiring Fund Common
Shares to be issued in connection with the Reorganizations.
Shareholder approval of the issuance of additional Acquiring Fund Common Shares
requires the affirmative vote of a majority of the votes cast on the proposal,
provided that the total votes cast on the proposal represent over 50% in
interest of all securities entitled to vote on the matter. Subject to the
requisite approval of the shareholders of each Fund with regard to the
Reorganizations, it is expected that the closing date of each Acquired Fund will
be on the relevant dividend payment date immediately following the shareholders'
meeting. The closing date of each proposed Reorganization will differ and the
additional Acquiring Fund Common Shares will be issued on different closing
dates. For more information regarding voting requirements, see the section
entitled "Voting Information and Required Vote."
The Acquiring Fund Board recommends that you vote FOR the issuance of additional
Acquiring Fund Common Shares in connection with the Reorganizations.
PROPOSAL 1(b): ISSUANCE OF ADDITIONAL ACQUIRING FUND DARTS
In connection with each proposed Reorganization, the Acquiring Fund will issue
additional series of Acquiring Fund DARTS. The Acquiring Fund will acquire
substantially all of the assets and assume substantially all of the liabilities
of each Acquired Fund in exchange for newly-issued Acquiring Fund Common Shares
and newly-issued Acquiring Fund DARTS. Each Acquired Fund will distribute
Acquiring Fund Common Shares to its common shareholders and Acquiring Fund DARTS
to its preferred shareholders, and will then terminate its registration under
the 1940 Act and dissolve under applicable state law. It is not anticipated that
the Reorganizations will directly benefit holders of DARTS of the Acquiring
Fund; however, the Reorganizations will not adversely affect preferred
shareholders and none of the expenses of the Reorganizations will be borne by
preferred shareholders of the Acquiring Fund.
11
The aggregate liquidation preference of Acquiring Fund DARTS received in the
Reorganization will equal the aggregate liquidation preference of the Acquired
Fund's preferred shares held immediately prior to the Reorganization. No gain or
loss will be recognized by the Acquiring Fund or its shareholders in connection
with a Reorganization. The Acquiring Fund will continue to operate as a
registered closed-end investment company with the investment objective and
policies described in this Joint Proxy Statement/Prospectus.
In connection with the Reorganizations and as contemplated by each Agreement and
Plan of Reorganization, the Acquiring Fund will issue four additional series of
DARTS. The Acquiring Fund's By-Laws require that holders of the DARTS of the
Acquiring Fund approve the issuance of any additional series of DARTS to be
issued in connection with the Reorganizations. Upon approval of the issuance of
additional series of preferred shares, the Acquiring Fund's Declaration of Trust
and By-Laws will be amended to reflect such series that are created.
Shareholder approval of the issuance of additional series of Acquiring Fund
DARTS requires the affirmative vote of the holders of at least a majority of the
shares of the DARTS then outstanding, voting separately as a class. Subject to
the requisite approval of the shareholders of each Fund with regard to the
Reorganizations, it is expected that the closing date of each Acquired Fund will
be on the relevant dividend payment date immediately following the shareholders'
meeting. The closing date of each proposed Reorganization will differ, and the
additional Acquiring Fund DARTS will be issued on different closing dates. For
more information regarding voting requirements, see the section entitled "Voting
Information and Required Vote."
The Acquiring Fund Board recommends that you vote FOR the issuance of additional
Acquiring Fund DARTS in connection with the Reorganizations.
PROPOSAL 2: REORGANIZATIONS OF THE ACQUIRED FUNDS
The Reorganizations seek to combine five similar Funds to achieve certain
economies of scale and other operational efficiencies. Each Fund is registered
as a diversified, closed-end management investment company under the 1940 Act.
The preferred shares of the Acquiring Fund, Premium Dividend Fund I and Global
Dividend Fund are designated as "DARTS"; the preferred shares of Select Dividend
Trust are designated as "AMPS"; and the preferred shares of Preferred Dividend
Fund are designated as "ARPS." Although the preferred shares of Select Dividend
Trust and Preferred Dividend Fund differ in name from those of the other Funds,
most material aspects of the securities are the same. Only the Acquiring Fund
offers two share classes, Series A and Series B. Although each preferred share
class is treated individually for the purpose of assessing shareholder rights
and dividends, they enjoy the same shareholder rights and dividend related
provisions.
The Acquiring Fund, Premium Dividend Fund I, Select Dividend Trust and Global
Dividend Fund each seeks to provide common shareholders with a high level of
current income (which qualifies for the Dividends Received Deduction in the case
of Premium Dividend Fund I), consistent with modest growth of capital. Preferred
Dividend Fund seeks to provide common shareholders with a high level of current
income, consistent with preservation of capital. Each Fund invests at least 80%
of its assets in dividend-paying securities (dividend-paying preferred stocks,
in the case of Preferred Dividend Fund) and emphasizes investments in securities
of companies in the utilities industries. The quality of ratings of each Fund's
portfolio investments stipulates that preferred stocks and debt obligations in
which the Fund will invest will be investment grade (at least "BBB" by S&P or
"Baa" by Moody's) at the time of investment or will be preferred stocks of
issuers of investment grade senior debt, some of which may have speculative
characteristics, or, if not rated, will be of comparable quality as determined
by the Adviser. Each Fund will invest in common stocks of issuers whose senior
debt is rated investment grade or, in the case of issuers that have no rated
senior debt outstanding, whose senior debt is considered by the Adviser to be of
comparable quality. The Funds are managed by the same investment advisory
personnel.
Although the investment objective of each Fund is similar, their investment
policies and risks are different, particularly with respect to the Global
Dividend Fund and Preferred Dividend Fund. Under normal market conditions,
Global Dividend Fund invests at least 65% of its total assets in securities of
issuers located in three or more countries, including the United States, with no
more than 25% of the Fund's total assets in securities of issuers located in any
single country other than the United States. Although the Acquiring Fund is not
restricted from investing in foreign securities, the Acquiring Fund will likely
not concentrate its investments in foreign issuers. In addition, whereas the
Acquiring Fund invests at least 80% of its net assets in dividend paying
preferred and common stocks, Preferred Dividend Fund invests at least 80% of its
assets in dividend paying preferred securities. Finally, whereas the Acquiring
Fund, Premium Dividend Fund I and Select Dividend Fund normally invest more than
65% of their total assets in securities of companies in the utilities industry,
Global Dividend Fund invests at least 25% of its total assets in such securities
and also invests a portion of its assets (although less than 25% of its total
assets) in securities issued by companies in the banking industry. Preferred
Dividend Fund emphasizes investments in preferred
12
stocks issued by corporations in the financial services and utilities sectors,
as well as other regulated industries, but does not invest more than 25% of the
value of its total assets in the securities of issuers primarily engaged in
these or any other industries.
In each Reorganization, the Acquiring Fund will acquire substantially all of the
assets and assume substantially all of the liabilities of the Acquired Fund in
exchange for an equal aggregate value of Acquiring Fund Common Shares and
Acquiring Fund DARTS. The Acquired Fund will distribute Acquiring Fund Common
Shares to common shareholders of the Acquired Fund and Acquiring Fund DARTS to
preferred shareholders of the Acquired Fund and will then terminate its
registration under the 1940 Act and dissolve under applicable state law. The
aggregate NAV of Acquiring Fund Common Shares received in the Reorganization
will equal the aggregate NAV of the Acquired Fund common shares held immediately
prior to the Reorganization, less the costs of the Reorganization (though common
shareholders may receive cash for their fractional shares). The aggregate
liquidation preference of Acquiring Fund DARTS received in the Reorganization
will equal the aggregate liquidation preference of each Acquired Fund preferred
shares held immediately prior to the Reorganization. The auction dates, rate
period and dividend payment dates of the Acquiring Fund DARTS received in the
Reorganization will be the same as that of the preferred shares held immediately
prior to the Reorganization. In addition, the ratings expected to be received by
the Acquiring Fund DARTS are "AA" from S&P and "aa2" from Moody's. The Acquiring
Fund will continue to operate as a registered closed-end investment company with
the investment objective and policies described in this Joint Proxy
Statement/Prospectus.
Each Acquired Fund Board, based upon its evaluation of all relevant information,
anticipates that the common shareholders of each Acquired Fund will benefit from
their Fund's respective Reorganization. In particular, the Board of each
Acquired Fund believes, based on data presented by the Adviser, that common
shareholders of each Acquired Fund will experience a reduced annual operating
expense ratio as a result of their Fund's respective Reorganization. The
combined fund resulting from the Reorganizations will have a larger asset base
than any of the Funds has currently; certain fixed administrative costs, such as
costs of printing shareholders reports, legal expenses, audit fees, mailing
costs and other expenses, will be spread across this larger asset base, thereby
lowering the expense ratio for common shareholders of the combined fund.
13
Comparison of the Funds: Investment Objectives and Policies
Comparison of Premium Dividend Fund I to Premium Dividend Fund II
Premium Dividend Fund I Premium Dividend Fund II
Business Each Fund is a diversified closed-end management investment company organized as a Massachusetts
business trust.
Net assets as of $219.7 million $287.1 million
September 30, 2006
Listing NYSE under the ticker symbol "PDF" NYSE under the ticker symbol "PDT"
(common shares)
Rating of "AA" from S&P o "AA" from S&P
preferred shares o "aa2" from Moody's
Fiscal year end date 9/30 10/31
Investment adviser, Investment Adviser:
sub-adviser and John Hancock Advisers, LLC
portfolio managers
Investment Sub-Adviser:
MFC Global Investment Management (U.S.), LLC ("MFC Global (U.S.)")
Portfolio managers:
Gregory K. Phelps
- Joined MFC Global (U.S.) in 2005
- Joined Adviser in 1995
- Began business career in 1980
Mark T. Maloney
- Joined MFC Global (U.S.) in 2005
- Joined Adviser in 1982
- Began business career in 1976
Managers share investment strategy and decisions.
Investment objective The Fund's investment objective is to provide The Fund's investment objective is to provide
high current income qualifying for the high current income, consistent with modest
Dividends Received Deduction consistent with growth of capital for holders of its common
modest growth of capital for shareholders of its shares. The potential for modest capital
common stock. The potential for modest capital appreciation on the Fund's investments in
appreciation on the Fund's investments in common stocks is a secondary consideration. The
common stocks is a secondary consideration. managers intend to manage the Fund's portfolio
This objective is fundamental and may not be to maximize income qualifying for the Dividends
changed without shareholder approval. Received Deduction. This objective is not
fundamental and may be changed without
shareholder approval.
Primary investments The Funds pursue their investment objective by investing in a diversified portfolio of dividend-
paying preferred and common stocks. Under normal circumstances, each Fund invests at least 80%
of its net assets in dividend-paying securities. The "assets" are defined as net assets, including the
liquidation preference amount of the DARTS, plus borrowings for investment purposes. Each Fund
normally invests more than 65% of its total assets in securities of companies in the utilities
industry.
Investment strategy The managers perform their own investment analysis when making investment decisions for the
Funds and do not rely solely on the ratings assigned to securities by the Rating Agencies. The
managers' analysis may include consideration of the issuer's experience and managerial strength,
changing financial condition, borrowing requirements or debt maturity schedules, and its
responsiveness to changes in business conditions and interest or dividend rates. The managers also
consider relative values based on anticipated cash flow, interest or dividend coverage, asset coverage
and earnings prospects.
14
Premium Dividend Fund I Premium Dividend Fund II
In selecting preferred stocks, the managers consider current effective yield, price stability and the
underlying fundamental characteristics of the issuer, with particular emphasis on debt and dividend
coverage and the potential for timely payment of dividends. The managers select common stocks on
the basis of their current dividend rate and fundamental value. Each Fund focuses on common
stocks of those issuers which, in the opinion of the managers, have strong fundamental characteristics,
large market capitalizations, favorable credit quality and current dividend yields generally higher than
the currently available dividend yield quoted on the S&P 500 Index. In assessing the fundamental
values of common stocks, the managers concentrate on the relationship between the issuer's
underlying earning power and the relevant price of the issuer's stock. The potential for modest
capital appreciation on a Fund's investments in common stocks is a secondary consideration.
The managers attempt to reduce investment and market risk by allocating substantially all of a Fund's
assets among the following three sectors:
o Common Stock Sector -- consisting of common stocks with current dividend yields generally
higher than the currently available dividend yield quoted on the S&P 500 Index.
o Preferred Stock Sector -- consisting of cumulative fixed-rate preferred stocks, sinking fund
preferred stocks, convertible preferred stocks and adjustable rate preferred stocks which the
managers believe have above-average current effective dividend yields.
o Low Volatility Sector -- consisting predominantly of auction preferred stocks and money market
instruments, as well as certain dividend-paying securities which, in the managers' opinion, are
currently exhibiting greater price stability than the securities in the Common and Preferred
Stock Sectors.
The managers determine the assets allocated to each of the above sectors based on its assessment of the
maximum level of current income that can be achieved consistent with each Fund's objective of modest
growth of capital. The managers rely in part on quantitative analytical techniques which measure the
relative risks and opportunities of each sector based on current and historical market data, as well as
on its own assessment of economic and market conditions. Under normal conditions, at least 20% of
Premium Dividend Fund I's total assets are invested in each sector. During periods of stock market
weakness or uncertain market or economic conditions, as determined by the managers, the Funds may
substantially increase the portion of their assets invested in the Low Volatility Sector. The managers
continually review each Fund's asset allocation and make adjustments as they deem appropriate.
Diversification Each Fund is diversified, which means that, with respect to 75% of its total assets, each Fund cannot
invest (i) more than 5% of its total assets in securities of a single issuer or (ii) in securities
representing more than 10% of the outstanding voting securities of an issuer.
Concentration Under normal conditions more than 65% of The Fund normally invests more than 65% of
the Fund's total assets are invested in securities its total assets in securities of companies in the
of companies in the utilities industry. No more utilities industry. No more than 25% of the
than 20% of the Fund's total assets may be Fund's total assets may be invested in securities
invested in securities of companies in any other of companies in any other one industry; provided
one industry; provided that this limitation does that this limitation does not apply to obligations
not apply to obligations issued or guaranteed issued or guaranteed as to interest and principal
as to interest and principal by the U.S. by the U.S. Government or its agencies or
Government or its agencies or instrumentalities instrumentalities or to repurchase agreements
or to repurchase agreements secured by such secured by such obligations or to bank money-
obligations. This policy is fundamental and may market instruments.
not be changed without shareholder approval.
Investment companies Each Fund may invest up to 10% of the value of its total assets in dividend-paying securities of
registered investment companies that invest primarily in investment grade securities. Neither
Fund will acquire securities of any one investment company if, immediately thereafter, (i) the Fund
would own in the aggregate more than 3% of such company's total outstanding voting securities or
(ii) securities issued by such company would have an aggregate value in excess of 5% of the Fund's
total assets. In addition, each Fund and all other investment companies having the same adviser will
not acquire securities of any one investment company amounting in the aggregate to more than 10%
of such company's total outstanding voting stock. The investment companies in which the Fund
invests include those open- and closed-end investment companies whose distributions qualify for the
Dividends Received Deduction. To the extent that investment advisory and brokerage expenses of
an investment company are reflected in the price of its shares held in the Fund's portfolio, there
may be a duplication of such expenses.
15
Premium Dividend Fund I Premium Dividend Fund II
Preferred stocks The preferred stocks in which each Fund invests are rated investment-grade (at least "BBB" by S&P or
"Baa" by Moody's) at the time of investment or are preferred stocks of issuers of investment-grade
senior debt, some of which may have speculative characteristics, or if not rated, are of comparable
quality as determined by the managers.
Common stocks Each Fund invests in common stocks of issuers whose senior debt is rated investment grade or, in the
case of issuers that have no rated senior debt outstanding, whose senior debt is considered by the
managers to be of comparable quality.
Debt securities The debt obligations in which each Fund invests are rated investment-grade (at least "BBB" by S&P or
"Baa" by Moody's) at the time of investment or, if not rated, are of comparable quality as determined by
the managers.
Foreign securities Neither Fund's prospectus references the ability to invest in foreign securities. Neither Fund may
invest in Russian securities of any type.
Illiquid securities Each Fund may invest up to 20% of its net assets in securities purchased in direct placements.
When-issued Each Fund may make contracts to purchase securities on a "when-issued" basis, which means that delivery
purchases and payment for the securities take place at a future date beyond the customary settlement date. The
payment obligation and the interest rate on the securities will be fixed at the time the Fund enters
into the commitment, but interest will not accrue to the Fund until delivery of and payment for the
securities. An amount of cash or short-term U.S. Government securities equal to the Fund's commitment
would be deposited in a segregated account at the Fund's custodian bank to secure the Fund's obligation.
Although the Fund would generally purchase securities on a when- issued or delayed delivery basis with
the intention of actually acquiring the securities for its portfolio (or for delivery pursuant to
options contracts it has entered into) the Fund may dispose of a security prior to settlement if the
managers deem it advisable.
Repurchase Each Fund may invest up to 5% of its net assets in repurchase agreements with broker-dealers, banks and
agreements other financial institutions provided that the Fund's custodian bank always has possession of securities
serving as collateral whose market value at least equals the amount of the repurchase obligation. To
minimize this risk of loss, each Fund may enter into repurchase agreements only with financial
institutions considered by the managers to be creditworthy under guidelines adopted by the Fund's Board.
Reverse repurchase Both Funds are currently prohibited by current Rating Agency Guidelines from entering into reverse
obligations repurchase agreements unless the relevant Rating Agency has advised the Fund in writing that any such
action would not adversely affect the then-current rating of the preferred shares and that any such
action will be in accordance with guidelines established by the relevant Rating Agency.
Securities loans Both Funds are currently prohibited by Rating Agency Guidelines from lending portfolio securities but,
if permitted to do so in the future, they may seek to obtain additional income by making secured loans
of their portfolio securities with a value of up to 331/3% of each Fund's total assets. Any securities
loans are made pursuant to agreements requiring that the loans be continuously secured by collateral in
cash or short-term debt obligations at least equal at all times to the market value of the loaned
securities. Each Fund may pay reasonable finders', administrative and custodial fees in connection with
loans of its portfolio securities. Although voting rights or rights to consent accompanying loaned
securities pass to the borrower, each Fund retains the right to call the loans at any time on reasonable
notice and it will do so in order that the securities may be voted by the Fund with respect to matters
materially affecting the Fund's investment. Each Fund may also call a loan in order to sell the
securities involved. Loans of portfolio securities are made only to borrowers considered by the managers
to be creditworthy under guidelines adopted by each Fund's Board.
16
Premium Dividend Fund I Premium Dividend Fund II
Active trading The managers make portfolio adjustments that reflect the Fund's investment strategy but do not trade
securities for the Fund for the purpose of seeking short-term profits. However, if the Fund is required
to sell assets to effect mandatory redemptions of the preferred shares or to repurchase common shares,
the Fund's portfolio turnover may be higher than would otherwise be the case. Each Fund operates so that
all of the dividends paid on the preferred shares are designated as qualifying for the Dividends
Received Deduction and tax considerations relating to the maintenance of a Fund's status as a regulated
investment company limit the Fund's portfolio turnover and the amount of short-term capital gains it may
realize.
The portfolio turnover rate for Premium Dividend Fund I for the period ended September 30, 2006 was 30%.
The portfolio turnover rate for Premium Dividend Fund II for the period ended October 31, 2006, was 24%.
Each Fund's annual portfolio turnover rate generally will not exceed 200% (excluding turnover of
securities having maturities of one year or less).
Derivatives The Fund may at times seek to hedge against a The Fund is permitted to engage in options and
decline in the value of securities included in the futures transaction under its investment
Fund's portfolio or an increase in the price of restrictions. The Fund may engage in such
securities which it plans to purchase for the Fund transactions to hedge against a decline in the
through the writing an purchase of options and value of securities included in the Fund's
the purchase and sale of financial futures and portfolio or in the price of securities which it
related options on such futures contracts. In plans to purchase for the Fund through the
addition, the Fund may seek to increase the writing and purchase of options and the
current return of the Fund's portfolio by writing purchase and sale of financial contracts and
covered call or secured put options. The Fund's related options on such futures contracts. In
ability to engage in options and futures addition, the Fund may seek to increase the
transactions may be limited by the rating agency current return of the Fund's portfolio by writing
guidelines and by tax considerations. The Fund covered call or secured put options. The Fund's
will not engage in options and futures ability to engage in options and futures
transactions for leverage purposes. transactions may be limited by the Rating Agency
Guidelines. The Fund will not engage in options
and futures transactions for leveraging purposes.
Short sales The Rating Agency Guidelines provide that neither Fund may make short sales of securities unless the
Rating Agency has advised the Fund in writing that any such action would not adversely affect its then
current rating of the preferred shares of the Fund and that any such action is in accordance with
guidelines established by the relevant Rating Agency.
Temporary defensive During periods of stock market weakness or There may be times when, in the managers'
positions uncertain market or economic conditions, as judgment, conditions in the securities markets
determined by the Adviser, the Fund may would make pursuing the Fund's investment
substantially increase its investments in the Low strategy inconsistent with achieving the Fund's
Volatility Sector -- consisting predominately of investment objective. At such times, the
auction preferred stocks and money market managers may employ alternative strategies
instruments, as well as certain dividend paying primarily to seek to reduce fluctuations in the
securities which, in the Adviser's opinion, are value of the Fund's assets. In implementing
currently exhibiting greater price stability than defensive strategies, depending on the
the securities in the Common and Preferred circumstances, the Fund may invest any portion
Stock Sectors. of its portfolio in U.S. Government securities,
investment grade corporate debt securities, high
quality, short-term money market instruments
and in cash. Investment income received by a
Fund with respect to these investments is not
eligible for the Dividends Received Deduction
when distributed to shareholders and may
increase the amount of additional dividends
payable on the preferred shares. It is impossible
to predict when, or for how long, the Fund may
use these alternative strategies.
Borrowings Current Rating Agency Guidelines prohibit the Fund from borrowing money unless the relevant Rating
Agency has advised the Fund in writing that any such action would not adversely affect the then-current
rating of the DARTS and that any such action will be in accordance with guidelines established by the
relevant Rating Agency.
17
Comparison of Select Dividend Trust to Premium Dividend Fund II
Select Dividend Trust Premium Dividend Fund II
Business Each Fund is a diversified closed-end management investment company organized as a Massachusetts
business trust.
Net assets as of $219.2 million $287.1 million
September 30, 2006
Listing NYSE under the ticker symbol "DIV" NYSE under the ticker symbol "PDT"
(common shares)
Rating of o "AA" from S&P
preferred shares o "aa2" from Moody's
Fiscal year end date 6/30 10/31
Investment adviser, Investment Adviser:
sub-adviser and John Hancock Advisers, LLC
portfolio managers
Investment Sub-Adviser:
MFC Global Investment Management (U.S.), LLC
Portfolio managers:
Gregory K. Phelps
- Joined MFC Global (U.S.) in 2005
- Joined Adviser in 1995
- Began business career in 1980
Mark T. Maloney
- Joined MFC Global (U.S.) in 2005
- Joined Adviser in 1982
- Began business career in 1976
Managers share investment strategy and decisions.
Investment objective Each Fund's investment objective is to provide high current income, consistent with modest growth of
capital for holders of its common shares. The potential for modest capital appreciation on the Fund's
investments in common stocks is a secondary consideration. The managers intend to manage each Fund's
portfolio to maximize income qualifying for the Dividend Received Deduction. Each Fund's objective is
not fundamental and may be changed without shareholder approval.
Primary investments Each Fund pursues its investment objective by investing in a diversified portfolio of dividend-paying
preferred and common stocks. Under normal circumstances, each Fund invests at least 80% of its net
assets in dividend-paying securities. The "assets" are defined as net assets, including the liquidation
preference amount of the preferred shares, plus borrowings for investment purposes. Each Fund normally
invests more than 65% of its total assets in securities of companies in the utilities industry.
Investment strategy The managers perform their own investment analysis when making investment decisions for the Funds and do
not rely solely on the ratings assigned to securities by the Rating Agencies. The managers' analysis may
include consideration of the issuer's experience and managerial strength, changing financial condition,
borrowing requirements or debt maturity schedules, and its responsiveness to changes in business
conditions and interest or dividend rates. The managers also consider relative values based on
anticipated cash flow, interest or dividend coverage, asset coverage and earnings prospects.
18
Select Dividend Trust Premium Dividend Fund II
In selecting preferred stocks, the managers consider current effective yield, price stability and the
underlying fundamental characteristics of the issuer, with particular emphasis on debt and dividend
coverage and the potential for timely payment of dividends. The managers select common stocks on the
basis of their current dividend rate and fundamental value. Each Fund focuses on common stocks of those
issuers which, in the opinion of the managers, have strong fundamental characteristics, large market
capitalizations, favorable credit quality and current dividend yields generally higher than the
currently available dividend yield quoted on the S&P 500 Index. In assessing the fundamental values of
common stocks, the managers concentrate on the relationship between the issuer's underlying earning
power and the relevant price of the issuer's stock. The potential for modest capital appreciation on a
Fund's investments in common stocks is a secondary consideration.
The managers attempt to reduce investment and market risk by allocating substantially all of a Fund's
assets among the following three sectors:
o Common Stock Sector -- consisting of common stocks with current dividend yields generally higher
than the currently available dividend yield quoted on the S&P 500 Index.
o Preferred Stock Sector -- consisting of cumulative fixed-rate preferred stocks, sinking fund
preferred stocks, convertible preferred stocks and adjustable rate preferred stocks which the
managers believe have above-average current effective dividend yields.
o Low Volatility Sector -- consisting predominantly of auction preferred stocks (as well as
remarketed preferred stocks in the case of Select Dividend Fund) and money market instruments, as
well as certain dividend-paying securities which, in the managers' opinion, are currently
exhibiting greater price stability than the securities in the Common and Preferred Stock Sectors.
The managers determine the assets allocated to each of the above sectors based on its assessment of the
maximum level of current income that can be achieved consistent with each Fund's objective of modest
growth of capital. The managers rely in part on quantitative analytical techniques which measure the
relative risks and opportunities of each sector based on current and historical market data, as well as
on its own assessment of economic and market conditions. During periods of stock market weakness or
uncertain market or economic conditions, as determined by the managers, the Funds may substantially
increase the portion of their assets invested in the Low Volatility Sector. The managers continually
review each Fund's asset allocation and make adjustments, as they deem appropriate.
Diversification Each Fund is diversified, which means that, with respect to 75% of its total assets, neither Fund
invests (i) more than 5% of its total assets in securities of a single issuer, nor (ii) in securities
representing more than 10% of the outstanding voting securities of an issuer.
Concentration Each Fund normally invests more than 65% of its total assets in securities of companies in the utilities
industry. No more than 25% of the Fund's total assets may be invested in securities of companies in any
other one industry; provided that this limitation does not apply to obligations issued or guaranteed as
to interest and principal by the U.S. Government or its agencies or instrumentalities or to repurchase
agreements secured by such obligations or to bank money-market instruments.
Investment companies Each Fund may invest up to 10% of the value of its total assets in dividend-paying securities of
registered investment companies that invest primarily in investment grade securities. Neither Fund will
acquire securities of any one investment company if, immediately thereafter, (i) the Fund would own in
the aggregate more than 3% of such company's total outstanding voting securities or (ii) securities
issued by such company would have an aggregate value in excess of 5% of the Fund's total assets. In
addition, each Fund and all other investment companies having the same adviser will not acquire
securities of any one investment company amounting in the aggregate to more than 10% of such company's
total outstanding voting stock. The investment companies in which the Fund invests include those open-
and closed-end investment companies whose distributions qualify for the Dividends Received Deduction. To
the extent that investment advisory and brokerage expenses of an investment company are reflected in the
price of its shares held in the Fund's portfolio, there is a duplication of such expenses.
Preferred stocks The preferred stocks in which each Fund invests are rated investment-grade (at least "BBB" by S&P or
"Baa" by Moody's) at the time of investment or are preferred stocks of issuers of investment-grade
senior debt, some of which may have speculative characteristics, or if not rated, are of comparable
quality as determined by the managers.
Common stocks Each Fund invests in common stocks of issuers whose senior debt is rated investment grade or, in the
case of issuers that have no rated senior debt outstanding, whose senior debt is considered by the
managers to be of comparable quality.
19
Select Dividend Trust Premium Dividend Fund II
Debt securities The debt obligations in which each Fund invests are rated investment-grade (at least "BBB" by S&P or
"Baa" by Moody's) at the time of investment, or if not rated, are of comparable quality as determined by
the managers.
Foreign securities Neither Fund's prospectus references the ability to invest in foreign securities. Neither Fund may
invest in Russian securities of any type.
Illiquid securities Each Fund may invest up to 20% of its net assets in securities purchased in direct placements.
When-issued Each Fund may make contracts to purchase securities on a "when-issued" basis, which means that delivery
purchases and payment for the securities take place at a future date beyond the customary settlement date. The
payment obligation and the interest rate on the securities will be fixed at the time the Fund enters
into the commitment, but interest will not accrue to the Fund until delivery of and payment for the
securities. An amount of cash or short-term U.S. Government securities equal to the Fund's commitment
would be deposited in a segregated account at the Fund's custodian bank to secure the Fund's obligation.
Although the Fund would generally purchase securities on a when- issued basis with the intention of
actually acquiring the securities for its portfolio (or for delivery pursuant to options contracts it
has entered into) the Fund may dispose of a security prior to settlement if the managers deem it
advisable.
Repurchase Each Fund may invest up to 5% of its net assets in repurchase agreements with broker-dealers, banks and
agreements other financial institutions. Each Fund may enter into repurchase agreements, provided that the Fund's
custodian bank always has possession of securities serving as collateral whose market value at least
equals the amount of the repurchase obligation. To minimize this risk of loss, each Fund enters into
repurchase agreements only with financial institutions considered by the managers to be creditworthy
under guidelines adopted by the Fund's Board.
Reverse repurchase Current Rating Agency Guidelines prohibit the Funds from entering into reverse repurchase agreements
obligations unless the relevant Rating Agency has advised the Fund in writing that any such action would not
adversely affect the then-current rating of the preferred shares and that any such action will be in
accordance with guidelines established by the relevant Rating Agency.
Securities loans Both Funds are currently prohibited by Rating Agency Guidelines from lending portfolio securities but,
if permitted to do so, they may seek to obtain additional income by making secured loans of their
portfolio securities with a value of up to 331/3% of each Fund's total assets. All securities loans will
be made pursuant to agreements requiring that the loans be continuously secured by collateral in cash or
short-term debt obligations at least equal at all times to the market value of the loaned securities.
Each Fund may pay reasonable finders', administrative and custodial fees in connection with loans of its
portfolio securities. Although voting rights or rights to consent accompanying loaned securities pass to
the borrower, each Fund retains the right to call the loans at any time on reasonable notice and it will
do so in order that the securities may be voted by the Fund with respect to matters materially affecting
the Fund's investment. Each Fund may also call a loan in order to sell the securities involved. Loans of
portfolio securities are made only to borrowers considered by the managers to be creditworthy under
guidelines adopted by each Fund's Board.
Active trading The managers make portfolio adjustments that reflect the Fund's investment strategy but do not trade
securities for the Fund for the purpose of seeking short-term profits. However, if the Fund is required
to sell assets to effect mandatory redemptions of the preferred shares or to repurchase common shares,
the Fund's portfolio turnover will be higher than would otherwise be the case. Each Fund's intention to
operate so that the dividends paid can be designated as qualifying for the Dividends Received Deduction
and tax considerations relating to the maintenance of a Fund's status as a regulated investment company
limit the Fund's portfolio turnover and the amount of short-term capital gains it realizes.
The portfolio turnover rate for Select Dividend Fund for the period ended June 30, 2006 was 26%. The
portfolio turnover rate for Premium Dividend Fund II for the period ended October 31, 2006, was 24%.
Each Fund's annual portfolio turnover rate generally will not exceed 200% (excluding turnover of
securities having maturities of one year or less).
20
Select Dividend Trust Premium Dividend Fund II
Derivatives Each Fund is permitted to engage in options and futures transaction under its investment restrictions.
Each Fund will engage in such transactions to hedge against a decline in the value of securities
included in the Fund's portfolio or in the price of securities which it plans to purchase for the Fund
through the writing and purchase of options and the purchase and sale of financial contracts and related
options on such futures contracts. In addition, each Fund may seek to increase the current return of the
Fund's portfolio by writing covered call or secured put options. Each Fund's ability to engage in
options and futures transactions may be limited by the Rating Agency Guidelines. Neither Fund will
engage in options and futures transactions for leveraging purposes.
Short sales Current Rating Agency Guidelines provide that neither Fund may make short sales of securities unless the
relevant Rating Agency has advised the Fund in writing that any such action would not adversely affect
its then-current rating of the preferred shares of the Fund and that any such action will be in
accordance with guidelines established by the relevant Rating Agency.
Temporary defensive There may be times when, in the managers' judgment, conditions in the securities markets would make
positions pursuing the Fund's investment strategy inconsistent with achieving the Fund's investment objective. At
such times, the managers may employ alternative strategies primarily to seek to reduce fluctuations in
the value of the Fund's assets. In implementing defensive strategies, depending on the circumstances,
the Fund may invest any portion of its portfolio in U.S. Government securities, investment grade
corporate debt securities, high quality, short-term money market instruments and in cash. Investment
income received by a Fund with respect to these investments will not be eligible for the Dividends
Received Deduction when distributed to shareholders and may increase the amount of additional dividends
payable on the preferred shares. It is impossible to predict when, or for how long, the Fund may use
these alternative strategies.
Borrowings Current Rating Agency Guidelines prohibit the Funds from borrowing money, unless the relevant Rating
Agency has advised the Fund in writing that any such action would not adversely affect the then-current
rating of the preferred shares and that any such action will be in accordance with guidelines
established by the relevant Rating Agency.
21
Comparison of Global Dividend Fund to Premium Dividend Fund II
Global Dividend Fund Premium Dividend Fund II
Business Each Fund is a diversified closed-end management investment company organized as a Massachusetts
business trust.
Net assets as of $177.3 million $287.1 million
September 30, 2006
Listing NYSE under the ticker symbol "PGD" NYSE under the ticker symbol "PDT"
(common shares)
Rating of o "AA" from S&P
preferred shares o "aa2" from Moody's
Fiscal year end date 7/31 10/31
Investment adviser, Investment Adviser:
sub-adviser and John Hancock Advisers, LLC
portfolio managers
Investment Sub-Adviser:
MFC Global Investment Management (U.S.), LLC
Portfolio managers:
Gregory K. Phelps
- Joined MFC Global (U.S.) in 2005
- Joined Adviser in 1995
- Began business career in 1980
Mark T. Maloney
- Joined MFC Global (U.S.) in 2005
- Joined Adviser in 1982
- Began business career in 1976
Managers share investment strategy and decisions.
Investment objective The Fund's investment objective is to provide a The Fund's investment objective is to provide high
high level of current income, consistent with current income, consistent with modest growth of
modest growth of capital, for holders of its capital for holders of its common shares. The
common shares of beneficial interest. The potential for modest capital appreciation on the
potential for modest capital appreciation on Fund's investments in common stocks is a secondary
the Fund's investment in common stocks is a consideration. The managers manage the Fund's
secondary consideration. This objective is not portfolio to maximize income qualifying for the
fundamental and may be changed without Dividends Received Deduction. This objective is not
shareholder approval. fundamental and may be changed without shareholder
approval.
Primary investments The Fund pursues its objective by investing in The Fund pursues its investment objective by
a diversified portfolio of dividend-paying investing in a diversified portfolio of dividend-
preferred and common stocks of domestic and paying preferred and common stocks. Under normal
foreign issuers, as well as debt obligations, circumstances, the Fund invests at least 80% of its
with the Fund investing only in U.S. net assets in dividend-paying securities. The
dollar-denominated securities. Under normal "assets" are defined as net assets, including the
circumstances, the Fund invests at least 80% of liquidation preference amount of the DARTS, plus
its net assets in dividend- paying preferred borrowings for investment purposes. Each Fund
and common stocks of domestic and foreign normally invests more than 65% of its total assets
issuers. The "assets" are defined as net in securities of companies in the utilities
assets, including the liquidation preference industry.
amount of the DARTS, plus borrowings for
investment purposes. Under normal market
conditions, the Fund invests at least 65% of
its total assets in securities of issuers
located in three or more countries, including
the United States, with no more than 25% of the
Fund's total assets in securities of issuers
located in any single country other than the
United States.
22
Global Dividend Fund Premium Dividend Fund II
Under normal market conditions, the Fund
concentrates its investment in securities of
domestic and foreign companies in the utilities
industry by investing at least 25% of its total
assets in such securities. In addition, under
normal market conditions, the Fund invests a
portion of its assets (although less than 25%
of its total assets) in securities issued by
companies in the banking industry.
Investment strategy The managers perform their own investment The managers perform their own investment analysis
analysis when making investment decisions for when making investment decisions for the Fund and do
the Fund and do not rely solely on the ratings not rely solely on the ratings assigned to
assigned to securities by the Rating Agencies. securities by the Rating Agencies. The managers'
The managers' analysis may include analysis may include consideration of the issuer's
consideration of the issuer's experience and experience and managerial strength, changing
managerial strength, changing financial financial condition, borrowing requirements or debt
condition, borrowing requirements or debt maturity schedules, and its responsiveness to
maturity schedules, and its responsiveness to changes in business conditions and interest or
changes in business conditions and interest or dividend rates. The managers also consider relative
dividend rates. The managers also consider values based on anticipated cash flow, interest or
relative values based on anticipated cash flow, dividend coverage, asset coverage and earnings
interest or dividend coverage, asset coverage prospects.
and earnings prospects.
In selecting preferred stocks, the managers consider
In selecting preferred stocks and debt current effective yield, price stability and the
obligations, the managers consider current underlying fundamental characteristics of the
effective yield, price stability and the issuer, with particular emphasis on debt and
underlying fundamental characteristics of the dividend coverage and the potential for timely
issuer, with particular emphasis on debt and payment of dividends. The managers select common
dividend coverage and the potential for timely stocks on the basis of their current dividend rate
payment of dividends and interest. The managers and fundamental value. The Fund focuses on common
select common stocks on the basis of their stocks of those issuers which, in the opinion of the
current dividend rate and fundamental value. managers, have strong fundamental characteristics,
The Fund focuses on common stocks of those large market capitalizations, favorable credit
issuers which, in the opinion of the managers, quality and current dividend yields generally higher
have strong fundamental characteristics, large than the currently available dividend yield quoted
market capitalizations, favorable credit on the S&P 500 Index. In assessing the fundamental
quality and current dividend yields generally values of common stocks, the managers concentrate on
higher than the currently available quoted the relationship between the issuer's underlying
dividend yield on common stocks included in the earning power and the relevant price of the issuer's
S&P 500 Index. In assessing the fundamental stock. The potential for modest capital appreciation
values of common stocks, the managers on the Fund's investments in common stocks is a
concentrate on the relationship between the secondary consideration.
issuer's underlying earning power and the
relevant price of the issuer's stock. The The managers attempt to reduce investment and market
potential for modest capital appreciation on risk by allocating substantially all of the Fund's
the Fund's investments in common stocks will be assets among the following three sectors:
a secondary consideration.
o Common Stock Sector -- consisting of common
The managers will attempt to reduce investment stocks with current dividend yields generally
and market risk by allocating substantially all higher than the currently available dividend
of the Fund's assets among the following three yield quoted on the S&P 500 Index.
sectors:
o Preferred Stock Sector -- consisting of
o Common Stock Sector -- consisting of common cumulative fixed-rate preferred stocks, sinking
stocks with current dividend yields fund preferred stocks, convertible preferred
generally higher than the currently stocks and adjustable rate preferred stocks which
available quoted dividend yield on common the managers believe have above- average current
stocks included in the S&P 500 Index. effective dividend yields.
23
Global Dividend Fund Premium Dividend Fund II
o Preferred Stock and Bond Sector -- o Low Volatility Sector -- consisting predominantly
consisting of (i) cumulative fixed-rate of auction preferred stocks and money market
preferred stocks, sinking fund preferred instruments, as well as certain dividend-paying
stocks, convertible preferred stocks and securities which, in the managers' opinion, are
adjustable rate preferred stocks and (ii) currently exhibiting greater price stability than
investment grade debt obligation of a the securities in the Common and Preferred Stock
variety of domestic and foreign issuers, Sectors.
including corporations, banks, governments
and their agencies, instrumentalities, and The managers determine the assets allocated to each
political subdivisions and international and of the above sectors based on their assessment of
supranational organizations, which the the maximum level of current income that can be
managers believe have above-average current achieved consistent with the Fund's objective of
effective yields. modest growth of capital. The managers rely in part
on quantitative analytical techniques which measure
o Low Volatility Sector -- consisting the relative risks and opportunities of each sector
predominantly of auction rate preferred based on current and historical market data, as well
stocks, remarketed preferred stocks and as on its own assessment of economic and market
money market instruments, as well as certain conditions. During periods of stock market weakness
dividend-paying securities which, in the or uncertain market or economic conditions, as
managers' opinion, are currently exhibiting determined by the managers, the Fund may
greater price stability than the securities substantially increase the portion of their assets
in the Common Stock and Preferred Stock and invested in the Low Volatility Sector. The managers
Bond Sectors. continually review the Fund's asset allocation and
make adjustments as they deem appropriate.
The managers determine the assets allocated to
each of the above sectors based on their
assessment of the maximum level of current
income that can be achieved consistent with the
Fund's objective of modest growth of capital
and its investment policies. The managers rely
in part on quantitative analytical techniques
which measure the relative risks and
opportunities of each sector based on current
and historical market data, as well as on its
own assessment of economic and market
conditions. During periods of stock or bond
market weakness or uncertain market or economic
conditions, as determined by the managers, the
Fund may substantially increase the portion of
their assets invested in the Low Volatility
Sector. The managers continually review the
Fund's asset allocation and make adjustments as
they deem appropriate.
24
Global Dividend Fund Premium Dividend Fund II
Dividends Received So long as any DARTS are outstanding, when The managers manage the Fund's portfolio to maximize
Deduction considering the relative yields available from income qualifying for the Dividends Received
alternative investments, the managers take into Deduction. The Fund operates so that dividends paid
account whether the income derived from such qualify in their entirety for the Dividends Received
securities qualifies for the Dividends Received Deduction and the Fund does not intend to realize
Deduction. If the income derived from such any net capital gains, but there is no assurance
securities does not so qualify for the that this result will be achieved. If any dividends
Dividends Received Deduction, the managers take on the DARTS do not so qualify because the Fund
into account whether the yields available on realizes net capital gains or receives net income,
non- Dividends Received Deduction qualifying excluding net capital gains, in excess of dividends
securities are sufficiently in excess of the that qualify for the Dividends Received Deduction,
yields available from comparable Dividends the Fund will pay additional dividends so that the
Received Deduction qualifying securities to Net After-Tax Return to holders of the DARTS will,
compensate for any additional or higher under then-current law, be the same as the Net
dividends that the Fund may be required to pay After-Tax Return that would have been derived if
on the DARTS. Because the Fund may pay such dividends had so qualified.
dividends that qualify for the Dividends
Received Deduction only from the dividends the
Fund receives from equity securities of U.S.
issuers, depending on the relative yields
available from time to time on non-Dividends
Received Deduction qualifying securities and
Dividends Received Deduction qualifying
securities, a substantial portion of the Fund's
total assets may be invested in dividend paying
securities of U.S. issuers. Under normal market
conditions, the Fund anticipates that at least
50% of the dividends paid to the holders of the
DARTS will qualify for the Dividends Received
Deduction when distributed to shareholders.
Dividend roll program In order to seek to increase dividend income, N/A
the Fund may engage in a "dividend roll
program." Under such a program, the Fund will
purchase dividend-paying stock prior to its
ex-dividend date and sell it on or after the
ex-dividend date. The Fund currently intends to
hold such stock of U.S. domestic issuers at
least 46 days and to meet certain other
requirements in connection with its efforts to
enable dividends from such stock to be eligible
for the Dividends Received Deduction when
distributed to shareholders. Dividends from
stock of foreign issuers are not eligible for
the Dividends Received Deduction.
Diversification Each Fund is diversified, which means that, with respect to 75% of its total assets, each Fund cannot
invest (i) more than 5% of its total assets in securities of a single issuer or (ii) in securities
representing more than 10% of the outstanding voting securities of an issuer.
Concentration The Fund will not invest more than 25% of the The Fund normally invests more than 65% of its total
value of its total assets in the securities of assets in securities of companies in the utilities
issuers primarily engaged in any one industry industry. No more than 25% of the Fund's total
except the utilities industry, in which the assets may be invested in securities of companies in
Fund invests not less than 25% of its total any other one industry; provided that this
assets; provided that this limitation does not limitation does not apply to obligations issued or
apply to obligations issued or guaranteed as to guaranteed as to interest and principal by the U.S.
interest and principal by the U.S. Government Government or its agencies or instrumentalities or
or its agencies or instrumentalities or to to repurchase agreements secured by such obligations
repurchase agreements secured by such or to bank money-market instruments.
obligations.
25
Global Dividend Fund Premium Dividend Fund II
Investment companies To the extent permitted by the 1940 Act, the The Fund may invest up to 10% of the value of its
Fund may invest in dividend paying securities total assets in dividend-paying securities of
of registered investment companies that invest registered investment companies that invest
primarily in investment grade securities. To primarily in investment grade securities. The Fund
the extent that investment advisory and will not acquire securities of any one investment
brokerage expenses of an investment company are company if, immediately thereafter, the Fund would
reflected in the price of its shares held in own in the aggregate more than 3% of such company's
the Fund's portfolio, investment in securities total outstanding voting stock or securities issued
of other investment companies results in a by such company would have an aggregate value in
duplication of such expenses. excess of 5% of the Fund's total assets. In
addition, the Fund and all other investment
companies having the same adviser will not acquire
securities of any one investment company amounting
in the aggregate to more than 10% of such company's
total outstanding voting stock. The investment
companies in which the Fund invests include those
open- and closed-end investment companies whose
distributions qualify for the Dividends Received
Deduction. To the extent that investment advisory
and brokerage expenses of an investment company are
reflected in the price of its shares held in the
Fund's portfolio, there is a duplication of such
expenses.
Preferred stocks The preferred stocks in which each Fund invests are rated investment-grade (at least "BBB" by S&P or
"Baa" by Moody's) at the time of investment or are preferred stocks of issuers of investment-grade
senior debt, some of which may have speculative characteristics, or if not rated, are of comparable
quality as determined by the managers.
Common stocks Each Fund invests in common stocks of issuers whose senior debt is rated investment grade or, in the
case of issuers that have no rated senior debt outstanding, whose senior debt is considered by the
managers to be of comparable quality.
Debt securities The Fund may invest up to 35% of its total The debt obligations in which the Fund invests are
assets in debt obligations of a variety of rated investment-grade (at least "BBB" by S&P or
domestic and foreign issuers, including "Baa" by Moody's) at the time of investment or, if
corporations, banks, governments and their not rated, are of comparable quality as determined
agencies, instrumentalities and political by the managers.
subdivisions and international and
supranational organizations.
The debt obligations in which the Fund invests
are rated investment-grade (at least "BBB" by
S&P or "Baa" by Moody's) at the time of
investment or, if not rated, will be of
comparable quality as determined by the
managers.
26
Global Dividend Fund Premium Dividend Fund II
Foreign securities The Fund invests in three or more countries The Fund's prospectus does not reference the ability
(including the United States), but it may not to invest in foreign securities. The Fund may not
invest more than 25% of its total assets in any invest in Russian securities of any type.
single country, excluding the United States.
The Fund may invest only in U.S. dollar
denominated securities of foreign issuers.
These securities may include investment grade
preferred stocks of foreign corporations and
investment grade debt obligations of a variety
of foreign issuers, including foreign
corporations and banks, foreign governments and
their agencies, instrumentalities and political
subdivisions, and international and
supranational organizations such as the World
Bank and the Asian Development Bank. The
foreign securities in which the Fund invests
are of issuers located in Western Europe,
Canada, Australia, New Zealand or the Far East,
although the Fund is not prohibited from
investing in securities of issuers located in
any other country or region. When selecting
among issuers located in different countries,
the managers consider such factors as relative
yield, credit quality, interest rate trends and
political and economic stability.
The Fund may invest in Russian securities, with
restrictions. The Fund may invest a maximum of
10% of its total assets in Russian fixed income
securities and a maximum of 5% of its total
assets in Russian equity securities. Further,
all Russian securities must be (i) denominated
in USD; (ii) traded on a major exchange; and
(iii) held physically outside of Russia.
As an alternative to investing directly in
foreign securities, the Fund may invest in
American Depositary Receipts ("ADRs"). The Fund
will only invest in those ADRs sponsored by the
issuer of the underlying foreign security.
Illiquid securities The Fund may invest up to 20% of its total The Fund may invest up to 20% of its net assets in
assets in securities for which there is no securities purchased in direct placements.
readily available secondary market, including
securities acquired in private placements,
joint ventures and partnerships.
27
Global Dividend Fund Premium Dividend Fund II
When-issued The Fund may make contracts to purchase The Fund may make contracts to purchase securities
purchases securities on a "when-issued" or "delayed on a "when-issued" basis, which means that delivery
delivery" basis. Pursuant to such contracts, and payment for the securities take place at a
delivery and payment for the securities occurs future date beyond the customary settlement date.
at a date later than the customary settlement The payment obligation and the interest rate on the
date. The payment obligation and the interest securities are fixed at the time the Fund enters
rate on the securities are fixed at the time into the commitment, but interest does not accrue to
the Fund enters into the commitment, but the Fund until delivery of and payment for the
interest will not accrue to the Fund until securities. An amount of cash or short-term U.S.
delivery of and payment for the securities. An Government securities equal to the Fund's commitment
amount of cash or high quality securities equal is deposited in a segregated account at the Fund's
to the amount of the Fund's commitment is custodian bank to secure the Fund's obligation.
deposited in a segregated account at the Fund's Although the Fund generally purchases securities on
custodian to secure the Fund's obligation. a when-issued basis with the intention of actually
Although the Fund generally purchases acquiring the securities for its portfolio (or for
securities on a when-issued or delayed delivery delivery pursuant to options contracts it has
basis with the intention of actually acquiring entered into), the Fund may dispose of a security
the securities for its portfolio (or for prior to settlement if the managers deem it
delivery pursuant to options contracts it has advisable.
entered into) and not for leverage purposes,
the Fund may dispose of a security prior to
settlement if the managers deem it advisable.
Repurchase The Fund may engage in repurchase agreements The Fund may invest up to 5% of its net assets in
agreements with broker-dealers, banks and other financial repurchase agreements with broker-dealers, banks and
institutions. other financial institutions.
Each Fund may enter into repurchase agreements, provided that each Fund's custodian bank always has
possession of securities serving as collateral whose market value at least equals the amount of the
repurchase obligation. To minimize the risk of loss, each Fund will enter into repurchase agreements
only with financial institutions considered by the managers to be creditworthy under guidelines adopted
by the Fund's Board.
Reverse repurchase Current Rating Agency Guidelines prohibit the Funds from entering into reverse repurchase agreements
obligations unless the relevant Rating Agency has advised the Fund in writing that any such action would not
adversely affect the then-current rating of the preferred shares and that any such action will be in
accordance with guidelines established by the relevant Rating Agency.
Securities loans Current Rating Agency Guidelines prohibit the Fund from lending any securities unless it has received
written confirmation by the relevant Rating Agency that such action would not impair the ratings then
assigned to the DARTS. In the future, and if permitted to do so, the Funds may seek to obtain additional
income by making secured loans of their portfolio securities with a value of up to 331/3% of each Fund's
total assets. All securities loans will be made pursuant to agreements requiring that the loans be
continuously secured by collateral in cash or short-term debt obligations at least equal at all times to
the market value of the loaned securities. Each Fund may pay reasonable finders', administrative and
custodial fees in connection with loans of its portfolio securities. Although voting rights or rights to
consent accompanying loaned securities pass to the borrower, each Fund retains the right to call the
loans at any time on reasonable notice and it will do so in order that the securities may be voted by
the Fund with respect to matters materially affecting the Fund's investment. Each Fund may also call a
loan in order to sell the securities involved. Loans of portfolio securities will be made only to
borrowers considered by the managers to be creditworthy under guidelines adopted by each Fund's Board.
28
Global Dividend Fund Premium Dividend Fund II
Active trading The portfolio turnover rate for Global Dividend The managers make portfolio adjustments that reflect
Fund for the period ended July 31, 2006, was the Fund's investment strategy, but do not trade
24%. The Fund's annual portfolio turnover rate securities for the Fund for the purpose of seeking
generally will not exceed 200% (excluding short-term profits. However, if the Fund is required
turnover of securities having maturities of one to sell assets to effect mandatory redemptions of
year or less). the preferred shares or to repurchase common shares,
the Fund's portfolio turnover will be higher than
would otherwise be the case. The Fund's intends to
operate so that the dividends paid are designated as
qualifying in their entirety for the Dividends
Received Deduction, and tax considerations relating
to the maintenance of the Fund's status as a
regulated investment company limit the Fund's
portfolio turnover and the amount of short-term
capital gains it may realize.
The portfolio turnover rate for Premium Dividend Fund II
for the period ended October 31, 2006, was 24%. The
Fund's annual portfolio turnover rate generally will not
exceed 200% (excluding turnover of securities having
maturities of one year or less).
Derivatives The Fund is permitted to engage in options and The Fund is permitted to engage in options and
futures transactions under its investment futures transaction under its investment
restrictions. The Fund may engage in such restrictions. The Fund may engage in such
transactions when deemed advantageous in order transactions to hedge against a decline in the value
to pursue the Fund's investment objective, to of securities included in the Fund's portfolio or in
seek to hedge against the effects of market the price of securities which it plans to purchase
conditions, to seek to stabilize the value of for the Fund through the writing and purchase of
its assets, to facilitate the sale of options and the purchase and sale of financial
securities, to establish a position in the contracts and related options on such futures
securities markets as a temporary substitute contracts. In addition, the Fund may seek to
for purchasing particular securities, to manage increase the current return of the Fund's portfolio
the effective dollar-weighted average duration by writing covered call or secured put options. The
of the Fund's portfolio and for other Fund's ability to engage in options and futures
appropriate risk management purposes. In transactions may be limited by the Rating Agency
addition, the Fund may seek to increase the Guidelines. The Fund will not engage in options and
current return of the Fund's portfolio by futures transactions for leveraging purposes.
writing covered call or secured put options.
The Fund's ability to engage in options and
futures transactions may be limited by the
Rating Agency Guidelines. The Fund will not
engage in options and futures transactions for
speculative purposes.
Short sales The Rating Agency Guidelines provide that the Current Rating Agency Guidelines provide that the
Fund may not make short sales of securities Fund may not make short sales of securities unless
unless covered, unless it has received written the relevant Rating Agency has advised the Fund in
confirmation from the relevant Rating Agency writing that any such action would not adversely
that any such action would not impair the affect its then-current rating of the preferred
rating then assigned to the DARTS and that any shares of the Fund and that any such action will be
such action will be in accordance with the in accordance with guidelines established by the
guidelines established by the relevant Rating relevant Rating Agency.
Agency.
29
Global Dividend Fund Premium Dividend Fund II
Temporary defensive When in the judgment of the managers a There may be times when, in the managers' judgment,
positions temporary defensive posture is appropriate, the conditions in the securities markets would make
Fund may invest its assets without limitation pursuing the Fund's investment strategy inconsistent
in U.S. Government obligations, high grade with achieving the Fund's investment objective. At
(i.e., rated within the two highest rating such times, the managers may employ alternative
categories by a nationally recognized rating strategies primarily to seek to reduce fluctuations
service) corporate debt securities of domestic in the value of the Fund's assets. In implementing
issuers, U.S. dollar- denominated high grade defensive strategies, depending on the
debt obligations of foreign issuers, high circumstances, the Fund may invest any portion of
grade, short-term money market instruments and its portfolio in U.S. Government securities,
cash. investment grade corporate debt securities, high
quality, short-term money market instruments and in
cash. Investment income received by a Fund with
respect to these investments will not be eligible
for the Dividends Received Deduction when
distributed to shareholders and may increase the
amount of additional dividends payable on the
preferred shares. It is impossible to predict when,
or for how long, the Fund may use these alternative
strategies.
Borrowings Current Agency Guidelines prohibit the Fund Current Agency Guidelines prohibit the Fund from
from borrowing money except for the purpose of borrowing money unless the relevant Rating Agency
clearing transactions in portfolio securities has advised the Fund in writing that any such action
(which borrowings shall under any circumstances would not adversely affect the then- current rating
be limited to the lesser of $10 million and an of the DARTS and that any such action will be in
amount equal to 5% of the market value of the accordance with guidelines established by the
Fund's assets at the time of such borrowings relevant Rating Agency.
and which borrowings shall be repaid within 60
days and not be extended or renewed), unless
the Fund has received written confirmation from
the relevant Rating Agency that such action
would not impair the ratings then assigned to
the DARTS.
30
Comparison of Preferred Dividend Fund to Premium Dividend Fund II
Preferred Dividend Fund Premium Dividend Fund II
Business Each Fund is a diversified closed-end management investment company organized as a Massachusetts
business trust.
Net assets as of $154.2 million $287.1 million
September 30, 2006
Listing NYSE under the ticker symbol "PPF" NYSE under the ticker symbol "PDT"
(common shares)
Rating of "aa" from Moody's o "AA" from S&P
preferred shares o "aa2" from Moody's
Fiscal year end date 5/31 10/31
Investment adviser, Investment Adviser:
sub-adviser and John Hancock Advisers, LLC
portfolio managers
Investment Sub-Adviser:
MFC Global Investment Management (U.S.), LLC
Portfolio managers:
Gregory K. Phelps
- Joined MFC Global (U.S.) in 2005
- Joined Adviser in 1995
- Began business career in 1980
Mark T. Maloney
- Joined MFC Global (U.S.) in 2005
- Joined Adviser in 1982
- Began business career in 1976
Managers share investment strategy and decisions.
Investment objective The Fund's investment objective is to provide a The Fund's investment objective is to provide high
high level of current income, consistent with current income, consistent with modest growth of
preservation of capital. This objective is non- capital for holders of its common shares. The
fundamental and can be changed without potential for modest capital appreciation on the
shareholder approval. Fund's investments in common stocks is a secondary
consideration. The managers manage the Fund's
portfolio to maximize income qualifying for the
Dividends Received Deduction. This objective is not
fundamental and may be changed without shareholder
approval.
Primary investments The Fund pursues its objective by investing in The Fund pursues its investment objective by
preferred stocks that, in the opinion of the investing in a diversified portfolio of dividend
managers, may be undervalued relative to paying preferred and common stocks. Under normal
similar securities in the marketplace. Under circumstances, the Fund invests at least 80% of its
normal circumstances, the Fund invests at least net assets in dividend-paying securities. The
80% of its assets in dividend-paying preferred "assets" are defined as net assets, including the
securities. The "assets" are defined as net liquidation preference amount of the DARTS, plus
assets including the liquidation preference borrowings for investment purposes. The Fund
amount of the preferred shares plus borrowings normally invests more than 65% of its total assets
for investment purposes. in securities of companies in the utilities
industry.
31
Preferred Dividend Fund Premium Dividend Fund II
Investment strategy The managers perform their own investment The managers perform their own investment analysis
analysis when making investment decisions for when making investment decisions for the Fund and do
the Fund and do not rely solely on the ratings not rely solely on the ratings assigned to
assigned to rated securities. The managers' securities by the Rating Agencies. The managers'
analysis may include consideration of the analysis may include consideration of the issuer's
issuer's experience and managerial strength, experience and managerial strength, changing
changing financial condition, borrowing financial condition, borrowing requirements or debt
requirements or debt maturity schedules, and maturity schedules, and its responsiveness to
its responsiveness to changes in business changes in business conditions and interest or
conditions and interest or dividend rates. The dividend rates. The managers also consider relative
managers also consider relative values based on values based on anticipated cash flow, interest or
anticipated cash flow, interest or dividend dividend coverage, asset coverage and earnings
coverage, asset coverage, earnings prospects, prospects.
current yield, price stability and the
underlying fundamental characteristics of the In selecting preferred stocks, the managers consider
issuer, with particular emphasis on the current effective yield, price stability and the
potential for timely payment of dividends and underlying fundamental characteristics of the
interest. issuer, with particular emphasis on debt and
dividend coverage and the potential for timely
payment of dividends. The managers select common
stocks on the basis of their current dividend rate
and fundamental value. The Fund focuses on common
stocks of those issuers which, in the opinion of the
managers, have strong fundamental characteristics,
large market capitalizations, favorable credit
quality and current dividend yields generally higher
than the currently available dividend yield quoted
on the S&P 500 Index. In assessing the fundamental
values of common stocks, the managers concentrate on
the relationship between the issuer's underlying
earning power and the relevant price of the issuer's
stock. The potential for modest capital appreciation
on a Fund's investments in common stocks is a
secondary consideration.
The managers attempt to reduce investment and market
risk by allocating substantially all of the Fund's
assets among the following three sectors:
o Common Stock Sector -- consisting of common
stocks with current dividend yields generally
higher than the currently available dividend
yield quoted on the S&P 500 Index.
o Preferred Stock Sector -- consisting of
cumulative fixed-rate preferred stocks, sinking
fund preferred stocks, convertible preferred
stocks and adjustable rate preferred stocks which
the managers believe have above- average current
effective dividend yields.
o Low Volatility Sector -- consisting predominantly
of auction preferred stocks and money market
instruments, as well as certain dividend-paying
securities which, in the managers' opinion, are
currently exhibiting greater price stability than
the securities in the Common and Preferred Stock
Sectors.
32
Preferred Dividend Fund Premium Dividend Fund II
The managers determine the assets allocated to each
of the above sectors based on its assessment of the
maximum level of current income that can be achieved
consistent with the Fund's objective of modest
growth of capital. The managers rely in part on
quantitative analytical techniques which measure the
relative risks and opportunities of each sector
based on current and historical market data, as well
as on its own assessment of economic and market
conditions. During periods of stock market weakness
or uncertain market or economic conditions, as
determined by the managers, the Fund may
substantially increase the portion of their assets
invested in the Low Volatility Sector. The managers
continually review the Fund's asset allocation and
make adjustments as they deem appropriate.
Dividends Received So long as any preferred shares are The managers manage the Fund's portfolio to maximize
Deduction outstanding, when considering the relative income qualifying for the Dividends Received
yields available from alternative investments, Deduction. The Fund operates so that dividends paid
the managers manage the Fund's portfolio to qualify in their entirety for the Dividends Received
maximize the income derived from such Deduction and the Fund does not intend to realize
securities that qualifies for the Dividends any net capital gains, but there is no assurance
Received Deduction. If the income derived from that this result will be achieved. If any dividends
such investments does not so qualify, the on the DARTS do not so qualify because the Fund
managers will take into account whether the realizes net capital gains or receives net income,
yields available on non- Dividends Received excluding net capital gains, in excess of dividends
Deduction qualifying securities to compensate that qualify for the Dividends Received Deduction,
for the additional dividends that the Fund will the Fund will pay additional dividends so that the
be required to pay to the holders of the Net After-Tax Return to holders of the DARTS will,
preferred shares. Because only equity under then-current law, be the same as the Net
securities of U.S. issuers pay dividends from After-Tax Return that would have been derived if
which the Fund may make distributions that such dividends had so qualified.
qualify for the Dividends Received Deduction,
depending on the relative yields available from
time to time on non- Dividends Received
Deduction qualifying securities and Dividends
Received Deduction qualifying securities, a
substantial portion of the Fund's total assets
may be invested in dividend paying securities
of U.S. issuers.
Diversification Each Fund is diversified, which means that, with respect to 75% of its total assets, the Fund cannot
invest (i) more than 5% of its total assets in securities of a single issuer or (ii) in securities
representing more than 10% of the outstanding voting securities of an issuer.
Concentration The Fund emphasizes investments in preferred The Fund normally invests more than 65% of its total
stocks issued by corporations in the financial assets in securities of companies in the utilities
services and utilities sectors, as well as industry. No more than 25% of the Fund's total
other regulated industries. However, the Fund assets may be invested in securities of companies in
does not invest more than 25% of the value of any other one industry; provided that this
its total assets in the securities of issuers limitation does not apply to obligations issued or
primarily engaged in the financial services guaranteed as to interest and principal by the U.S.
sector, utilities sectors or any other Government or its agencies or instrumentalities or
industry; provided that this limitation does to repurchase agreements secured by such obligations
not apply to obligations issued or guaranteed or to bank money-market instruments.
as to interest and principal by the U.S.
Government or its agencies or instrumentalities
or to repurchase agreements secured by such
obligations.
33
Preferred Dividend Fund Premium Dividend Fund II
Preferred stocks The preferred stocks in which each Fund invests are rated investment-grade (at least "BBB" by S&P or
"Baa" by Moody's) at the time of investment or are preferred stocks of issuers of investment-grade
senior debt, some of which may have speculative characteristics or, if not rated, are of comparable
quality as determined by the managers.
Common stocks Up to 20% of the Fund's total assets may be The Fund invests in common stocks of issuers whose
invested in common stocks. The Fund invests in senior debt is rated investment-grade or, in the
common stocks of issuers whose senior debt is case of issuers that have no rated senior debt
rated investment-grade or, in the case of outstanding, whose senior debt is considered by the
issuers that have no rated senior debt managers to be of comparable quality.
outstanding, whose senior debt is considered by
the managers to be of comparable quality.
Debt securities The Fund may invest up to 20% of its total The debt obligations in which the Fund invests are
assets in debt securities with ratings rated investment-grade (at least "BBB" by S&P or
equivalent to those of the preferred stocks in "Baa" by Moody's) at the time of investment or, if
which the Fund may invest. Debt securities in not rated, are of comparable quality as determined
which the Fund may invest include securities by the managers.
issued or guaranteed by the U.S. Government,
its agencies or instrumentalities and custodial
receipts therefor; securities issued or
guaranteed by a foreign government or any of
its political subdivisions, authorities,
agencies or instrumentalities or by
international or supranational entities;
corporate debt securities including notes,
bonds and debentures; certificates of deposit
and bankers' acceptances issued or guaranteed
by, or time deposits maintained at banks
(including U.S. or foreign branches of U.S.
banks or U.S. or foreign branches of foreign
banks) having total assets of more than $1
billion; commercial paper; and mortgage related
securities. These securities are U.S. dollar
denominated and may be of any maturity.
Foreign securities The Fund will not invest in foreign denominated The Fund's prospectus does not reference the ability
securities. The Fund may not invest in Russian to invest in foreign securities. The Fund may not
securities of any type. invest in Russian securities of any type.
Illiquid securities The Fund may invest up to 5% of its total The Fund may invest up to 20% of its net assets in
assets in securities for which there is no securities purchased in direct placements.
readily available secondary market, including
securities acquired in private placements,
joint ventures and partnerships.
When-issued Each Fund may make contracts to purchase securities on a "when-issued" basis, which means that delivery
purchases and payment for the securities take place at a future date beyond the customary settlement date. The
payment obligation and the interest rate on the securities are fixed at the time the Fund enters into
the commitment, but interest does not accrue to the Fund until delivery of and payment for the
securities. An amount of cash or short-term U.S. Government securities equal to the Fund's commitment is
deposited in a segregated account at the Fund's custodian bank to secure the Fund's obligation. Although
the Fund generally purchases securities on a when-issued or delayed delivery basis with the intention of
actually acquiring the securities for its portfolio (or for delivery pursuant to options contracts it
has entered into), the Fund may dispose of a security prior to settlement if the managers deem it
advisable.
Repurchase The Fund may engage in repurchase agreements The Fund may invest up to 5% of its net assets in
agreements with broker-dealers, banks and other financial repurchase agreements with broker-dealers, banks and
institutions. other financial institutions.
34
Preferred Dividend Fund Premium Dividend Fund II
Each Fund may enter into repurchase agreements, provided that the Fund's custodian bank always has
possession of securities serving as collateral whose market value at least equals the amount of the
repurchase obligation. To minimize this risk of loss, each Fund enters into repurchase agreements only
with financial institutions considered by the managers to be creditworthy under guidelines adopted by
the Fund's Board.
Reverse repurchase The Fund is currently prohibited by current The Fund is currently prohibited by current Rating
agreements Rating Agency Guidelines from entering into Agency Guidelines from entering into reverse
reverse repurchase agreements unless the repurchase agreements unless the relevant Rating
relevant Rating Agency has advised the Fund in Agency has advised the Fund in writing that any such
writing that any such action would not action would not adversely affect the then-current
adversely affect the then-current rating of the rating of the preferred shares and that any such
preferred shares. action will be in accordance with guidelines
established by the relevant Rating Agency.
Securities loans The Fund does not currently intend to lend The Fund is currently prohibited by Rating Agency
portfolio securities. Guidelines from lending portfolio securities.
In the future, and if permitted to do so, the Funds may seek to obtain additional income by making
secured loans of their portfolio securities with a value of up to 331/3% of each Fund's total assets.
All securities loans are made pursuant to agreements requiring that the loans be continuously secured by
collateral in cash or short-term debt obligations at least equal at all times to the market value of the
loaned securities. Each Fund may pay reasonable finders', administrative and custodial fees in
connection with loans of its portfolio securities. Although voting rights or rights to consent
accompanying loaned securities pass to the borrower, each Fund retains the right to call the loans at
any time on reasonable notice and it will do so in order that the securities may be voted by the Fund
with respect to matters materially affecting the Fund's investment. Each Fund may also call a loan in
order to sell the securities involved. Loans of portfolio securities are made only to borrowers
considered by the managers to be creditworthy under guidelines adopted by each Fund's Board.
Active trading The portfolio turnover rate for Preferred The managers make portfolio adjustments that reflect
Dividend Fund for the period ended May 31, the Fund's investment strategy, but do not trade
2006, was 16%. The Fund's annual portfolio securities for the Fund for the purpose of seeking
turnover rate generally will not exceed 200% short-term profits. However, if the Fund is required
(excluding turnover of securities having to sell assets to effect mandatory redemptions of
maturities of one year or less). the preferred shares or to repurchase common shares,
the Fund's portfolio turnover will be higher than
would otherwise be the case. The Fund's intention to
operate so that the dividends paid are designated as
qualifying in their entirety for the Dividends
Received Deduction and tax considerations relating
to the maintenance of the Fund's status as a
regulated investment company limit the Fund's
portfolio turnover and the amount of short-term
capital gains it may realize.
The portfolio turnover rate for Premium Dividend
Fund II for the period ended October 30, 2005 was
11%. The Fund's annual portfolio turnover rate
generally will not exceed 200% (excluding turnover
of securities having maturities of one year or
less).
35
Preferred Dividend Fund Premium Dividend Fund II
Derivatives The Fund is permitted to engage in options, The Fund is permitted to engage in options and
futures and swap transactions under its futures transaction under its investment
Investment Transactions. The Fund may engage in restrictions. The Fund may engage in such
such transactions when deemed advantageous in transactions to hedge against a decline in the value
order to pursue the Fund's investment of securities included in the Fund's portfolio or in
objective, to seek to hedge against the effects the price of securities which it plans to purchase
of market conditions, to seek to stabilize the for the Fund through the writing and purchase of
value of its assets, to facilitate the sale of options and the purchase and sale of financial
securities, to establish a position in the contracts and related options on such futures
securities markets as a temporary substitute contracts. In addition, the Fund may seek to
for purchasing particular securities, to manage increase the current return of the Fund's portfolio
the effective duration of the Fund's portfolio by writing covered call or secured put options. The
and for appropriate risk management purposes. Fund's ability to engage in options and futures
In addition, the Fund is permitted under the transactions may be limited by the Rating Agency
Fund's investment restrictions to seek to Guidelines. The Fund will not engage in options and
increase the current return of the Fund's futures transactions for leveraging purposes.
portfolio by writing covered call or secured
put options. However, the Fund does not
currently intend to engage in options, futures
and swaps transactions other than for hedging
and risk management purposes. The Fund's
ability to engage in options, futures and swaps
transactions may be limited by the Rating
Agency Guidelines.
Short sales Current Rating Agency Guidelines provide that Current Rating Agency Guidelines provide that the
the Fund may not make short sales of securities Fund may not make short sales of securities unless
unless covered and unless it has received the Rating Agency has advised the Fund in writing
written confirmation from the relevant Rating that any such action would not adversely affect its
Agency that any such action would not impair then-current rating of the preferred shares of the
the rating then assigned to the preferred Fund and that any such action will be in accordance
shares. with guidelines established by the relevant Rating
Agency.
Temporary defensive There may be times when, in the managers' There may be times when, in the managers' judgment,
positions judgment, conditions in the securities market conditions in the securities markets would make
would make pursuit of the Fund's investment pursuing the Fund's investment strategy inconsistent
strategy inconsistent with achievement of the with achieving the Fund's investment objective. At
Fund's investment objective. At such times, the such times, the managers may employ alternative
managers may employ alternative strategies strategies primarily to seek to reduce fluctuations
primarily to seek to reduce fluctuations in the in the value of the Fund's assets. In implementing
value of the Fund's assets. In implementing defensive strategies, depending on the
these temporary defensive strategies, depending circumstances, the Fund may invest any portion of
on the circumstances, the Fund may invest an its portfolio in U.S. Government securities,
unlimited portion of its portfolio in U.S. investment grade corporate debt securities, high
dollar-denominated corporate debt securities, quality, short-term money market instruments and in
short-term money market instruments, in each cash. Investment income received by a Fund with
case rated within the two highest rating respect to these investments will not be eligible
categories by a nationally recognized for the Dividends Received Deduction when
statistical rating organization, U.S. distributed to shareholders and may increase the
Government securities and cash . amount of additional dividends payable on the
preferred shares. It is impossible to predict when,
or for how long, the Fund may use these alternative
strategies.
36
Preferred Dividend Fund Premium Dividend Fund II
Borrowings Current Rating Agency Guidelines prohibit the Current Rating Agency Guidelines prohibit the Fund
Fund from borrowing money except for the from borrowing money, unless the relevant Rating
purpose of clearing transactions in portfolio Agency has advised the Fund in writing that any such
securities (which borrowings shall under any action would not adversely affect the then-current
circumstances be limited to the lesser of $10 rating of the DARTS and that any such action will be
million and an amount equal to 5% of the market in accordance with guidelines established by the
value of the Fund's assets at the time of such relevant Rating Agency.
borrowing and which borrowings shall be repaid
within 60 days and not be extended or renewed),
unless the Fund has received written
confirmation from the relevant Rating Agency
that such action would not impair the ratings
then assigned to the preferred shares. If the
Fund's borrowings exceed 5% of its net assets,
the Fund may not purchase additional portfolio
securities.
37
Fee, Expense and Distributions on Preferred Shares Table for Common Shareholders
of the Funds
Summary of Expense Comparison
As the tables below indicate, the pro forma total annual expenses of Premium
Dividend Fund II are expected to be lower than your Fund's total annual
expenses.
The Funds' Expenses
The tables below illustrate the change in operating expenses expected as a
result of the Reorganization. The tables set forth (i) the fees, expenses and
distributions to preferred shareholders paid by Premium Dividend Fund I for the
12-month period ended September 30, 2006, (ii) the fees, expenses and
distributions to preferred shareholders paid by Premium Dividend Fund II for the
12-month period ended October 31, 2006; (iii) the fees, expenses, and
distributions to preferred shareholders paid by Select Dividend Trust for the
12-month period ended June 30, 2006; (iv) the fees, expenses and distributions
to preferred shareholders paid by Global Dividend Fund for the 12-month period
ended July 31, 2006; (v) the fees, expenses and distributions to preferred
shareholders paid by Preferred Dividend Fund for the 12-month period ended May
31, 2006; and (vi) the pro forma fees, expenses and distributions to preferred
shareholders for the Acquiring Fund for the 12-month period ended October 31,
2006, assuming each of the Reorganizations had been completed at the beginning
of such period. The following tables show each Fund's expenses as a percentage
of net assets attributable to common shares and reflect the issuance of
preferred shares in an amount equal to 34.0% of the Acquiring Fund's total
assets, 31.2% of Premium Dividend Fund I's total assets, 33.2% of Select
Dividend Trust's total assets, 34.4% of Global Dividend Fund's total assets,
32.5% of Preferred Dividend Fund's total assets and 34.5% of the combined Fund's
total assets after the Reorganizations are completed.
As described herein, an unfavorable vote by one of the Acquired Funds will not
affect the implementation of the Reorganization by another Acquired Fund if
approved by such other Acquired Fund. It is anticipated that the most favorable
expense ratio will be achieved for each Acquired Fund if all of the
Reorganizations are approved and implemented and that the least favorable
expense ratio for each Acquired Fund will result if such Acquired Fund is the
only Fund that participates in the Reorganization with the Acquiring Fund. As
such, the following tables illustrate the anticipated change in operating
expenses expected as a result of (i) all Acquired Funds approving and
participating in the Reorganization, (ii) Reorganization of only Premium
Dividend Fund I into the Acquiring Fund, (iii) Reorganization of only Select
Dividend Trust into the Acquiring Fund, (iv) Reorganization of only Global
Dividend Fund into the Acquiring Fund, and (v) Reorganization of only Preferred
Dividend Fund into the Acquiring Fund. Because each Acquired Fund's
participation in the Reorganization is not contingent on whether the
Reorganization is approved by any of the other Acquired Funds, several Fund
combinations are possible and the effects on expenses for all possible
combinations are not illustrated in the expense tables below. It is expected,
however, that the range of resulting expenses from the possible Fund
combinations will be captured in the included expense tables because such tables
illustrate what is anticipated to be the least and most favorable resulting
expenses for each Fund.
I. All Acquired Funds Participating in the Reorganization:
PRO
ACTUAL FORMA(1)
---------------------------------------------------------------------------------------
Premium
Premium Dividend Select Global Preferred Premium
Dividend Fund II Dividend Dividend Dividend Dividend
Fund I (PDF) (PDT) Trust (DIV) Fund (PGD) Fund (PPF) Fund II (PDT)
-----------------------------------------------------------------------------------------------------------------------
Common Shareholder Transaction
Expenses(2)
Sales Load (as a percentage
of offering price) None(3) None(3) None(3) None(3) None(3) None(3)
Dividend Reinvestment Plan Fees None(4) None(4) None(4) None(4) None(4) None(4)
38
(Unaudited)
ACTUAL
Percentage of Net Assets Attributable to Common Shares PRO
(Assuming Leverage as Described Above)(5) FORMA(1)
---------------------------------------------------------------------------------------
Premium
Premium Dividend Select Global Preferred Premium
Dividend Fund II Dividend Dividend Dividend Dividend
Fund I (PDF) (PDT) Trust (DIV) Fund (PGD) Fund (PPF) Fund II (PDT)
-----------------------------------------------------------------------------------------------------------------------
Annual Expenses (as a percentage
of net assets attributable to
common shares)
Management Fee 1.17%(6) 1.23%(6) 1.19% 1.22% 1.21% 1.21%(6)
Administration Fee 0.15% 0.16% 0.22% 0.23% 0.23% 0.15%
Interest Payments on
Borrowed Funds None None None None None None
Other Expenses(7) 0.29% 0.28% 0.29% 0.34% 0.46% 0.22%
Total Annual Expenses 1.61% 1.67% 1.70% 1.79% 1.90% 1.58%
Dividends on Preferred Shares 1.71%(8)(9) 2.09%(8)(10) 1.62%(8)(11) 1.81%(8)(12) 1.74%(8)(13) 1.93%(8)(14)
Total Annual Fund Operating
Expenses and Dividends on
Preferred Shares 3.32% 3.76% 3.32% 3.60% 3.64% 3.51%
(1) The pro forma column shown assumes all of the Reorganizations are
completed. As described herein, an unfavorable vote by one of the Acquired
Funds will not affect the implementation of the Reorganization by another
Acquired Fund if approved by such other Acquired Fund. As such, there could
be other combinations of approved Reorganizations.
(2) No expense information is presented with respect to preferred shares
because holders of preferred shares do not bear any transaction or
operating expenses of any of the Funds and will not bear any transaction or
operating expenses of the combined Fund.
(3) Shares of Funds purchased on the secondary market are not subject to sales
charges but may be subject to brokerage commissions or other charges. The
table does not include an underwriting commission paid by shareholders in
the initial offering of each Fund.
(4) Each participant in a Fund's dividend reinvestment plan pays a
proportionate share of the brokerage commissions incurred with respect to
open market purchases in connection with such plan.
(5) Stated as percentages of net assets attributable to common shares, assuming
no issuance of preferred shares or borrowings, each Fund's expenses would
be as follows:
(Unaudited)
ACTUAL
Percentage of Net Assets Attributable to Common Shares PRO
(Assuming No Leverage) FORMA(1)
---------------------------------------------------------------------------------------
Premium
Premium Dividend Select Global Preferred Premium
Dividend Fund II Dividend Dividend Dividend Dividend
Fund I (PDF) (PDT) Trust (DIV) Fund (PGD) Fund (PPF) Fund II (PDT)
-----------------------------------------------------------------------------------------------------------------------
Annual Expenses (as a percentage
of net assets attributable to
common shares)
Management Fee 0.79%(6) 0.79%(6) 0.80% 0.80% 0.80% 0.80%(6)
Administration Fee 0.10% 0.10% 0.15% 0.15% 0.15% 0.10%
Other Expenses (7) 0.20% 0.18% 0.19% 0.23% 0.30% 0.09%
Total Annual Expenses 1.09% 1.07% 1.14% 1.18% 1.25% 0.99%
(6) Reflects the effective management fee rate. Premium Dividend Fund I and
Premium Dividend Fund II pay a monthly management fee to the Adviser at an
annual rate of 0.50% of the Fund's average weekly NAV and the value
attributable to the preferred shares (collectively, "managed assets"), plus
5.00% of the Fund's weekly gross income. The Adviser's total fee with
respect to each Fund is limited to a maximum amount equal to 1.00% annually
of the Fund's average weekly managed assets.
39
(7) In connection with the Reorganizations, there are certain other transaction
expenses not reflected in "Other Expenses" which include, but are not
limited to: costs related to the preparation, printing and distributing of
this Joint Proxy Statement/Prospectus to shareholders; costs related to
preparation and distribution of materials distributed to each Fund's Board;
expenses incurred in connection with the preparation of each Agreement and
Plan of Reorganization and the registration statement on Form N-14; SEC and
state securities commission filing fees; legal and audit fees; portfolio
transfer taxes (if any); and any similar expenses incurred in connection
with the Reorganizations. In accordance with applicable SEC rules, the
Board of each Fund reviewed the fees and expenses that will be borne
directly or indirectly by the Funds in connection with the Reorganizations.
After considering various alternatives for allocating these costs borne by
Funds and not paid by the Adviser, the Board of each Fund agreed that, in
the event the Reorganizations are approved and completed, the expenses of
the Reorganizations will be shared by the Acquired Funds and the Acquiring
Fund in proportion to and up to the amount of their first year's projected
annual expense savings as a result of the Reorganizations and the Adviser
will bear the balance of these expenses. The table below summarizes each
Fund's net assets (common shares only) at October 31, 2006, projected
annual expense savings to each Fund as a result of the Reorganizations,
allocation of Reorganization expenses among the Funds in dollars and
percentages, an estimated pay-back period (in years) and the resulting
effect on each Fund's NAV per common share at October 31, 2006. Some Funds
will benefit more from projected annual expense savings of the
Reorganizations than other Funds. The projected annual expense savings are
generally not expected to be immediately realized. If shareholders sell
their common shares prior to the estimated pay-back period, then they may
not realize any of the projected expense savings resulting from the reduced
expense ratio of the combined Fund. The NAV per common share of each Fund
will be reduced at the closing date of the respective Reorganization to
reflect the allocation of Reorganization expenses to each Fund. The
reduction in NAV per common share resulting from the allocation of
Reorganization expenses, when compared to the relative net asset sizes of
each Fund involved in the Reorganizations, will be greater in some Funds
than others. In the event a Reorganization is not completed, the costs
associated with such Reorganization will be borne by the Acquiring Fund and
the remaining Acquired Funds whose shareholders have approved their
respective Reorganizations. The numbers presented in the table are
estimates; actual results may differ.
Projected Reorganization Estimated Reduction to
Net Assets Annual Expense Payback Net Asset
Fund (Common Expense Allocation in Period Value per
(Unaudited) Shares Only) Savings Dollars/Percentage (in Months) Common Share
-------------------------------------------------------------------------------------------------------------
Premium Dividend Fund I (PDT) $155,962,651 $152,827 $120,497/17.1% 9 $ 0.00788
Premium Dividend Fund II (PDF) $193,704,386 $134,403 $105,970/15.0% 9 $ 0.00704
Select Dividend Fund (DIV) $154,525,217 $214,773 $169,337/24.0% 9 $ 0.01692
Global Dividend Fund (PGD) $121,323,875 $239,542 $188,866/26.8% 9 $ 0.02263
Preferred Dividend Fund (PPF) $103,520,802 $153,494 $121,022/17.1% 9 $ 0.01668
(8) Dividend rates on preferred shares are set in the auction process.
Prevailing interest rate, yield curve and market circumstances at the time
at which the dividend rate on preferred shares for the next dividend period
are set substantially influence the rate determined in an auction. As these
factors change over time, so too do the dividend rates set. In this regard,
the dividend rates for each Fund's preferred shares were set on different
dates and therefore do not provide a direct comparison of what these rates
would be if established on the same date. The dividend rates for Premium
Dividend Fund II historically and on a pro-forma combined basis include the
most recent dividend rate resets and reflect recent increases in short-term
interest rates.
(9) Reflects a dividend rate on preferred shares of 3.64%.
(10) Reflects a dividend rate on preferred shares of 3.77%.
(11) Reflects a dividend rate on preferred shares of 3.36%.
(12) Reflects a dividend rate on preferred shares of 3.44%.
(13) Reflects a dividend rate on preferred shares of 3.32%.
(14) Reflects a dividend rate on preferred shares of 3.77%. Such rate is an
estimate and may differ based on varying market conditions that may exist
as and when preferred shares are issued.
40
II. Reorganization of only Premium Dividend Fund I into the Acquiring Fund:
ACTUAL PRO FORMA(1)
------------------------------------------------
Premium Premium
Dividend Dividend Premium Dividend
Fund I (PDF) Fund II (PDT) Fund II (PDT)
---------------------------------------------------------------------------------------------
Common Shareholder Transaction Expenses(2)
Sales Load (as a percentage of offering price) None(3) None(3) None(3)
Dividend Reinvestment Plan Fees None(4) None(4) None(4)
(Unaudited)
ACTUAL
Percentage of Net Assets Attribut-
able to Common Shares (Assuming
Leverage as Described Above)(5) PRO FORMA(1)
-----------------------------------------------------------------------
Premium Premium
Dividend Dividend Premium Dividend
Fund I (PDF) Fund II (PDT) Fund II (PDT)
------------------------------------------------------------------------------------------------------------------------------------
Annual Expenses (as a percentage of net assets attributable to
common shares) 1.20%(6)
Management Fee 1.17%(6) 1.23%(6) 0.15%
Administration Fee 0.15% 0.16% None
Interest Payments on Borrowed Funds None None 0.25%
Other Expenses(7) 0.29% 0.28% 1.60%
Total Annual Expenses 1.61% 1.67% 1.95%(8)(11)
Dividends on Preferred Shares 1.72%(8)(9) 2.09%(8)(10)
Total Annual Fund Operating Expenses and Dividends on
Preferred Shares 3.33% 3.76% 3.55%
(1) The pro forma column shown assumes that Premium Dividend Fund I was the
only Acquired Fund in the Reorganization completed. As described herein, an
unfavorable vote by one of the Acquired Funds will not affect the
implementation of the Reorganization by another Acquired Fund if approved
by such other Acquired Fund. As such, there could be other combinations of
approved Reorganizations.
(2) No expense information is presented with respect to preferred shares
because holders of preferred shares do not bear any transaction or
operating expenses of any of the Funds and will not bear any transaction or
operating expenses of the combined Fund.
(3) Shares of Funds purchased on the secondary market are not subject to sales
charges but may be subject to brokerage commissions or other charges. The
table does not include an underwriting commission paid by shareholders in
the initial offering of each Fund.
(4) Each participant in a Fund's dividend reinvestment plan pays a
proportionate share of the brokerage commissions incurred with respect to
open market purchases in connection with such plan.
(5) Stated as percentages of net assets attributable to common shares, assuming
no issuance of preferred shares or borrowings, each Fund's expenses would
be as follows:
(Unaudited)
ACTUAL
Percentage of Net Assets
Attributable
to Common Shares
(Assuming
No Leverage) PRO FORMA(1)
------------------------------ -----------------
Premium Premium
Dividend Dividend Premium Dividend
Fund I (PDF) Fund II (PDT) Fund II (PDT)
-----------------------------------------------------------------------------------------------------------------
Annual Expenses (as a percentage of net assets attributable to
common shares)
Management Fee 0.79%(6) 0.79%(6) 0.79%(6)
Administration Fee 0.10% 0.10% 0.10%
Other Expenses(7) 0.20% 0.18% 0.11%
Total Annual Expenses 1.09% 1.07% 1.00%
41
(6) Reflects the effective management fee rate. Premium Dividend Fund I and
Premium Dividend Fund II pay a monthly management fee to the Adviser at an
annual rate of 0.50% of the Fund's average weekly NAV and the value
attributable to the preferred shares (collectively, "managed assets"), plus
5.00% of the Fund's weekly gross income. The Adviser's total fee with
respect to each Fund is limited to a maximum amount equal to 1.00% annually
of the Fund's average weekly managed assets.
(7) In connection with the Reorganizations, there are certain other transaction
expenses not reflected in "Other Expenses" which include, but are not
limited to: costs related to the preparation, printing and distributing of
this Joint Proxy Statement/Prospectus to shareholders; costs related to
preparation and distribution of materials distributed to each Fund's Board;
expenses incurred in connection with the preparation of each Agreement and
Plan of Reorganization and the registration statement on Form N-14; SEC and
state securities commission filing fees; legal and audit fees; portfolio
transfer taxes (if any); and any similar expenses incurred in connection
with the Reorganizations. In accordance with applicable SEC rules, the
Board of each Fund reviewed the fees and expenses that will be borne
directly or indirectly by the Funds in connection with the Reorganizations.
After considering various alternatives for allocating these costs borne by
Funds and not paid by the Adviser, the Board of each Fund agreed that, in
the event the Reorganizations are approved and completed, the expenses of
the Reorganizations will be shared by the Acquired Funds and the Acquiring
Fund in proportion to and up to the amount of their first year's projected
annual expense savings as a result of the Reorganizations and the Adviser
will bear the balance of these expenses. The table below summarizes each
Fund's net assets (common shares only) at October 31, 2006, projected
annual expense savings to each Fund as a result of the Reorganizations,
allocation of Reorganization expenses among the Funds in dollars and
percentages, an estimated pay-back period (in years) and the resulting
effect on each Fund's NAV per common share at October 31, 2006. Some Funds
will benefit more from projected annual expense savings of the
Reorganizations than other Funds. The projected annual expense savings are
generally not expected to be immediately realized. If shareholders sell
their common shares prior to the estimated pay-back period, then they may
not realize any of the projected expense savings resulting from the reduced
expense ratio of the combined Fund. The NAV per common share of each Fund
will be reduced at the closing date of the respective Reorganization to
reflect the allocation of Reorganization expenses to each Fund. The
reduction in NAV per common share resulting from the allocation of
Reorganization expenses, when compared to the relative net asset sizes of
each Fund involved in the Reorganizations, will be greater in some Funds
than others. In the event a Reorganization is not completed, the costs
associated with such Reorganization will be borne by the Acquiring Fund and
the remaining Acquired Funds whose shareholders have approved their
respective Reorganizations. The numbers presented in the table are
estimates; actual results may differ.
Projected Reorganization Estimated Reduction to
Net Assets Annual Expense Payback Net Asset
Fund (Common Expense Allocation in Period Value per
(Unaudited) Shares Only) Savings Dollars/Percentage (in Months) Common Share
-------------------------------------------------------------------------------------------------------------
Premium Dividend Fund I (PDT) $155,962,651 $152,827 $120,497/17.1% 9 $ 0.00788
Premium Dividend Fund II (PDF) $193,704,386 $134,403 $105,970/15.0% 9 $ 0.00704
Select Dividend Fund (DIV) $154,525,217 $214,773 $169,337/24.0% 9 $ 0.01692
Global Dividend Fund (PGD) $121,323,875 $239,542 $188,866/26.8% 9 $ 0.02263
Preferred Dividend Fund (PPF) $103,520,802 $153,494 $121,022/17.1% 9 $ 0.01668
(8) Dividend rates on preferred shares are set in the auction process.
Prevailing interest rate, yield curve and market circumstances at the time
at which the dividend rate on preferred shares for the next dividend period
are set substantially influence the rate determined in an auction. As these
factors change over time, so too do the dividend rates set. In this regard,
the dividend rates for each Fund's preferred shares were set on different
dates and therefore do not provide a direct comparison of what these rates
would be if established on the same date. The dividend rates for Premium
Dividend Fund II historically and on a pro-forma combined basis include the
most recent dividend rate resets and reflect recent increases in short-term
interest rates.
(9) Reflects a dividend rate on preferred shares of 3.64%.
(10) Reflects a dividend rate on preferred shares of 3.77%.
(11) Reflects a dividend rate on preferred shares of 3.76%. Such rate is an
estimate and may differ based on varying market conditions that may exist
as and when preferred shares are issued.
42
III. Reorganization of only Select Dividend Trust into the Acquiring Fund:
ACTUAL PRO FORMA(1)
---------------------------------------------------
Premium
Select Dividend Dividend Premium Dividend
Trust (DIV) Fund II (PDT) Fund II (PDT)
-----------------------------------------------------------------------------------------------------
Common Shareholder Transaction Expenses(2)
Sales Load (as a percentage of offering price) None(3) None(3) None(3)
Dividend Reinvestment Plan Fees None(4) None(4) None(4)
(Unaudited)
ACTUAL
Percentage of Net Assets Attribut-
able to Common Shares (Assuming
Leverage as Described Above)(5) PRO FORMA(1)
----------------------------------------------------------------------
Premium
Select Dividend Dividend Premium Dividend
Trust (DIV) Fund II (PDT) Fund II (PDT)
------------------------------------------------------------------------------------------------------------------------------------
Annual Expenses (as a percentage of net assets attributable to
common shares)
Management Fee 1.19% 1.23%(6) 1.21%(6)
Administration Fee 0.22% 0.16% 0.15%
Interest Payments on Borrowed Funds None None None
Other Expenses(7) 0.29% 0.28% 0.25%
Total Annual Expenses 1.70% 1.67% 1.61%
Dividends on Preferred Shares 1.62%(8)(9) 2.09%(8)(10) 1.97%(8)(11)
Total Annual Fund Operating Expenses and Dividends on
Preferred Shares 3.32% 3.76% 3.58%
(1) The pro forma column shown assumes that Select Dividend Trust was the only
Acquired Fund in the Reorganization completed. As described herein, an
unfavorable vote by one of the Acquired Funds will not affect the
implementation of the Reorganization by another Acquired Fund if approved
by such other Acquired Fund. As such, there could be other combinations of
approved Reorganizations.
(2) No expense information is presented with respect to preferred shares
because holders of preferred shares do not bear any transaction or
operating expenses of any of the Funds and will not bear any transaction or
operating expenses of the combined Fund.
(3) Shares of Funds purchased on the secondary market are not subject to sales
charges but may be subject to brokerage commissions or other charges. The
table does not include an underwriting commission paid by shareholders in
the initial offering of each Fund.
(4) Each participant in a Fund's dividend reinvestment plan pays a
proportionate share of the brokerage commissions incurred with respect to
open market purchases in connection with such plan.
(5) Stated as percentages of net assets attributable to common shares, assuming
no issuance of preferred shares or borrowings, each Fund's expenses would
be as follows:
(Unaudited)
ACTUAL
Percentage of Net Assets
Attribut-
able to Common Shares (Assuming
No Leverage) PRO FORMA(1)
-------------------------------------------------------
Premium
Select Dividend Dividend Premium Dividend
Trust (DIV) Fund II (PDT) Fund II (PDT)
--------------------------------------------------------------------------------------------------------------------
Annual Expenses (as a percentage of net assets attributable to
common shares)
Management Fee 0.80% 0.79%(6) 0.79%(6)
Administration Fee 0.15% 0.10% 0.10%
Other Expenses(7) 0.19% 0.18% 0.11%
Total Annual Expenses 1.14% 1.07% 1.00%
43
(6) Reflects the effective management fee rate. Premium Dividend Fund I and
Premium Dividend Fund II pay a monthly management fee to the Adviser at an
annual rate of 0.50% of the Fund's average weekly NAV and the value
attributable to the preferred shares (collectively, "managed assets"), plus
5.00% of the Fund's weekly gross income. The Adviser's total fee with
respect to each Fund is limited to a maximum amount equal to 1.00% annually
of the Fund's average weekly managed assets.
(7) In connection with the Reorganizations, there are certain other transaction
expenses not reflected in "Other Expenses" which include, but are not
limited to: costs related to the preparation, printing and distributing of
this Joint Proxy Statement/Prospectus to shareholders; costs related to
preparation and distribution of materials distributed to each Fund's Board;
expenses incurred in connection with the preparation of each Agreement and
Plan of Reorganization and the registration statement on Form N-14; SEC and
state securities commission filing fees; legal and audit fees; portfolio
transfer taxes (if any); and any similar expenses incurred in connection
with the Reorganizations. In accordance with applicable SEC rules, the
Board of each Fund reviewed the fees and expenses that will be borne
directly or indirectly by the Funds in connection with the Reorganizations.
After considering various alternatives for allocating these costs borne by
Funds and not paid by the Adviser, the Board of each Fund agreed that, in
the event the Reorganizations are approved and completed, the expenses of
the Reorganizations will be shared by the Acquired Funds and the Acquiring
Fund in proportion to and up to the amount of their first year's projected
annual expense savings as a result of the Reorganizations and the Adviser
will bear the balance of these expenses. The table below summarizes each
Fund's net assets (common shares only) at October 31, 2006, projected
annual expense savings to each Fund as a result of the Reorganizations,
allocation of Reorganization expenses among the Funds in dollars and
percentages, an estimated pay-back period (in years) and the resulting
effect on each Fund's NAV per common share at October 31, 2006. Some Funds
will benefit more from projected annual expense savings of the
Reorganizations than other Funds. The projected annual expense savings are
generally not expected to be immediately realized. If shareholders sell
their common shares prior to the estimated pay-back period, then they may
not realize any of the projected expense savings resulting from the reduced
expense ratio of the combined Fund. The NAV per common share of each Fund
will be reduced at the closing date of the respective Reorganization to
reflect the allocation of Reorganization expenses to each Fund. The
reduction in NAV per common share resulting from the allocation of
Reorganization expenses, when compared to the relative net asset sizes of
each Fund involved in the Reorganizations, will be greater in some Funds
than others. In the event a Reorganization is not completed, the costs
associated with such Reorganization will be borne by the Acquiring Fund and
the remaining Acquired Funds whose shareholders have approved their
respective Reorganizations. The numbers presented in the table are
estimates; actual results may differ.
Projected Reorganization Estimated Reduction to
Net Assets Annual Expense Payback Net Asset
Fund (Common Expense Allocation in Period Value per
(Unaudited) Shares Only) Savings Dollars/Percentage (in Months) Common Share
---------------------------------------------------------------------------------------------------------------
Premium Dividend Fund I (PDT) $155,962,651 $152,827 $120,497/17.1% 9 $ 0.00788
Premium Dividend Fund II (PDF) $193,704,386 $134,403 $105,970/15.0% 9 $ 0.00704
Select Dividend Fund (DIV) $154,525,217 $214,773 $169,337/24.0% 9 $ 0.01692
Global Dividend Fund (PGD) $121,323,875 $239,542 $188,866/26.8% 9 $ 0.02263
Preferred Dividend Fund (PPF) $103,520,802 $153,494 $121,022/17.1% 9 $ 0.01668
(8) Dividend rates on preferred shares are set in the auction process.
Prevailing interest rate, yield curve and market circumstances at the time
at which the dividend rate on preferred shares for the next dividend period
are set substantially influence the rate determined in an auction. As these
factors change over time, so too do the dividend rates set. In this regard,
the dividend rates for each Fund's preferred shares were set on different
dates and therefore do not provide a direct comparison of what these rates
would be if established on the same date. The dividend rates for Premium
Dividend Fund II historically and on a pro-forma combined basis include the
most recent dividend rate resets and reflect recent increases in short-term
interest rates.
(9) Reflects a dividend rate on preferred shares of 3.36%.
(10) Reflects a dividend rate on preferred shares of 3.77%.
(11) Reflects a dividend rate on preferred shares of 3.76%. Such rate is an
estimate and may differ based on varying market conditions that may exist
as and when preferred shares are issued.
44
IV. Reorganization of only Global Dividend Fund into the Acquiring Fund:
ACTUAL PRO FORMA(1)
-------------------------------------------------
Premium
Global Dividend Dividend Premium Dividend
Fund (PGD) Fund II (PDT) Fund II (PDT)
-----------------------------------------------------------------------------------------------
Common Shareholder Transaction Expenses(2)
Sales Load (as a percentage of offering price) None(3) None(3) None(3)
Dividend Reinvestment Plan Fees None(4) None(4) None(4)
(Unaudited)
ACTUAL
Percentage of Net Assets Attribut-
able to Common Shares (Assuming
Leverage as Described Above)(5) PRO FORMA(1)
----------------------------------------------------------------------
Premium
Global Dividend Dividend Premium Dividend
Fund (PGD) Fund II (PDT) Fund II (PDT)
--------------------------------------------------------------------------------------------------------------------------------
Annual Expenses (as a percentage of net assets attributable to
common shares)
Management Fee 1.22% 1.23%(6) 1.22%(6)
Administration Fee 0.23% 0.16% 0.15%
Interest Payments on Borrowed Funds None None None
Other Expenses(7) 0.34% 0.28% 0.26%
Total Annual Expenses 1.79% 1.67% 1.63%
Dividends on Preferred Shares 1.81%(8)(9) 2.09%(8)(10) 2.05%(8)(11)
Total Annual Fund Operating Expenses and Dividends on
Preferred Shares 3.60% 3.76% 3.68%
(1) The pro forma column shown assumes that Global Dividend Fund was the only
Acquired Fund in the Reorganization completed. As described herein, an
unfavorable vote by one of the Acquired Funds will not affect the
implementation of the Reorganization by another Acquired Fund if approved
by such other Acquired Fund. As such, there could be other combinations of
approved Reorganizations.
(2) No expense information is presented with respect to preferred shares
because holders of preferred shares do not bear any transaction or
operating expenses of any of the Funds and will not bear any transaction or
operating expenses of the combined Fund.
(3) Shares of Funds purchased on the secondary market are not subject to sales
charges but may be subject to brokerage commissions or other charges. The
table does not include an underwriting commission paid by shareholders in
the initial offering of each Fund.
(4) Each participant in a Fund's dividend reinvestment plan pays a
proportionate share of the brokerage commissions incurred with respect to
open market purchases in connection with such plan.
(5) Stated as percentages of net assets attributable to common shares, assuming
no issuance of preferred shares or borrowings, each Fund's expenses would
be as follows:
(Unaudited)
ACTUAL
Percentage of Net Assets
Attribut-
able to Common Shares (Assuming
No Leverage) PRO FORMA(1)
--------------------------------------------------
Premium
Global Dividend Dividend Premium Dividend
Fund (PGD) Fund II (PDT) Fund II (PDT)
------------------------------------------------------------------------------------------------------------------
Annual Expenses (as a percentage of net assets attributable to
common shares)
Management Fee 0.80% 0.79%(6) 0.79%(6)
Administration Fee 0.15% 0.10% 0.10%
Other Expenses(7) 0.23% 0.18% 0.11%
Total Annual Expenses 1.18% 1.07% 1.00%
45
(6) Reflects the effective management fee rate. Premium Dividend Fund I and
Premium Dividend Fund II pay a monthly management fee to the Adviser at an
annual rate of 0.50% of the Fund's average weekly NAV and the value
attributable to the preferred shares (collectively, "managed assets"), plus
5.00% of the Fund's weekly gross income. The Adviser's total fee with
respect to each Fund is limited to a maximum amount equal to 1.00% annually
of the Fund's average weekly managed assets.
(7) In connection with the Reorganizations, there are certain other transaction
expenses not reflected in "Other Expenses" which include, but are not
limited to: costs related to the preparation, printing and distributing of
this Joint Proxy Statement/Prospectus to shareholders; costs related to
preparation and distribution of materials distributed to each Fund's Board;
expenses incurred in connection with the preparation of each Agreement and
Plan of Reorganization and the registration statement on Form N-14; SEC and
state securities commission filing fees; legal and audit fees; portfolio
transfer taxes (if any); and any similar expenses incurred in connection
with the Reorganizations. In accordance with applicable SEC rules, the
Board of each Fund reviewed the fees and expenses that will be borne
directly or indirectly by the Funds in connection with the Reorganizations.
After considering various alternatives for allocating these costs borne by
Funds and not paid by the Adviser, the Board of each Fund agreed that, in
the event the Reorganizations are approved and completed, the expenses of
the Reorganizations will be shared by the Acquired Funds and the Acquiring
Fund in proportion to and up to the amount of their first year's projected
annual expense savings as a result of the Reorganizations and the Adviser
will bear the balance of these expenses. The table below summarizes each
Fund's net assets (common shares only) at October 31, 2006, projected
annual expense savings to each Fund as a result of the Reorganizations,
allocation of Reorganization expenses among the Funds in dollars and
percentages, an estimated pay-back period (in years) and the resulting
effect on each Fund's NAV per common share at October 31, 2006. Some Funds
will benefit more from projected annual expense savings of the
Reorganizations than other Funds. The projected annual expense savings are
generally not expected to be immediately realized. If shareholders sell
their common shares prior to the estimated pay-back period, then they may
not realize any of the projected expense savings resulting from the reduced
expense ratio of the combined Fund. The NAV per common share of each Fund
will be reduced at the closing date of the respective Reorganization to
reflect the allocation of Reorganization expenses to each Fund. The
reduction in NAV per common share resulting from the allocation of
Reorganization expenses, when compared to the relative net asset sizes of
each Fund involved in the Reorganizations, will be greater in some Funds
than others. In the event a Reorganization is not completed, the costs
associated with such Reorganization will be borne by the Acquiring Fund and
the remaining Acquired Funds whose shareholders have approved their
respective Reorganizations. The numbers presented in the table are
estimates; actual results may differ.
Projected Reorganization Estimated Reduction to
Net Assets Annual Expense Payback Net Asset
Fund (Common Expense Allocation in Period Value per
(Unaudited) Shares Only) Savings Dollars/Percentage (in Months) Common Share
-------------------------------------------------------------------------------------------------------------
Premium Dividend Fund I (PDT) $155,962,651 $152,827 $120,497/17.1% 9 $ 0.00788
Premium Dividend Fund II (PDF) $193,704,386 $134,403 $105,970/15.0% 9 $ 0.00704
Select Dividend Fund (DIV) $154,525,217 $214,773 $169,337/24.0% 9 $ 0.01692
Global Dividend Fund (PGD) $121,323,875 $239,542 $188,866/26.8% 9 $ 0.02263
Preferred Dividend Fund (PPF) $103,520,802 $153,494 $121,022/17.1% 9 $ 0.01668
(8) Dividend rates on preferred shares are set in the auction process.
Prevailing interest rate, yield curve and market circumstances at the time
at which the dividend rate on preferred shares for the next dividend period
are set substantially influence the rate determined in an auction. As these
factors change over time, so too do the dividend rates set. In this regard,
the dividend rates for each Fund's preferred shares were set on different
dates and therefore do not provide a direct comparison of what these rates
would be if established on the same date. The dividend rates for Premium
Dividend Fund II historically and on a pro-forma combined basis include the
most recent dividend rate resets and reflect recent increases in short-term
interest rates.
(9) Reflects a dividend rate on preferred shares of 3.44%.
(10) Reflects a dividend rate on preferred shares of 3.77%.
(11) Reflects a dividend rate on preferred shares of 3.78%. Such rate is an
estimate and may differ based on varying market conditions that may exist
as and when preferred shares are issued.
46
V. Reorganization of only Preferred Dividend Fund into the Acquiring Fund:
ACTUAL PRO FORMA(1)
----------------------------------------------
Preferred Premium
Dividend Dividend Premium Dividend
Fund (PPF) Fund II (PDT) Fund II (PDT)
--------------------------------------------------------------------------------------------
Common Shareholder Transaction Expenses(2)
Sales Load (as a percentage of offering price) None(3) None(3) None(3)
Dividend Reinvestment Plan Fees None(4) None(4) None(4)
(Unaudited)
ACTUAL
Percentage of Net Assets Attribut-
able to Common Shares (Assuming
Leverage as Described Above)(5) PRO FORMA(1)
------------------------------------------------------------
Preferred Premium
Dividend Dividend Premium Dividend
Fund (PPF) Fund II (PDT) Fund II (PDT)
----------------------------------------------------------------------------------------------------------------------------
Annual Expenses (as a percentage of net assets attributable to
common shares)
Management Fee 1.21% 1.23%(6) 1.23%(6)
Administration Fee 0.23% 0.16% 0.15%
Interest Payments on Borrowed Funds None None None
Other Expenses(7) 0.46% 0.28% 0.27%
Total Annual Expenses 1.90% 1.67% 1.65%
Dividends on Preferred Shares 1.72%(8)(9) 2.09%(8)(10) 2.05%(8)(11)
Total Annual Fund Operating Expenses and Dividends on
Preferred Shares 3.62% 3.76% 3.70%
(1) The pro forma column shown assumes that Preferred Dividend Fund was the
only Acquired Fund in the Reorganization completed. As described herein, an
unfavorable vote by one of the Acquired Funds will not affect the
implementation of the Reorganization by another Acquired Fund if approved
by such other Acquired Fund. As such, there could be other combinations of
approved Reorganizations.
(2) No expense information is presented with respect to preferred shares
because holders of preferred shares do not bear any transaction or
operating expenses of any of the Funds and will not bear any transaction or
operating expenses of the combined Fund.
(3) Shares of Funds purchased on the secondary market are not subject to sales
charges but may be subject to brokerage commissions or other charges. The
table does not include an underwriting commission paid by shareholders in
the initial offering of each Fund.
(4) Each participant in a Fund's dividend reinvestment plan pays a
proportionate share of the brokerage commissions incurred with respect to
open market purchases in connection with such plan.
(5) Stated as percentages of net assets attributable to common shares, assuming
no issuance of preferred shares or borrowings, each Fund's expenses would
be as follows:
(Unaudited)
ACTUAL
Percentage of Net Assets
Attribut-
able to Common Shares
(Assuming
No Leverage) PRO FORMA(1)
----------------------------------------------
Preferred Premium
Dividend Dividend Premium Dividend
Fund (PPF) Fund II (PDT) Fund II (PDT)
---------------------------------------------------------------------------------------------------------
Annual Expenses (as a percentage of net assets attributable to
common shares)
Management Fee 0.80% 0.79%(6) 0.80%(6)
Administration Fee 0.15% 0.10% 0.10%
Other Expenses(7) 0.30% 0.18% 0.11%
Total Annual Expenses 1.25% 1.07% 1.01%
47
(6) Reflects the effective management fee rate. Premium Dividend Fund I and
Premium Dividend Fund II pay a monthly management fee to the Adviser at an
annual rate of 0.50% of the Fund's average weekly NAV and the value
attributable to the preferred shares (collectively, "managed assets"), plus
5.00% of the Fund's weekly gross income. The Adviser's total fee with
respect to each Fund is limited to a maximum amount equal to 1.00% annually
of the Fund's average weekly managed assets.
(7) In connection with the Reorganizations, there are certain other transaction
expenses not reflected in "Other Expenses" which include, but are not
limited to: costs related to the preparation, printing and distributing of
this Joint Proxy Statement/Prospectus to shareholders; costs related to
preparation and distribution of materials distributed to each Fund's Board;
expenses incurred in connection with the preparation of each Agreement and
Plan of Reorganization and the registration statement on Form N-14; SEC and
state securities commission filing fees; legal and audit fees; portfolio
transfer taxes (if any); and any similar expenses incurred in connection
with the Reorganizations. In accordance with applicable SEC rules, the
Board of each Fund reviewed the fees and expenses that will be borne
directly or indirectly by the Funds in connection with the Reorganizations.
After considering various alternatives for allocating these costs borne by
Funds and not paid by the Adviser, the Board of each Fund agreed that, in
the event the Reorganizations are approved and completed, the expenses of
the Reorganizations will be shared by the Acquired Funds and the Acquiring
Fund in proportion to and up to the amount of their first year's projected
annual expense savings as a result of the Reorganizations and the Adviser
will bear the balance of these expenses. The table below summarizes each
Fund's net assets (common shares only) at October 31, 2006, projected
annual expense savings to each Fund as a result of the Reorganizations,
allocation of Reorganization expenses among the Funds in dollars and
percentages, an estimated pay-back period (in years) and the resulting
effect on each Fund's NAV per common share at October 31, 2006. Some Funds
will benefit more from projected annual expense savings of the
Reorganizations than other Funds. The projected annual expense savings are
generally not expected to be immediately realized. If shareholders sell
their common shares prior to the estimated pay-back period, then they may
not realize any of the projected expense savings resulting from the reduced
expense ratio of the combined Fund. The NAV per common share of each Fund
will be reduced at the closing date of the respective Reorganization to
reflect the allocation of Reorganization expenses to each Fund. The
reduction in NAV per common share resulting from the allocation of
Reorganization expenses, when compared to the relative net asset sizes of
each Fund involved in the Reorganizations, will be greater in some Funds
than others. In the event a Reorganization is not completed, the costs
associated with such Reorganization will be borne by the Acquiring Fund and
the remaining Acquired Funds whose shareholders have approved their
respective Reorganizations. The numbers presented in the table are
estimates; actual results may differ.
Projected Reorganization Estimated Reduction to
Net Assets Annual Expense Payback Net Asset
Fund (Common Expense Allocation in Period Value per
(Unaudited) Shares Only) Savings Dollars/Percentage (in Months) Common Share
-------------------------------------------------------------------------------------------------------------
Premium Dividend Fund I (PDT) $155,962,651 $152,827 $120,497/17.1% 9 $ 0.00788
Premium Dividend Fund II (PDF) $193,704,386 $134,403 $105,970/15.0% 9 $ 0.00704
Select Dividend Fund (DIV) $154,525,217 $214,773 $169,337/24.0% 9 $ 0.01692
Global Dividend Fund (PGD) $121,323,875 $239,542 $188,866/26.8% 9 $ 0.02263
Preferred Dividend Fund (PPF) $103,520,802 $153,494 $121,022/17.1% 9 $ 0.01668
(8) Dividend rates on preferred shares are set in the auction process.
Prevailing interest rate, yield curve and market circumstances at the time
at which the dividend rate on preferred shares for the next dividend period
are set substantially influence the rate determined in an auction. As these
factors change over time, so too do the dividend rates set. In this regard,
the dividend rates for each Fund's preferred shares were set on different
dates and therefore do not provide a direct comparison of what these rates
would be if established on the same date. The dividend rates for Premium
Dividend Fund II historically and on a pro-forma combined basis include the
most recent dividend rate resets and reflect recent increases in short-term
interest rates.
(9) Reflects a dividend rate on preferred shares of 3.44%.
(10) Reflects a dividend rate on preferred shares of 3.77%.
(11) Reflects a dividend rate on preferred shares of 3.77%. Such rate is an
estimate and may differ based on varying market conditions that may exist
as and when preferred shares are issued.
48
The purpose of the tables in this section is to assist you in understanding the
various costs and expenses that a shareholder will bear directly or indirectly
by investing in a Fund's common shares and the combined fund's costs and
expenses that are expected to be incurred in the first year following the
Reorganizations.
Example
The following example is intended to help you compare the costs of investing in
the Acquiring Fund pro forma after the Reorganizations with the costs of
investing in the Acquired Funds and the Acquiring Fund without the
Reorganizations. An investor would pay the following expenses on a $1,000
investment in common shares, assuming (i) the operating expense ratio for each
Fund (as a percentage of net assets attributable to common shares) set forth in
the table above for years 1 through 10, (ii) dividends on preferred shares as
set forth in the table above and (iii) a 5% annual return throughout the period.
Assuming Leverage
(Unaudited)
1 Year 3 Years 5 Years 10 Years
----------------------------------------------------------------------------------------
Premium Dividend Fund I (PDF) $335 $1,021 $1,731 $3,613
Premium Dividend Fund II (PDT) $378 $1,149 $1,939 $4,002
Select Dividend Trust (DIV) $335 $1,021 $1,731 $3,613
Global Dividend Fund (PGD) $363 $1,103 $1,864 $3,862
Preferred Dividend Fund (PPF) $366 $1,114 $1,883 $3,897
Pro Forma -- Premium Dividend Fund II (PDT)(1) $354 $1,077 $1,822 $3,783
Pro Forma -- Premium Dividend Fund II (PDT)(2) $358 $1,088 $1,840 $3,818
Pro Forma -- Premium Dividend Fund II (PDT)(3) $361 $1,097 $1,855 $3,845
Pro Forma -- Premium Dividend Fund II (PDT)(4) $370 $1,126 $1,902 $3,932
Pro Forma -- Premium Dividend Fund II (PDT)(5) $372 $1,132 $1,911 $3,950
Assuming No Leverage
(Unaudited)
1 Year 3 Years 5 Years 10 Years
----------------------------------------------------------------------------------------
Premium Dividend Fund I (PDF) $111 $347 $601 $1,329
Premium Dividend Fund II (PDT) $109 $340 $590 $1,306
Select Dividend Trust (DIV) $116 $362 $628 $1,386
Global Dividend Fund (PGD) $120 $375 $649 $1,432
Preferred Dividend Fund (PPF) $127 $397 $686 $1,511
Pro Forma -- Premium Dividend Fund II (PDT)(1) $101 $315 $547 $1,213
Pro Forma -- Premium Dividend Fund II (PDT)(2) $102 $318 $552 $1,225
Pro Forma -- Premium Dividend Fund II (PDT)(3) $102 $318 $552 $1,225
Pro Forma -- Premium Dividend Fund II (PDT)(4) $102 $318 $552 $1,225
Pro Forma -- Premium Dividend Fund II (PDT)(5) $103 $322 $558 $1,236
(1) The pro forma row shown assumes each of the Reorganizations is completed.
As described herein, an unfavorable vote by one of the Acquired Funds will
not affect the implementation of the Reorganizations of another Acquired
Fund if approved by such other Acquired Fund. This means that there could
be other combinations of approved Reorganizations.
(2) The pro forma row shown assumes Premium Dividend Fund I was the only
Acquired Fund in the Reorganization completed. As described herein, an
unfavorable vote by one of the Acquired Funds will not affect the
implementation of the Reorganizations of another Acquired Fund if approved
by such other Acquired Fund. This means that there could be other
combinations of approved Reorganizations.
(3) The pro forma row shown assumes Select Dividend Trust was the only Acquired
Fund in the Reorganization completed. As described herein, an unfavorable
vote by one of the Acquired Funds will not affect the implementation of the
Reorganizations of another Acquired Fund if approved by such other Acquired
Fund. This means that there could be other combinations of approved
Reorganizations.
(4) The pro forma row shown assumes Global Dividend Fund was the only Acquired
Fund in the Reorganization completed. As described herein, an unfavorable
vote by one of the Acquired Funds will not affect the implementation of the
Reorganizations of another Acquired Fund if approved by such other Acquired
Fund. This means that there could be other combinations of approved
Reorganizations.
49
(5) The pro forma row shown assumes Preferred Dividend Fund was the only
Acquired Fund in the Reorganization completed. As described herein, an
unfavorable vote by one of the Acquired Funds will not affect the
implementation of the Reorganizations of another Acquired Fund if approved
by such other Acquired Fund. This means that there could be other
combinations of approved Reorganizations.
The example set forth above assumes the reinvestment of all dividends and
distributions at NAV. The example should not be considered a representation of
past or future expenses or annual rates of return. Actual expenses or annual
rates of return may be more or less than those assumed for purposes of the
example.
Capitalization
With respect to each Proposal, the following tables set forth the capitalization
of each Fund as of October 31, 2006, and the pro forma combined capitalization
of the Acquiring Fund as if all proposed Reorganizations had occurred on that
date, as well as the pro forma combined capitalization of the Acquiring Fund as
if each Reorganization had occurred on that date absent any of the other
Reorganizations. Because each Acquired Fund's participation in the
Reorganization is not contingent on the participation of the other Acquired
Funds, many Fund combinations are possible. It is expected that the range of
resulting pro forma capitalization will be captured in the tables contained
herein because the capitalization would be highest if all Acquired Funds
approved and implemented the Reorganization and would be lowest if each Acquired
Fund was the sole Acquired Fund to approve the Reorganization. The tables should
not be relied upon to determine the amount of Acquiring Fund shares that will
actually be received and distributed.
If the Reorganization of your Fund(s) had taken place on October 31, 2006:
(Unaudited)
ACTUAL PRO FORMA
-----------------------------------------------------------------------------
Premium Premium Select Global Preferred Premium
Dividend Dividend Dividend Dividend Dividend Dividend
Fund I Fund II Trust Fund Fund Fund II
----------------------------------------------------------------------------------------------------------------------
Net assets consist of (amounts
in thousands): $155,842 $193,598 $154,356 $121,135 $103,400 $ 727,917
Common Shares (no par value)* 15,293 15,047 10,010 8,345 7,257 56,606
Paid in surplus $143,177 $168,307 $143,162 $113,165 $ 99,436 $ 667,247
Net unrealized appreciation $ 20,071 $ 30,358 $ 15,384 $ 12,107 $ 5,328 $ 83,248
Accumulated undistributed net
investment income $ 97 $ 533 $ 58 $ 259 ($906) $ 533
Accumulated net realized gain (loss) ($7,503) ($5,600) ($4,248) ($4,396) ($458) ($23,111)
Net assets applicable to
common shares $155,842 $193,598 $154,356 $121,135 $103,400 $ 727,917
Preferred Shares and accrued
dividends (no par value, with
liquidation preference of
$100,000)* $ 68,580 $100,355 $ 70,053 $ 60,210 $ 52,721 $ 351,919
Net assets including
preferred shares $224,422 $293,953 $224,409 $181,345 $156,121 $1,079,836
Net asset value per common share $ 10.19 $ 12.87 $ 15.42 $ 14.52 $ 14.25 $ 12.86
* Based on the number of outstanding shares listed in the table under
"Outstanding Shares and Quorum" in the section entitled "Information
Concerning the Meeting" below.
50
If the Reorganization of your Fund(s) had taken place on October 31, 2006:
(Unaudited)
ACTUAL PRO FORMA
------------------------------------------------------
Premium Premium Premium Dividend
Dividend Fund I Dividend Fund II Fund II
--------------------------------------------------------------------------------------------------------------
Net assets consist of (amounts in thousands): $155,842 $193,598 $349,343
Common Shares (no par value)* 15,293 15,047 27,159
Paid in surplus $143,177 $168,307 $311,484
Net unrealized appreciation $ 20,071 $ 30,358 $ 50,429
Accumulated undistributed net investment income $ 97 $ 533 $ 533
Accumulated net realized gain (loss) ($7,503) ($5,600) ($13,103)
Net assets applicable to common shares $155,842 $193,598 $349,343
Preferred Shares and accrued dividends (no par value,
with liquidation preference of $100,000)* $ 68,580 $100,355 $168,935
Net assets including preferred shares $224,422 $293,953 $512,278
Net asset value per common share $ 10.19 $ 12.87 $ 12.86
* Based on the number of outstanding shares listed in the table under
"Outstanding Shares and Quorum" in the section entitled "Information
Concerning the Meeting" below.
If the Reorganization of your Fund(s) had taken place on October 31, 2006:
(Unaudited)
ACTUAL PRO FORMA
--------------------------------------------------------
Select Dividend Premium Premium Dividend
Trust Dividend Fund II Fund II
--------------------------------------------------------------------------------------------------------------
Net assets consist of (amounts in thousands): $154,356 $193,598 $347,896
Common Shares (no par value)* 10,010 15,047 27,043
Paid in surplus $143,162 $168,307 $311,469
Net unrealized appreciation $ 15,384 $ 30,358 $ 45,742
Accumulated undistributed net investment income $ 58 $ 533 $ 533
Accumulated net realized gain (loss) ($4,248) ($5,600) ($9,848)
Net assets applicable to common shares $154,356 $193,598 $347,896
Preferred Shares and accrued dividends (no par value,
with liquidation preference of $100,000)* $ 70,053 $100,355 $170,408
Net assets including preferred shares $224,409 $293,953 $518,304
Net asset value per common share $ 15.42 $ 12.87 $ 12.86
* Based on the number of outstanding shares listed in the table under
"Outstanding Shares and Quorum" in the section entitled "Information
Concerning the Meeting" below.
If the Reorganization of your Fund(s) had taken place on October 31, 2006:
(Unaudited)
ACTUAL PRO FORMA
--------------------------------------------------------
Global Dividend Premium Premium Dividend
Fund Dividend Fund II Fund II
--------------------------------------------------------------------------------------------------------------
Net assets consist of (amounts in thousands): $121,135 $193,598 $314,474
Common Shares (no par value)* 8,345 15,047 24,461
Paid in surplus $113,165 $168,307 $281,472
Net unrealized appreciation $ 12,107 $ 30,358 $ 42,465
Accumulated undistributed net investment income $ 259 $ 533 $ 533
Accumulated net realized gain (loss) ($4,396) ($5,600) ($9,996)
Net assets applicable to common shares $121,135 $193,598 $314,474
Preferred Shares and accrued dividends (no par value,
with liquidation preference of $100,000)* $ 60,210 $100,355 $160,565
Net assets including preferred shares $181,345 $293,953 $475,039
Net asset value per common share $ 14.52 $ 12.87 $ 12.86
* Based on the number of outstanding shares listed in the table under
"Outstanding Shares and Quorum" in the section entitled "Information
Concerning the Meeting" below.
51
If the Reorganization of your Fund(s) had taken place on October 31, 2006:
(Unaudited)
ACTUAL PRO FORMA
--------------------------------------------------------
Preferred Premium Premium Dividend
Dividend Fund Dividend Fund II Fund II
--------------------------------------------------------------------------------------------------------------
Net assets consist of (amounts in thousands): $103,400 $193,598 $296,998
Common Shares (no par value)* 7,257 15,047 23,083
Paid in surplus $ 99,436 $168,307 $267,743
Net unrealized appreciation $ 5,328 $ 30,358 $ 35,686
Accumulated undistributed net investment income ($906) $ 533 $ 533
Accumulated net realized gain (loss) ($458) ($5,600) ($6,964)
Net assets applicable to common shares $103,400 $193,598 $296,998
Preferred Shares and accrued dividends (no par value,
with liquidation preference of $100,000)* $ 52,721 $100,355 $153,076
Net assets including preferred shares $156,121 $293,953 $450,074
Net asset value per common share $ 14.25 $ 12.87 $ 12.86
(Unaudited)
1 Year 3 Years 5 Years 10 Years
--------------------------------------
Premium Dividend Fund I (PDF) $111 $347 $601 $1,329
Premium Dividend Fund II (PDT) $109 $340 $590 $1,306
Select Dividend Trust (DIV) $116 $362 $628 $1,386
Global Dividend Fund (PGD) $120 $375 $649 $1,432
Preferred Dividend Fund (PPF) $127 $397 $686 $1,511
Pro Forma -- Premium Dividend Fund II (PDT)(2) $101 $315 $547 $1,213
(2) The pro forma row shown above assumes each of the Reorganizations is
completed. As described herein, an unfavorable vote by one of the Acquired
Funds will not affect the implementation of the Reorganizations of another
Acquired Fund if approved by such other Acquired Fund. This means that
there could be other combinations of approved Reorganizations.
The example set forth above assumes the reinvestment of all dividends and
distributions at NAV. The example should not be considered a representation of
past or future expenses or annual rates of return. Actual expenses or annual
rates of return may be more or less than those assumed for purposes of the
example.
Additional Information About Common Shares of the Funds
General
The outstanding common shares of each Fund are fully paid and nonassessable by a
Fund (except as described under "Governing Law" below). The common shares of
each Fund have no preemptive, conversion, exchange or redemption rights. Each
common share has one vote, with fractional shares voting proportionately. Common
shares are freely transferable.
Outstanding Securities
Set forth below is information about each Fund's common shares as of October 31,
2006.
Premium Dividend Fund I
(4)
Amount Outstanding
(1) (2) (3) Exclusive of Amount
Title of Class Amount Authorized Amount Held by Fund Shown Under (3)
Common Shares unlimited* 0 15,292,571
52
Premium Dividend Fund II
(4)
Amount Outstanding
(1) (2) (3) Exclusive of Amount
Title of Class Amount Authorized Amount Held by Fund Shown Under (3)
Common Shares unlimited* 0 15,046,539
Select Dividend Trust
(4)
Amount Outstanding
(1) (2) (3) Exclusive of Amount
Title of Class Amount Authorized Amount Held by Fund Shown Under (3)
Common Shares unlimited* 0 10,010,393
Global Dividend Fund
(4)
Amount Outstanding
(1) (2) (3) Exclusive of Amount
Title of Class Amount Authorized Amount Held by Fund Shown Under (3)
Common Shares unlimited* 0 8,344,700
Preferred Dividend Fund
(4)
Amount Outstanding
(1) (2) (3) Exclusive of Amount
Title of Class Amount Authorized Amount Held by Fund Shown Under (3)
Common Shares unlimited* 0 7,257,200
* with requisite vote of holders of preferred shares
Purchase and Sale
Purchase and sale procedures for the common shares of each of the Funds are
identical. Investors typically purchase and sell common shares of the Funds
through a registered broker-dealer on the NYSE, thereby incurring a brokerage
commission set by the broker-dealer. Alternatively, investors may purchase or
sell common shares of the Funds through privately negotiated transactions with
existing shareholders.
Common Share Price Data
The following table sets forth the high and low sales prices for common shares
of each Fund on the NYSE for each full quarterly period within the two most
recent fiscal years and each full quarter since the beginning of the current
fiscal year, along with the NAV and discount or premium to NAV for each
quotation.
53
PREMIUM DIVIDEND FUND I
Quarterly High Net Asset Premium Low Net Asset Premium
Period Ending Price Value (Discount) Price Value (Discount)
-------------------------------------------------------------------------------------------------
December 31, 2006 $ 9.11 $ 10.42 (14.37%) $ 8.58 $ 9.87 (11.41%)
September 30, 2006 $ 8.65 $ 9.94 (16.14)% $ 7.87 $ 9.25 (11.40%)
June 30, 2006 $ 8.36 $ 9.60 (11.11%) $ 7.82 $ 9.00 (14.81%)
March 31, 2006 $ 8.69 $ 9.78 (9.33%) $ 8.06 $ 9.47 (15.15%)
December 31, 2005 $ 8.90 $ 9.88 (8.73%) $ 7.99 $ 9.24 (15.04%)
September 30, 2005 $ 9.48 $ 10.06 (5.77%) $ 8.88 $ 9.73 (9.64%)
June 30, 2005 $ 9.46 $ 10.01 (3.63%) $ 8.78 $ 9.48 (7.68%)
March 31, 2005 $ 10.00 $ 9.95 3.84% $ 8.67 $ 9.38 (8.06%)
December 31, 2004 $ 10.05 $ 9.75 5.90% $ 9.38 $ 9.27 0.93%
September 30, 2004 $ 9.54 $ 9.27 6.59% $ 8.92 $ 8.73 (0.77%)
PREMIUM DIVIDEND FUND II
Quarterly High Net Asset Premium Low Net Asset Premium
Period Ending Price Value (Discount) Price Value (Discount)
-------------------------------------------------------------------------------------------------
January 31, 2007 $ 11.49 $ 13.17 (13.81%) $ 11.14 $ 12.83 (11.25%)
October 31, 2006 $ 11.32 $ 12.88 (13.85%) $ 10.54 $ 12.15 (10.09%)
July 31, 2006 $ 8.29 $ 9.64 (11.11%) $ 7.82 $ 9.00 (16.14%)
April 30, 2006 $ 8.69 $ 9.78 (9.33%) $ 8.00 $ 9.23 (13.92%)
January 31, 2006 $ 8.56 $ 9.65 (8.75%) $ 7.99 $ 9.24 (15.15%)
October 31, 2005 $ 9.36 $ 10.03 (5.87%) $ 8.10 $ 9.24 (13.37%)
July 31, 2005 $ 9.48 $ 10.06 (3.87%) $ 8.93 $ 9.58 (8.17%)
April 30, 2005 $ 9.82 $ 9.95 (0.10%) $ 8.67 $ 9.38 (8.06%)
January 31, 2005 $ 10.05 $ 9.78 4.77% $ 9.58 $ 9.35 (0.93%)
October 31, 2004 $ 9.87 $ 9.38 6.59% $ 9.00 $ 8.87 (0.77%)
SELECT DIVIDEND TRUST
Quarterly High Net Asset Premium Low Net Asset Premium
Period Ending Price Value (Discount) Price Value (Discount)
-------------------------------------------------------------------------------------------------
December 31, 2006 $ 13.66 $ 15.78 (15.79%) $ 12.67 $ 14.90 (12.72%)
September 30, 2006 $ 12.76 $ 15.02 (16.55%) $ 11.91 $ 14.08 (14.28%)
June 30, 2006 $ 12.42 $ 14.52 (13.37%) $ 11.72 $ 13.67 (15.49%)
March 31, 2006 $ 12.86 $ 14.77 (12.52%) $ 12.11 $ 14.30 (15.72%)
December 31, 2005 $ 13.37 $ 14.96 (10.61%) $ 11.82 $ 13.89 (17.05%)
September 30, 2005 $ 13.91 $ 15.28 (7.19%) $ 13.05 $ 14.73 (11.82%)
June 30, 2005 $ 13.85 $ 15.20 (7.73%) $ 12.68 $ 14.42 (13.33%)
March 31, 2005 $ 14.55 $ 14.99 (1.17%) $ 12.40 $ 14.20 (13.35%)
December 31, 2004 $ 15.30 $ 14.76 4.88% $ 14.30 $ 14.03 (1.42%)
September 30, 2004 $ 14.65 $ 14.09 6.32% $ 13.68 $ 13.31 0.95%
June 30, 2004 $ 15.21 $ 14.71 6.26% $ 13.11 $ 13.05 (5.36%)
54
GLOBAL DIVIDEND FUND
Quarterly High Net Asset Premium Low Net Asset Premium
Period Ending Price Value (Discount) Price Value (Discount)
-------------------------------------------------------------------------------------------------
January 31, 2007 $ 13.25 $ 14.83 (13.47%) $ 12.61 $ 14.46 (9.37%)
October 31, 2006 $ 12.84 $ 14.56 (14.46%) $ 11.86 $ 13.76 (11.16%)
July 31, 2006 $ 11.83 $ 13.77 (10.17%) $ 11.19 $ 12.96 (15.70%)
April 30, 2006 $ 12.45 $ 14.09 (10.89%) $ 11.40 $ 13.33 (15.21%)
January 31, 2006 $ 12.48 $ 13.89 (10.09%) $ 11.45 $ 13.32 (15.25%)
October 31, 2005 $ 13.28 $ 14.51 (7.22%) $ 11.40 $ 13.30 (15.34%)
July 31, 2005 $ 13.44 $ 14.51 (6.93%) $ 12.30 $ 13.88 (11.45%)
April 30, 2005 $ 14.70 $ 14.30 3.52% $ 12.10 $ 13.65 (12.26%)
January 31, 2005 $ 14.33 $ 14.16 3.66% $ 13.21 $ 13.55 (3.08%)
October 31, 2004 $ 13.73 $ 13.59 3.48% $ 12.45 $ 12.75 (2.43%)
July 31, 2004 $ 12.68 $ 13.16 (2.43%) $ 11.39 $ 12.40 (9.17%)
PREFERRED DIVIDEND FUND
Quarterly High Net Asset Premium Low Net Asset Premium
Period Ending Price Value (Discount) Price Value (Discount)
-------------------------------------------------------------------------------------------------
November 30, 2006 $ 13.55 $ 14.38 (8.82%) $ 12.76 $ 13.88 (5.00%)
August 31, 2006 $ 13.03 $ 14.00 (10.90%) $ 11.85 $ 13.19 (6.86%)
May 31, 2006 $ 13.41 $ 14.11 (4.46%) $ 11.89 $ 13.23 (12.06%)
February 28, 2006 $ 13.80 $ 14.11 0.15% $ 12.95 $ 13.66 (6.74%)
November 30, 2005 $ 14.22 $ 14.51 (1.19%) $ 12.29 $ 13.60 (10.03%)
August 31, 2005 $ 14.23 $ 14.46 (0.84%) $ 13.38 $ 14.14 (7.08%)
May 31, 2005 $ 13.66 $ 14.41 (4.75%) $ 12.30 $ 13.98 (13.54%)
February 28, 2005 $ 14.15 $ 14.54 (1.71%) $ 13.38 $ 13.95 (5.93%)
November 30, 2004 $ 13.72 $ 14.11 (0.44%) $ 12.90 $ 13.59 (6.77%)
August 31, 2004 $ 13.25 $ 13.59 (1.92%) $ 12.05 $ 12.79 (6.66%)
May 31, 2004 $ 14.91 $ 14.25 5.37% $ 11.38 $ 12.70 (13.00%)
As of October 31, 2006, (i) the net value per share for common shares of the
Acquiring Fund was $12.87 and the market price per share was $11.26,
representing a discount to NAV of 12.51%, (ii) the NAV per share for common
shares of Premium Dividend Fund I was $10.20 and the market price per share was
$8.80, representing a discount to NAV of 13.73%, (iii) the NAV per share for
common shares of Select Dividend Trust was $15.44 and the market price per share
was $13.16, representing a discount to NAV of 14.77%, (iv) the NAV per share for
common shares of Global Dividend Fund was $14.54 and the market price per share
was $12.71, representing a discount to NAV of 12.59%, and (v) the NAV per share
for common shares of Preferred Dividend Fund was $14.26 and the market price per
share was $13.25, representing a discount to NAV of 7.08%.
The NAV per share and market price per share of the common shares of each Fund
may fluctuate prior to the closing date of each Reorganization. Depending on
market conditions immediately prior to the closing date of a Reorganization,
Acquiring Fund Common Shares may trade at a larger or smaller discount to NAV
than an Acquired Fund's common shares. This could result in the Acquiring Fund
Common Shares having a market value that is greater or less than the market
value of an Acquired Fund's common shares on the closing date of a
Reorganization.
Share Repurchases
Common shares of both the Acquired Funds and the Acquiring Fund have
historically traded at a discount to NAV. The Boards of Global Dividend Fund and
Preferred Dividend Fund will consider at least annually action that might be
taken to seek to reduce or eliminate any material discount from net asset value
that may occur in respect of com-
55
mon shares, which may include the repurchase of such common shares in the open
market or in private transactions, the making of a tender offer for such shares
or conversion of the Fund to an open-end investment company. There can be no
assurance, however, that the Board of Global Dividend Fund or Preferred Dividend
Fund will decide to take any of these actions or that share repurchases or
tender offers, if undertaken, will reduce market discount. The Board of Trustees
of each other Fund will, from time to time, consider either repurchasing shares
of common stock on the open market or making a tender offer for shares of the
common stock. Notwithstanding any of the foregoing, so long as a Fund's
preferred shares are outstanding, such Fund may not purchase, redeem or
otherwise acquire any of its common shares if (i) dividends on the preferred
shares are in arrears, or (ii) the 1940 Act asset coverage requirements and any
additional asset coverage requirements that may be imposed by a Rating Agency in
connection with any rating of the preferred shares would not be met after giving
effect to the transaction. Any service fees incurred in connection with any
tender offer made by a Fund will be borne by that Fund and will not reduce the
stated consideration to be paid to tendering common shareholders.
Subject to its investment restrictions, a 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 a Fund in
anticipation of share repurchases or tenders will reduce the Fund's net income.
The Fund will comply with the Securities Exchange Act of 1934, as amended (the
"1934 Act"), the 1940 Act and the rules and regulations thereunder in connection
with any share repurchase, tender offer or borrowing that might be approved by
the Fund's Board. Any such borrowings will be subject to the limitations imposed
by the 1940 Act and the Rating Agency Guidelines.
The repurchase by a Fund of its common shares at prices below NAV will result in
an increase in the NAV of those common shares that remain outstanding. However,
there can be no assurance that common share repurchases or tender offers at or
below NAV will result in the Fund's common shares trading at a price equal to
their NAV. Nevertheless, the fact that a Fund's common 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 NAV that might otherwise exist.
In addition, a purchase by the Fund of its common shares will decrease the
Fund's total assets which would likely have the effect of increasing the Fund's
expense ratio. Any purchase by the Fund of its common shares at a time when
preferred shares are outstanding will increase the leverage applicable to the
outstanding common shares then remaining.
Before deciding whether to take any action if the common shares trade below NAV,
a Fund's Board would likely consider all relevant factors, including the extent
and duration of the discount, the liquidity of the Fund's portfolio, the impact
of any action that might be taken on the Fund or its shareholders and market
considerations. Based on these considerations, even if a Fund's shares should
trade at a discount, the Fund's Board may determine that, in the interest of the
Fund and its shareholders, no action should be taken.
Premium Dividend Fund I, Global Dividend Fund and Preferred Dividend Fund.
Although the decision to take action in response to a discount from the NAV is
made by a Fund's Board at the time it considers such issue, it is the present
policy of the Boards of Premium Dividend Fund I and Preferred Dividend Fund,
which may be changed by the Board, not to authorize repurchases of common shares
or a tender offer for such shares if: (i) such transactions, if consummated,
would (a) result in the delisting of the common shares from the NYSE or (b)
impair the Fund's status as a regulated investment company under the Code (which
would make the Fund a taxable entity, causing the Fund's income to be taxed at
the corporate level in addition to the taxation of shareholders who receive
dividends from the Fund) or as a registered closed-end investment company under
the 1940 Act; (ii) the Fund would not be able to liquidate portfolio securities
in an orderly manner and consistent with the Fund's investment objective and
policies in order to repurchase common shares; or (iii) there is, in the Board's
judgment, any (a) material legal action or proceeding instituted or threatened
challenging such transactions or otherwise materially adversely affecting the
Fund, (b) general suspension of or limitation on prices for trading securities
on the NYSE or other national securities exchange, (c) declaration of a banking
moratorium by federal or state authorities or any suspension of payment by
United States or New York banks or other banks in which the Fund invests, (d)
material limitation affecting the Fund or the issuers of its portfolio
securities by federal or state authorities on the extension of credit by lending
institutions or on the exchange of foreign currency, (e) commencement of war,
armed hostilities or other international or national calamity directly or
indirectly involving the United States or (f) other event or condition which
would have a material adverse effect (including any adverse tax effect) on the
Fund or its shareholders if shares were repurchased. Each Fund's Board may in
the future modify these conditions in light of experience.
Select Dividend Fund and Premium Dividend Fund II. In authorizing repurchases of
common shares, the Boards of Select Dividend Fund and Premium Dividend II will
consider the effect of such repurchases on the Fund's expense ratio, portfolio
turnover, its ability to achieve its investment objective, the maintenance of
its status as a regulated
56
investment company and whether, as a consequence of such repurchases, the Fund
would be required to pay additional dividends on the preferred shares. It is the
policy of each Fund's Board, which may be changed by the Board, not to effect
share repurchases of common shares which would have a material adverse effect,
including adverse tax consequences, on the Fund or its shareholders. Annually,
the Boards of Select Dividend Fund and Premium Dividend Fund II will consider
making a tender offer for the common shares at their then-current net asset
value. At that time, each Board will consider the liquidity provided by trading
on the NYSE, including the historical price performance and trading volume of
the common share on the NYSE and whether such a tender is in the best interests
of the Fund and holders of the common shares. Any such tender offer or
repurchase must comply with the Rating Agency Guidelines and the 1940 Act asset
coverage requirements as long as any preferred shares are outstanding.
Dividends and Distributions
Premium Dividend Fund II and Select Dividend Fund. Each of Premium Dividend Fund
II and Select Dividend Fund intends to pay monthly dividends on the common
shares out of net income, subject to the Fund's obligations with respect to the
preferred shares, Rating Agency Guidelines and the 1940 Act asset coverage
requirements as long as any preferred shares are outstanding. Each Fund's net
income is all of its income (other than net capital gains) reduced by its
expenses. Each Fund's net capital gains equal the excess of its net long-term
capital gains over its net short-term capital losses. Distributions derived from
net capital gains, if any, will generally be made annually.
Global Dividend Fund and Preferred Dividend Fund. It is the policy of Global
Dividend Fund and Preferred Dividend Fund to make monthly distributions to the
holders of common shares of substantially all investment company taxable income
remaining after the payment of dividends on any outstanding preferred shares.
Investment company taxable income of a Fund consists of all of the Fund's
taxable income (after reduction by deductible expenses) other than its net
capital gain. Net capital gain (net long-term capital gain in excess of net
short-term capital loss), if any, if distributed, is expected to be distributed
at least annually and would be designated proportionately between the common
shares and any preferred shares, as described below in "U.S. Federal Income Tax
Matters." Alternatively, with respect to Preferred Dividend Fund only, the Fund
may and presently expects to retain such net capital gain, the tax consequences
of which are described below under "U.S. Federal Income Tax Matters." The
expenses of each Fund are accrued each day.
Premium Dividend Fund I. Premium Dividend Fund I intends to pay monthly
dividends on the shares of the common stock, out of earned surplus or net
profits remaining after payment of all required dividends (including additional
dividends, if any) on the shares of the DARTS. The Fund intends to retain net
capital gains, if any, for the benefit of shareholders of the common stock. The
Fund's "net income" includes all dividends, interest and other income and
short-term capital gains earned by the Fund on its portfolio holdings, net of
the Fund's expenses. The Fund's "net capital gains" consist of the excess of net
long-term capital gains over net short-term capital losses.
All Funds. As long as any preferred shares are outstanding, no Fund will
declare, pay or set apart for payment any dividend or other distribution in
respect of the common stock or any other stock of a Fund ranking junior to the
preferred shares (or on parity with such shares, in the case of Select Dividend
Trust, Global Dividend Fund and Preferred Dividend Fund) as to dividends or upon
liquidation, or call for redemption, redeem, purchase or otherwise acquire for
consideration any common shares or any other shares of the Fund ranking junior
to the preferred shares (or on parity with, in the case of Select Dividend
Trust, Global Dividend Fund and Preferred Dividend Fund) as to dividends or upon
liquidation, unless (i) immediately thereafter, the 1940 Act asset coverage
requirements and any asset coverage requirements that may be imposed by a Rating
Agency in connection with any rating of the preferred shares are met, (ii) full
cumulative dividends (including additional dividends, if any) on all preferred
shares for all past dividend periods have been paid or declared and a sum
sufficient for the payment of such dividends set apart for payment and (iii) the
Fund has redeemed the full number of preferred shares required to be redeemed by
any provision for mandatory redemption contained in the Agreement and
Declaration of Trust.
In addition, as long as any preferred shares are outstanding, no Fund is
permitted to declare any dividend or distribution on its common shares unless,
at the time of such declaration and after taking account of such dividend or
distribution, the Fund is in compliance with the 1940 Act asset coverage
requirements and with any applicable Rating Agency Guidelines. The Fund intends,
to the extent necessary, to redeem or purchase preferred shares from time to
time to maintain compliance with the 1940 Act asset coverage requirements and
the Rating Agency Guidelines. To the extent this is not possible, any
restriction on the payment of dividends or distributions might impair the
ability of a Fund to maintain its qualification, for federal income tax
purposes, as a regulated investment company that is exempt from taxation on
income or gains distributed to its shareholders.
If, for any taxable year, any portion of the distributions paid by a Fund on the
preferred shares does not qualify for the Dividends Received Deduction, the Fund
will be required to pay additional dividends to holders of the preferred
57
shares to compensate for the resulting reduction in the Net After-Tax Return (as
defined below) to the holders of the preferred shares. Such additional dividends
would decrease the amount of the Fund's net income and net capital gains
available for distribution to holders of common shares and may reduce the Fund's
NAV per share.
The term "Net After-Tax Return" means, with respect to any dividend paid on the
preferred shares, the amount of such dividend less the federal corporate income
tax to which such dividend would be subject, giving effect to the actual or
assumed (as the case may be) amount of such dividend effectively designated
under Section 854 of the Code as eligible for the Dividends Received Deduction.
For this purpose, in the case of any dividend (i) the applicable income tax rate
shall be assumed to be the highest marginal federal income tax rate applicable
to corporations under the law in effect at the time of the payment of such
dividend if received by a domestic corporation reporting taxable income based on
a calendar year, disregarding any alternative minimum tax and (ii) assuming the
full amount of such dividend were effectively designated under Section 854 of
the Code (or any successor provision) as eligible for Dividends Received
Deduction, the holder receiving such dividend shall be assumed to be entitled to
the Dividends Received Deduction with respect to such dividend in an amount
equal to the maximum amount provided in Section 243(a)(1) of the Code (or any
successor provision) as in effect at the time of payment of such dividend. The
highest marginal federal income tax rate for corporations currently is 35% and
the maximum amount provided in Section 243(a)(1) of the Code currently is 70%.
Dividend Reinvestment Plan
Each Fund offers its shareholders a Dividend Reinvestment Plan (each a "Plan,"
collectively the "Plans"), which offers the opportunity to earn compounded
yields. Each holder of common shares of the Funds, other than holders of
Preferred Dividend Fund and Premium Dividend Fund II, will automatically have
all distributions of dividends and capital gains reinvested by Mellon Investor
Services, as Plan agent for the common shareholders (the "Plan Agent"), unless
an election is made to receive cash. Holders of common shares of Preferred
Dividend Fund and Premium Dividend Fund II must elect to have all distributions
of dividends and capital gains reinvested by the Plan Agent. Holders of common
shares who elect not to participate in the Plan (or, in the case of Preferred
Dividend Fund and Premium Dividend Fund II, who do not elect to participate in
the Plan) will receive all distributions in cash, paid by check mailed directly
to the shareholder of record (or, if the common shares are held in street or
other nominee name, then to the nominee) by the Plan Agent, as
dividend-disbursing agent. After the Reorganizations, a holder of shares of a
Fund who currently elects to receive dividends in cash will continue to receive
dividends in cash; all holders who currently elect to participate in the Plan of
a Fund will have their dividends automatically reinvested in shares of the
combined fund.
Shareholders of Preferred Dividend Fund and Premium Dividend Fund II may join
their respective Plans by filling out and mailing an authorization card, by
notifying the Plan Agent by telephone or by visiting the Plan Agent's Web Site
at www.melloninvestor.com. Shareholders of Preferred Dividend Fund and Premium
Dividend Fund II must indicate an election to reinvest all or a portion of
dividend payments. If received in proper form by the Plan Agent before the
record date of a dividend, the election will be effective with respect to all
dividends paid after such record date.
Shareholders whose shares are held in the name of a broker or a nominee should
contact the broker or nominee to determine whether and how they may participate
in the Plan. The Plan Agent serves as agent for the holders of common shares in
administering the Plan. If Premium Dividend Fund I, Select Dividend Trust,
Preferred Dividend Fund or the Acquiring Fund declares a dividend payable either
in common shares or in cash, non-participants will receive the equivalent in
common shares. If the market price of the common shares of a Fund on the payment
date of the dividend is equal to or exceeds their NAV as determined on the
payment date, participants in the Plans (other than the Plan of Global Dividend
Fund) will be issued common shares (out of authorized but unissued shares) at a
value equal to or higher of NAV or 95% of the market price. If the NAV exceeds
the market price of the common shares at such time, or if the Board of a Fund
declares a dividend payable only in cash, the Plan Agent will, as agent for Plan
participants, buy shares in the open market, on the NYSE or elsewhere, for the
participants' accounts. Such purchases will be made promptly after the payable
date for such dividend and, in any event, prior to the next ex-dividend date
after such date, except where necessary to comply with federal securities laws.
If, before the Plan Agent has completed its purchases, the market price exceeds
the NAV of the common shares of a Fund, the average per share purchase price
paid by the Plan Agent may exceed the NAV of the common shares, resulting in the
acquisition of fewer shares than if the dividend had been paid in shares issued
by a Fund.
With respect to Global Dividend Fund only, after the Fund declares a dividend or
makes a capital gains distribution, the Plan Agent will, as an agent for the
participants, receive the cash payment and use it to buy shares on the open
market, on the NYSE or elsewhere, for the participants' accounts. Global
Dividend Fund will not issue any new shares in connection with the Plan.
58
Each participant will pay a pro rata share of brokerage commissions incurred
with respect to the Plan Agent's open market purchases in connection with the
reinvestment of dividends and distributions. The cost per share of the shares
purchased for each participant's account will be the average cost, including
brokerage commissions, of any shares purchased on the open market plus, in the
case of Premium Dividend Fund I, Select Dividend Trust, Preferred Dividend Fund
and the Acquiring Fund, the cost of any shares issued by those Funds. There will
be no brokerage charges with respect to common shares issued directly by Premium
Dividend Fund I, Select Dividend Trust, Preferred Dividend Fund or the Acquiring
Fund. There are no other charges to participants for reinvesting dividends or
capital gain distributions.
Participants in a Plan may withdraw from the Plan at any time by contacting the
Plan Agent by telephone, in writing or by visiting the Plan Agent's Web Site at
www.melloninvestor.com. Such withdrawal will be effective immediately if, with
respect to Premium Dividend Fund I and Global Dividend Fund, received prior to a
dividend record date (and with respect to Premium Dividend Fund II, Select
Dividend Trust and Preferred Dividend Fund, if received not less than 10 days
prior to a dividend record date); otherwise, it will be effective for all
subsequent dividend record dates. When a participant withdraws from a Plan or
upon termination of a Plan, as provided below, certificates for whole common
shares credited to his or her account under a Plan will be issued and a cash
payment will be made for any fraction of a share credited to such account.
The Plan Agent maintains each shareholder's account in a Plan and furnishes
monthly written confirmations of all transactions in the accounts, including
information needed by the shareholders for personal and tax records. The Plan
Agent will hold common shares in the account of each Plan participant in
non-certificated form in the name of the participant. Proxy material relating to
the shareholders' meetings of a Fund will include those shares purchased, as
well as shares held pursuant to a Plan.
The reinvestment of dividends and distributions will not relieve participants of
any federal income tax that may be payable or required to be withheld on such
dividends or distributions. Participants under a Plan will receive tax
information annually. The amount of dividend to be reported on the 1099-DIV
should be: (1) in the case of shares issued by a Fund (other than Global
Dividend Fund), the fair market value of such shares on the dividend payment
date or (2) in the case of shares purchased by the Plan Agent in the open
market, the amount of cash used by the Plan Agent to purchase shares in the open
market, including the amount of cash allocated to brokerage commissions paid on
such purchases. Experience under a Plan may indicate that changes are desirable.
Accordingly, each Fund reserves the right to amend or terminate its Plan as
applied to any dividend or distribution paid subsequent to written notice of the
change sent to all shareholders of a Fund at least 90 days before the record
date for the dividend or distribution. The Plan may be amended or terminated by
the Plan Agent after at least 90 days written notice to all shareholders of a
Fund. All correspondence or additional information concerning the Plans should
be directed to the Plan Agent, Mellon Bank, N.A., c/o Mellon Investor Services,
P.O. Box 3338, South Hackensack, NJ 07606-1938 (Telephone: 1-800-852-0218).
Additional Information About Preferred Shares of the Funds
General
The preferred shares of Premium Dividend Fund I, Premium Dividend Fund II and
Global Dividend Fund are labeled "DARTS", the preferred shares of Select
Dividend Trust are labeled "AMPS" and the preferred shares of Preferred Dividend
Fund are labeled "ARPS". The DARTS, AMPS and ARPS are preferred shares of
beneficial interest that entitle their holders to receive when, as and if
declared by the Board of a Fund, out of funds legally available therefore,
cumulative cash dividends at a rate per annum that may vary for the successive
dividend periods for each series of preferred shares, and cumulative cash
additional dividends, payable on specified dates. The DARTS, AMPS and ARPS are
not traded on a stock exchange or over-the-counter. Each preferred share carries
one vote on matters on which preferred shares can be voted. The DARTS, AMPS or
ARPS are not convertible into common shares and have no preemptive rights. Each
of the outstanding DARTS, AMPS and ARPS have a liquidation preference of
$100,000 plus an amount equal to accumulated and unpaid dividends per share
(whether or not earned by the Fund or declared, including additional dividends,
if any) and are fully paid and nonassessable (except as described under
"Governing Law" below).
Series
Under the 1940 Act, each Fund is permitted to have outstanding more than one
series of preferred shares as long as no single series has priority over another
series as to the distribution of assets of the Fund or the payment of dividends.
Other than Premium Dividend Fund II, each Fund currently has one series of
preferred shares outstanding. Premium Dividend Fund II currently has two series
of DARTS outstanding. If the Reorganizations are approved and
59
completed, the combined fund will have six series of DARTS. The existing series
of Acquiring Fund DARTS will remain Series A and Series B and the Acquiring Fund
will issue: Acquiring Fund DARTS, Series C in exchange for the existing series
of DARTS of Premium Dividend Fund I; Acquiring Fund DARTS, Series D in exchange
for the existing series of AMPS of Select Dividend Trust; Acquiring Fund DARTS,
Series E in exchange for the existing series of ARPS of Preferred Dividend Fund;
and Acquiring Fund DARTS, Series F in exchange for the existing series of DARTS
of Global Dividend Fund. The additional series of preferred shares that will be
exchanged for existing series of preferred shares of each Acquired Fund are
expected to be designated in accordance with the foregoing, but may be
designated pursuant to the order that each series is issued by the Acquiring
Fund. The aggregate liquidation preference of each new series will equal the
aggregate liquidation preference of the existing shares that the respective new
series replaces. For each series, the number of shares and the liquidation
preference per share will be the same as the existing series. The auction dates,
rate period and dividend payment dates of the Acquiring Fund DARTS received in
the Reorganization will be the same as that of the preferred shares held
immediately prior to the Reorganization. The closings of the Reorganizations are
conditioned upon the Acquiring Fund DARTS receiving a rating of "AA" from S&P
and "aa2" from Moody's.
Outstanding Securities
Set forth below is information about each Fund's preferred shares as of December
22, 2006.
Premium Dividend Fund I
(4)
Amount Outstanding
(1) (2) (3) Exclusive of Amount
Title of Class Amount Authorized Amount Held by Fund Shown Under (3)
DARTS, Series A unlimited 0 685
Premium Dividend Fund II
(4)
Amount Outstanding
(1) (2) (3) Exclusive of Amount
Title of Class Amount Authorized Amount Held by Fund Shown Under (3)
DARTS, Series A unlimited 0 500
DARTS, Series B unlimited 0 500
Select Dividend Trust
(4)
Amount Outstanding
(1) (2) (3) Exclusive of Amount
Title of Class Amount Authorized Amount Held by Fund Shown Under (3)
AMPS, Series A unlimited 0 700
Global Dividend Fund
(4)
Amount Outstanding
(1) (2) (3) Exclusive of Amount
Title of Class Amount Authorized Amount Held by Fund Shown Under (3)
DARTS unlimited 0 600
Preferred Dividend Fund
(4)
Amount Outstanding
(1) (2) (3) Exclusive of Amount
Title of Class Amount Authorized Amount Held by Fund Shown Under (3)
ARPS unlimited 0 525
60
Purchase and Sale
Each Fund's series of preferred shares are purchased and sold at separate
auctions conducted on a regular basis (unless a Fund elects, subject to certain
conditions, to declare a special dividend period) by Deutsche Bank Trust Company
Americas ("Deutsche Bank"), as Auction Agent for each of the Funds' preferred
shares (other than Preferred Dividend Fund), or The Bank of New York ("BONY"),
as Auction Agent for Preferred Dividend Fund's ARPS. Unless otherwise permitted
by the Funds, existing and potential holders of preferred shares only may
participate in auctions through their broker-dealers. Broker-dealers submit the
orders of their respective customers who are existing and potential holders of
preferred shares to the Auction Agent. On or prior to each auction date for the
preferred shares (the business day prior to the beginning of a dividend period),
each holder may submit a hold order, bid or sell order to its broker-dealer.
Broker dealers may maintain a secondary trading market in the preferred shares
outside of auctions; however, historically they have not done so and are not
expected to do so in the future. The broker-dealers have no obligation to make a
secondary market in the preferred shares outside of the auction and there can be
no assurance that a secondary market for the preferred shares will develop or,
if it does develop, that it will provide holders with liquidity of investment.
The preferred shares are not registered on any stock exchange or on the National
Association of Securities Dealers Automated Quotations system.
Broker-Dealers
After each auction, the Auction Agent will pay a service charge, from funds
provided by each Fund, to each broker-dealer, at the annual rate of 0.25% of the
aggregate purchase price of all preferred shares placed by such broker-dealer in
such auction, for the number of days in the rate period to which such auction
relates, calculated on the basis of a year of 360 days. For purposes of the
preceding sentence, preferred shares will be deemed to have been placed by a
broker-dealer if such shares were (i) the subject of hold orders deemed to have
been made by existing holders of preferred shares that initially were acquired
by such existing holders through such broker-dealer or (ii) the subject of the
following orders submitted by such broker-dealer: (a) a submitted bid of an
existing holder pursuant to which such existing holder continues to hold such
shares as a result of the auction, (b) a submitted bid of a potential holder
pursuant to which such potential holder purchases such shares as a result of the
auction or (c) a submitted hold order.
The broker-dealer agreements provide that a broker-dealer may submit orders in
auctions for its own account unless a Fund notifies all broker-dealers that they
may no longer do so; provided, however, that in any event such broker-dealers
may continue to submit hold orders and sell orders. If a broker-dealer submits
an order for its own account in any auction, it may have knowledge of orders
placed through it in that auction and therefore have an advantage over other
bidders; such broker-dealer, however, would not have knowledge of orders
submitted by other broker-dealers in that auction. In the broker-dealer
agreements, broker-dealers agree to handle customer orders in accordance with
their respective duties under applicable securities laws and rules.
Dividends and Distributions
General. Dividends on the preferred shares, which accrue daily, are cumulative
at a rate that was established at each offering of the preferred shares and has
been reset every 49 days thereafter by auction. Separate auctions will be
conducted for each series of preferred shares of each Fund. Dividends will be
payable when, as and if declared by a Fund's Board, every 49 days, subject to
certain exceptions. Prior to each dividend payment date, each Fund is required
to deposit with the Auction Agent sufficient and timely funds for the payment of
declared dividends payable on such dividend payment date. Dividends generally
will be paid through The Depository Trust Company or its successor (the
"Securities Depository") on each dividend payment date. The Securities
Depository, in accordance with current procedures, is expected to distribute
dividends received from a Fund in next-day funds on each dividend payment date
to agent members. These agent members are in turn expected to distribute such
dividends to the person for whom they are acting as agents. The auction dates,
rate period and dividend payment dates of the Acquiring Fund DARTS received in
the Reorganization will be the same as that of the preferred shares held
immediately prior to the Reorganization. Notwithstanding the foregoing, (i) if
an auction with respect to a dividend period for the preferred shares is not
held for any reason, the dividend rate on the shares of the preferred shares for
such dividend period shall be the Maximum Applicable Rate (as defined in each
Fund's By-Laws) on the auction date with respect to such dividend period and
(ii) if the preferred shares are called for redemption, the dividend rate for
such shares until the commencement of the next dividend period will be the
dividend rate otherwise in effect on the date of the Notice of Redemption and
the dividend rate for such shares for each subsequent dividend period or part
thereof (if any) until the redemption date will be the Maximum Applicable Rate
on the auction date with respect to such dividend period.
61
If the Acquiring Fund, Select Dividend Trust, Global Dividend Fund or Preferred
Dividend Fund fails to pay on any dividend payment date (or within the
applicable grace period) the full amount of any dividend, the applicable rate
will not, until such failure to pay is cured, be determined based on the results
of an auction, but instead will be equal to 200% of the 60-day "AA" Composite
Commercial Paper Rate (as defined in each Fund's By-Laws).
No dividends shall be declared or paid or set apart for payment on the preferred
shares for any dividend period or part thereof unless full cumulative dividends
(including additional dividends, if any) have been or contemporaneously are
declared and paid on each of the preferred shares through the most recent
dividend payment date. If full cumulative dividends are not paid on the
preferred shares, all dividends on the preferred shares will be paid pro rata to
the holders of the outstanding preferred shares. Holders of preferred shares
will not be entitled to any dividends, whether payable in cash, property or
stock, in excess of full cumulative dividends. No interest, or sum of money in
lieu of interest, will be paid in respect of any dividend payment that may be in
arrears.
Under current law, dividends paid by a Fund will be taxable as ordinary income
and will be eligible for the Dividends Received Deduction to the extent that
they are designated by a Fund as qualifying for such deduction. Each of Premium
Dividend Fund I, Premium Dividend Fund II and Select Dividend Trust intends to
operate so that dividends paid will qualify in their entirety for the Dividends
Received Deduction and each Fund does not intend to realize any net capital
gains, but there can be no assurance that this result will be achieved.
Preferred Dividend Fund will be managed with a view to maximizing the portion of
the Fund's distributions to holders of the preferred shares that, under normal
market conditions, will qualify for the Dividends Received Deduction. Under
normal market conditions, Global Dividend Fund anticipates that at least 50% of
the dividends paid to holders of the preferred shares as a class will qualify
for the Dividends Received Deduction.
62
If, with respect to Premium Dividend Fund I, the qualified dividends are less
than its net income, exclusive of net capital gains, then the Fund will allocate
the qualified dividends first to the preferred shares and then to the common
shares, provided that the Fund receives an opinion of counsel that such
preferential allocation is permitted under applicable law. If any other Fund
realizes net capital gains in any taxable year, the Fund will designate a
proportionate share of the dividends on the common shares and the preferred
shares for the year as derived from such gains. Similarly, if the net income of
any Fund other than Premium Dividend Fund I exceeds its qualified dividends in
any taxable year, the Fund will designate a proportionate share of the dividends
on the common shares and the preferred shares for the year as qualifying for the
Dividends Received Deduction. In either case, dividends on the preferred shares
for the taxable year would not qualify in their entirety for the Dividends
Received Deduction and additional dividends would become payable on the
preferred shares to compensate for the resulting reduction in the Net After-Tax
Return to the holders of the preferred shares.
Additional Dividends. With respect to all Funds other than Premium Dividend Fund
I, if for any taxable year, (i) a Fund realizes net capital gain, or (ii) the
net income of a Fund, excluding net capital gains, exceeds its qualified
dividends (each an "Additional Dividend Event"), a Fund will not designate a
portion of the dividends paid on the preferred shares as qualifying for the
Dividends Received Deduction. In that event, a cumulative additional dividend
will become payable on each series of the preferred shares to all holders of
record of the preferred shares as of the applicable dividend payment date and
will be calculated such that the Net After-Tax Return to a holder of preferred
shares that is a corporation based on the dividends paid with respect to the
relevant dividend period for which the Additional Dividend Event occurs and the
additional dividend relating to such dividends will be the same as the Net
After-Tax Return that would have been derived from such dividends if such
Additional Dividend Event had not occurred.
If, for any taxable year, any portion of the dividends paid on the preferred
shares of Premium Dividend Fund I is ineligible for the Dividends Received
Deduction because (i) the dividends received by the Fund that qualify for the
Dividends Received Deduction are less than the net income of the Fund, excluding
net capital gains, and, as a result, the Fund is not permitted to designate all
of the dividends paid on the shares of the DARTS as qualifying for the Dividends
Received Deduction or (ii) the net capital gains of the Fund are not allocated
solely to the shares of the common stock (each an "Indemnity Event"), then a
cumulative additional dividend will become payable on the shares of the DARTS in
December of such year such that the Net After-Tax Return to a holder of shares
of the DARTS that is a corporation from the dividends paid in respect of the
year and the additional dividend relating to such dividends will be the same as
the Net After-Tax Return that would have been derived from the dividends paid in
respect of the year if such Indemnity Event had not occurred.
Unlike the other Funds, Premium Dividend Fund I has a provision in its By-Laws
governing its preferred shares that permits it to allocate items of income and
gain disproportionately to preferred shares such that items that are not
eligible for the Dividends Received Deduction can be allocated away from
preferred shares. This provision is based upon federal income tax law in effect
at the time of the launch of Premium Dividend Income Fund I. Subsequent changes
in federal income tax law permit pre-existing funds, such as Premium Dividend
Income Fund I, to continue this practice but prohibit all funds offered
subsequently from doing this. All of the Funds other than Premium Dividend
Income Fund I accordingly do not have this capability. In certain circumstances,
this allocation practice could enable Premium Dividend Fund I to avoid paying
additional dividends on preferred shares at the expense of common shareholders
where the other Funds could not. Following the Reorganization of Premium
Dividend Fund I and the Acquiring Fund, common shareholders of Premium Dividend
Fund I will no longer have this potential benefit. Because the Acquiring Fund
operates to ensure that all dividends paid are eligible for the Dividends
Received Deduction, Advisers does not believe that the loss of this benefit will
be of material significance as a practical matter to common shareholders of
Premium Dividend Fund I and is substantially outweighed by the benefits of the
Reorganization.
If any designations or allocations made by a Fund are not given effect for
federal income tax purposes, a Fund will not be required to pay additional
dividends on the preferred shares to compensate for the resulting reduction in
the Net After-Tax Return to the holders of the preferred shares. Moreover, no
additional dividends shall be payable as a result of any change in the law
concerning the eligibility of amounts paid with respect to the preferred shares
for the Dividends Received Deduction or the reduction or elimination of the
Dividends Received Deduction.
63
Dividend Rates
The following table provides information about the dividend rates for each
series of each Fund's preferred shares as of a recent auction date:
AUCTION DATE FUND/SERIES RATE
----------------------------------------------------------------------------
January 26, 2007 Premium Dividend Fund I, DARTS, Series A 3.999%
January 3, 2007 Premium Dividend Fund II, DARTS, Series A 3.119%
January 10, 2007 Premium Dividend Fund II, DARTS, Series B 3.980%
December 19, 2006 Select Dividend Trust, AMPS, Series A 4.090%
January 5, 2007 Global Dividend Fund, DARTS 4.049%
January 2, 2007 Preferred Dividend Fund, ARPS 4.069%
The dividend rates in effect at the closing of the Reorganizations will be the
rates determined at the auctions held immediately prior to the closing date of
each Reorganization. The auction dates, rate period and dividend payment dates
of the Acquiring Fund DARTS received in the Reorganization will be the same as
that of the preferred shares held immediately prior to the Reorganization.
Ratings
The DARTS of Premium Dividend Fund I have been issued a rating of "AA" from S&P.
The preferred shares of Premium Dividend Fund II, Select Dividend Trust and
Global Dividend Fund have been issued a rating of "AA" from S&P and "aa2" from
Moody's. The ARPS of Preferred Dividend Fund have been rated "aa" by Moody's.
The ratings expected to be received by the Acquiring Fund DARTS are "AA" from
S&P and "aa2" from Moody's. Compliance with the Rating Agency Guidelines may
impose restrictions on the securities in which a Fund may invest. Each Fund
intends that, so long any preferred shares are outstanding, the composition of
such Fund's portfolio reflects in part the Rating Agency Guidelines established
by S&P and/or Moody's in connection with the Fund's receipt of ratings of "AA"
from S&P and/or "aa2" or "aa" from Moody's, as applicable. Compliance with the
Rating Agency Guidelines is required by each Fund's By-Laws.
The Rating Agency Guidelines require the Fund to meet, as of certain specified
dates, certain asset coverage requirements that are imposed in connection with
the rating of the preferred shares. If the Fund fails to meet such asset
coverage requirements, the Fund may be required to redeem some or all of its
outstanding preferred shares or may be required to purchase or otherwise acquire
sufficient assets to meet the asset coverage requirements of the Rating Agency.
In addition to the Rating Agency Guidelines, each Fund is required to comply
with the 1940 Act requirement that the value of its total assets, less all
liabilities not constituting senior securities of the Fund, must be at least
equal to 200% of the aggregate liquidation preference of the preferred shares
outstanding plus the value of any senior securities representing indebtedness.
If a Fund fails to meet the 1940 Act asset coverage requirement as of certain
specified evaluation dates and fails, within a specified period, to cure such
failure, it may be required to redeem some or all of the outstanding preferred
shares.
S&P and Moody's are nationally recognized, independent statistical Rating
Agencies which issue ratings that reflect the perceived creditworthiness of
various securities. Each Fund will pay certain fees to S&P and/or Moody's for
rating the preferred shares. The guidelines for rating such preferred shares
have been developed by S&P and Moody's in connection with other issuances of
asset-backed and similar securities, including debt obligations and auction rate
preferred stock, generally on a case-by-case basis through discussions with the
respective issuers of these securities. The guidelines are designed to ensure
that assets underlying outstanding debt or preferred stock will be sufficiently
varied and will be of sufficient quality, duration and amount to justify
investment grade ratings. The guidelines do not have the force of law on a Fund,
but have been adopted by each Fund in its By-Laws in order to satisfy current
requirements necessary for S&P and/or Moody's to issue the above-described
ratings for the preferred shares, which ratings are generally relied upon by
institutional investors in purchasing such securities. In the context of a
closed-end investment company such as the Fund, therefore, the guidelines
provide a set of tests for portfolio composition and asset coverage that
supplement (and in some cases are more restrictive than) the applicable
requirements under the 1940 Act. A Rating Agency's guidelines will apply to the
preferred shares of a Fund only so long as such Rating Agency is rating the
preferred shares.
Each Fund may, but is not required to, adopt any modifications to the Rating
Agency Guidelines that may hereafter by established by S&P or Moody's. Failure
to adopt any such modifications, however, may result in a change in the ratings
assigned to the preferred shares or a withdrawal of ratings altogether. In
addition, any Rating Agency providing a rating for the preferred shares may, at
any time, change or withdraw any such rating. The Board of each Fund may,
without shareholder approval, amend, alter or repeal any or all of the
definitions and related provisions which have been adopted by a Fund pursuant to
the Rating Agency Guidelines in the event S&P and/or Moody's is no
64
longer rating the preferred shares or the Fund receives written confirmation
from S&P and/or Moody's that any such amendment, alternation or repeal would not
impair the rating then assigned to the preferred shares.
A preferred stock rating is an assessment of the capacity and willingness of an
issuer to pay preferred stock obligations. The rating on the preferred shares is
not a recommendation to purchase, hold or sell those shares, inasmuch as the
rating does not comment as to market price or suitability for a particular
investor. The Rating Agency Guidelines described above also do not address the
likelihood that an owner of preferred shares will be able to sell such shares in
an auction or otherwise. The rating is based on current information furnished to
S&P and/or Moody's by a Fund and/or the Adviser and information obtained from
other sources. The rating may be changed, suspended or withdrawn as a result of
changes in, or the unavailability of, such information. The common shares of
each Fund have not been rated by S&P or Moody's. Each Fund may at some future
time seek to have the preferred shares rated by an additional or substitute
Rating Agency.
Redemptions
Notwithstanding the provisions for redemptions described below, no Fund may
redeem, purchase or otherwise acquire preferred shares (or, with respect to
Select Dividend Trust, Global Dividend Fund and Preferred Dividend Fund, mail a
notice of redemption with respect to an optional redemption), unless: (i) all
accumulated and unpaid dividends (including additional dividends) on all
outstanding preferred shares for all applicable past dividend periods shall have
been or are contemporaneously paid or declared, and a sum sufficient for the
payment of such dividends is set apart for payment and (ii) the 1940 asset
coverage requirements and any asset coverage requirements that may be imposed by
a Rating Agency in connection with any rating of the preferred shares would be
met on the date of such redemption, purchase or other acquisition after giving
effect thereto. Global Dividend Fund is subject to the additional condition
that: (a) in the case the preferred shares are then being rated by Moody's, the
Fund has cash and short-term money market instruments maturing prior to the
redemption date in the aggregate amount equal in value to the amount required to
be paid upon any such redemption (including any required premium) and, (b) in
the case the preferred shares are then being rated by S&P, the Fund has S&P
Eligible Asset (as, defined in the By-Laws) with a maturity or tender date not
later than the redemption date and with a value at least equal to the amount
required to be paid upon any such redemption (including any required premium).
Preferred Dividend Fund is subject to the additional condition set forth in (a)
above. Notwithstanding any of the foregoing, a Fund may, subject to the
requirements of the 1940 Act, redeem, purchase or otherwise acquire preferred
shares (1) as a whole, either pursuant to an optional redemption or a mandatory
redemption or (2) pursuant to a purchase or exchange offer made on an equal
basis for all of the outstanding preferred shares for a price that is proper
under the 1940 Act. In the event that fewer than all of the outstanding
preferred shares are to be redeemed pursuant to either an optional redemption or
a mandatory redemption, the shares to be redeemed shall otherwise be selected by
lot, or such other method as the Board deems fair and equitable.
Optional Redemptions. The preferred shares are redeemable at the option of each
Fund, as a whole or in part, on any dividend payment date with respect to Global
Dividend Fund, Select Dividend Trust and Preferred Dividend Fund and on the
second business day preceding any dividend payment date with respect to the
Acquiring Fund and Premium Dividend Fund I, at a price equal to $100,000 per
share plus, in each case, accumulated and unpaid dividends (including additional
dividends, if any) to the redemption date. The ARPS of Preferred Dividend Fund
may not be optionally redeemed in part if, after such partial redemption, fewer
than 30 ARPS remain outstanding. The DARTS of Global Dividend Fund may not be
optionally redeemed in part if, after such partial redemption fewer than 30
DARTS remain outstanding. No other Funds have any provision for the minimum
number of preferred shares outstanding to allow the Fund to optionally redeem
its shares. Each Fund (other than Preferred Dividend Fund) provides that
optional redemptions may occur with not fewer than 30 nor more than 45 days'
notice. Preferred Dividend Fund provides that optional redemptions may occur
with no fewer than 25 nor more than 30 days' notice.
Mandatory Redemptions. The preferred shares are subject to mandatory redemption
if either the 1940 Act asset coverage requirements or the asset coverage
requirements that may be imposed by a Rating Agency in connection with any
rating of the preferred shares are not met as of an applicable cure date, in
part to the extent necessary to restore such asset coverage or, if such asset
coverage cannot be so restored, as a whole. In each case, the redemption price
will be $100,000 per share plus accumulated and unpaid dividends (including
additional dividends, if any) to the redemption date.
If a Fund does not have funds legally available for the redemption of all or any
portion of the preferred shares to be redeemed on any mandatory redemption date,
the Fund will redeem on such mandatory redemption date the number of preferred
shares that it has legally available funds to redeem and the remainder of the
preferred shares required to be redeemed will be redeemed on the earliest
practicable date next following the day on which the Fund has funds legally
available for the redemption of the preferred shares, pursuant to a notice of
redemption
65
(which will specify a mandatory redemption date that is not fewer than the
minimum number of days after the date of such notice required by the 1940 Act).
From and after the occurrence of any event requiring the redemption of preferred
shares, and for so long as any preferred shares are subject to mandatory
redemption, a Fund may not reinvest the proceeds of any assets received prior to
the mandatory redemption date for any such shares except in short-term money
market instruments with maturity dates prior to such mandatory redemption date,
except that the foregoing restrictions will not be applicable to any
reinvestment of such proceeds if, after giving effect thereto, the Fund would
have sufficient monies to redeem all of the preferred shares that are subject to
redemption on such mandatory redemption date.
Liquidation Rights
In the event of any voluntary or involuntary liquidation, dissolution or winding
up of a Fund, holders of preferred shares are entitled to receive, out of the
assets of a Fund available for distribution to shareholders after satisfying
claims of creditors but before any payment or distribution of assets is made to
the holders of the common shares or any other class of shares of beneficial
interest ranking junior to the preferred shares upon liquidation, a liquidation
distribution in the amount of $100,000 per share plus an amount equal to
accumulated and unpaid dividends (whether or not earned or declared and
including additional dividends, if any) to the date of such distribution. If
upon such events, the assets of a Fund are insufficient to pay the holders of
preferred shares the full amount of the liquidation distributions to which they
are entitled, holders of preferred shares will share ratably in any such
distribution of assets. Unless and until payment in full has been made to
holders of preferred shares of the liquidation distributions to which they are
entitled, no dividends or distributions in liquidation will be made to holders
of the common shares or any other shares of beneficial interest ranking junior
to the preferred shares and no purchase, redemption or other acquisition for any
consideration by a Fund will be made in respect of the common shares or any
other shares of beneficial interest ranking junior to the preferred shares upon
liquidation. After payment to holders of the preferred shares of the full amount
of the liquidation distributions to which they are entitled, such holders will
have no rights or claims to the remaining assets of the Fund. Neither a sale,
lease or exchange of all or substantially all of the property and assets of a
Fund nor a consolidation or merger of a Fund with or into any other trust or
corporation will be deemed to be a liquidation, whether voluntary or
involuntary, dissolution or winding up of a Fund for the purpose of determining
liquidation rights.
Additional Information
For additional information on Acquiring Fund DARTS, Acquired Fund shareholders
should consult the Acquiring Fund's By-Laws attached as Appendix A to the
Statement of Additional Information. Acquiring Fund DARTS issued in connection
with the Reorganizations will be governed by the By-Laws of the Acquiring Fund,
which, upon completion of the Reorganizations, will be amended to reflect the
creation of new series and the issuance of additional DARTS.
U.S. Federal Income Tax Matters
The following is a summary discussion of certain U.S. federal income tax
consequences that may be relevant to a shareholder of acquiring, holding and
disposing of common shares or preferred shares of a Fund. This discussion only
addresses U.S. federal income tax consequences to U.S. shareholders who hold
their shares as capital assets and does not address all of the U.S. federal
income tax consequences that may be relevant to particular shareholders in light
of their individual circumstances. This discussion also does not address the tax
consequences to shareholders who are subject to special rules, including,
without limitation, financial institutions; insurance companies; dealers in
securities or foreign currencies; foreign shareholders; shareholders who hold
their shares as or in a hedge against currency risk, a constructive sale or a
conversion transaction; shareholders who are subject to the alternative minimum
tax, or tax-exempt or tax-deferred plans accounts, or entities. In addition, the
discussion does not address any state, local or foreign tax consequences and it
does not address any U.S. federal tax consequences other than U.S. federal
income tax consequences. The discussion reflects applicable tax laws of the
United States as of the date of this Prospectus, which tax laws may be changed
or subject to new interpretations by the courts or the IRS retroactively or
prospectively. No attempt is made to present a detailed explanation of all U.S.
federal income tax concerns affecting each Fund and its shareholders, and the
discussion set forth herein does not constitute tax advice. Investors are urged
to consult their own tax advisers to determine the specific tax consequences to
them of investing in a Fund, including the applicable federal, state, local and
foreign tax consequences to them and the effect of possible changes in tax laws.
Each Fund intends to elect to be treated and to qualify each year as a
"regulated investment company" under Subchapter M of the Code so that it
generally will not pay U.S. federal income tax on income and capital gains
distrib-
66
uted to shareholders. In order to qualify as a regulated investment company
under Subchapter M of the Code, which qualification this discussion assumes, a
Fund must, among other things, (i) derive at least 90% of its gross income for
each taxable year from (a) dividends, interest, payments with respect to
securities loans, gains from the sale or other disposition of stock, securities
or foreign currencies, or other income (including gains from options, futures
and forward contracts) derived with respect to its business of investing in such
stock, securities or currencies 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
for the items described in (a) above (each a "Qualified Publicly Traded
Partnership") (the "90% income test"); 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 (I) cash and cash items, U.S.
government securities, the securities of other regulated investment companies
and (II) other securities, with such other securities limited, in respect to 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 (other than U.S. government securities and the securities of
other regulated investment companies) of (I) any one issuer, (II) any two or
more issuers that the Fund controls and that are determined to be engaged in the
same or similar trades or businesses or related trades or businesses or (III)
any one or more Qualified Publicly Traded Partnerships. For purposes of the 90%
income test, the character of income earned by certain entities in which a Fund
invests that are not treated as corporations for U.S. federal income tax
purposes (e.g., partnerships or trusts) will generally pass through to the Fund.
Consequently, a Fund may be required to limit its equity investments in such
entities that earn fee income, rental income or other nonqualifying income.
If a Fund qualifies as a regulated investment company and, for each taxable
year, it distributes to its shareholders an amount equal to or exceeding the sum
of (i) 90% of its "investment company taxable income" as that term is defined in
the Code (which includes, among other things, dividends, taxable interest and
the excess of any net short-term capital gains over net long-term capital
losses, as reduced by certain deductible expenses) without regard to the
deduction for dividends paid and (ii) 90% of the excess of its gross tax-exempt
interest, if any, over certain disallowed deductions, the Fund generally will be
relieved of U.S. federal income tax on any income of a Fund, including "net
capital gains" (the excess of net long-term capital gain over net short-term
capital loss), distributed to shareholders. However, if a Fund retains any
investment company taxable income or net capital gain, it generally will be
subject to U.S. federal income tax at regular corporate rates on the amount
retained. Each Fund intends to distribute at least annually all or substantially
all of its investment company taxable income, net tax exempt interest, if any,
and net capital gain. If for any taxable year a Fund did not qualify as a
regulated investment company, it would be treated as a corporation subject to
U.S. federal income tax thereby subjecting any income earned by the Fund to tax
at the corporate level at a 35% federal tax rate and, when such income is
distributed, to a further tax at the shareholder level. In addition, a Fund
could be required to recognize unrealized gains, pay taxes and make
distributions (which could be subject to interest charges) before requalifying
as a regulated investment company.
In order to avoid incurring a nondeductible 4% federal excise tax obligation,
the Code requires that a Fund distribute (or be deemed to have distributed) by
December 31 of each calendar year an amount at least equal to the sum of (i) 98%
of its ordinary income for such year, (ii) 98% of its capital gain net income
(which is the excess of its realized net long-term capital gain over its
realized net short-term capital loss), generally computed on the basis of the
one-year period ending on October 31 of such year, after reduction by any
available capital loss carryforwards and (iii) 100% of any ordinary income and
capital gain net income from the prior year (as previously computed) that were
not paid out during such year and on which the Fund paid no federal income tax.
Under current law, provided that a Fund qualifies as a regulated investment
company for federal income tax purposes, the Fund should not be liable for any
income, corporate excise or franchise tax in the Commonwealth of Massachusetts.
Although dividends generally will be treated as distributed when paid, any
dividend declared by a Fund as of a record date in October, November or December
and paid during the following January will be treated for U.S. federal income
tax purposes as received by shareholders on December 31 of the calendar year in
which it is declared. In addition, certain other distributions made after the
close of a taxable year of a Fund may be "spilled back" and treated as paid by
the Fund (except for purposes of the 4% excise tax) during such taxable year. In
such case, shareholders will be treated as having received such dividends in the
taxable year in which the distributions were actually made.
Each holder of common shares of the Funds, other than holders of Preferred
Dividend Fund and Premium Dividend Fund II, will automatically have all
distributions of dividends and capital gains reinvested by the Plan Agent,
unless an election is made to receive cash. Holders of common shares of
Preferred Dividend Fund and Premium Dividend Fund II must elect to have all
distributions of dividends and capital gains reinvested by the Plan Agent. For
U.S. federal income tax purposes, assuming the Fund has sufficient current or
accumulated earnings and profits, such distributions generally will be taxable
whether a shareholder takes them in cash or they are reinvested pursuant to
67
the Plan in additional shares of the Fund. In general, dividends from investment
company taxable income are taxable either as ordinary income or, if so
designated by the Fund, as "qualified dividend income" taxable to individual
shareholders at a maximum 15% tax rate (if any) and dividends from net capital
gain (if any) that are designated as capital gain dividends are taxable as
long-term capital gains for U.S. federal income tax purposes without regard to
the length of time the shareholder has held shares of the Fund. A portion of the
dividend distributions to individual shareholders may qualify as "qualified
dividend income" as that term is defined in Section 1(h)(11) of the Code,
qualifying for the maximum 15% tax rate on dividends under the Jobs and Growth
Tax Relief Reconciliation Act of 2003 to the extent that such dividends are
attributable to qualified dividend income from the Fund's investments in common
and preferred stock of U.S. companies and stock of certain foreign corporations,
provided that certain holding period and other requirements are met. Capital
gain dividends distributed by a Fund (if any) to individual shareholders
generally will qualify for the maximum 15% tax rate under such Act. Absent
further legislation, the maximum 15% tax rate on qualified dividend income and
long-term capital gains will cease to apply to taxable years beginning after
December 31, 2010. Shareholders receiving distributions in the form of
additional shares issued by a Fund will be treated for federal income tax
purposes as receiving a distribution in an amount equal to the amount of cash
they would have received had they elected to receive cash, except when a Fund
distributes newly issued shares, in which case the amount of the distribution
will be equal to the fair market value of the shares received, determined as of
the distribution date. The basis of such shares will equal the amount of the
distribution. The source and U.S. federal income tax status of all distributions
will be reported to shareholders annually and shareholders receiving
distributions in the form of additional shares of a Fund will receive a report
as to the NAV of those shares.
If a Fund retains any net capital gains for a taxable year, the Fund may
designate the retained amount as undistributed capital gains in a notice to
shareholders who, if subject to U.S. federal income tax on long-term capital
gains, (i) will be required to include in income for U.S. federal income tax
purposes, as long-term capital gain, their proportionate shares of such
undistributed amount and (ii) will be entitled to credit their proportionate
shares of the tax paid by the Fund on the undistributed amount against their
U.S. federal income tax liabilities, if any, and to claim refunds to the extent
the credit exceeds such liabilities.
If a Fund acquires any equity interest (under Treasury regulations that may be
promulgated in the future, generally including not only stock but also an option
to acquire stock such as is inherent in a convertible bond) in certain foreign
corporations that receive at least 75% of their annual gross income from passive
sources (such as interest, dividends, certain rents and royalties, or capital
gains) or that hold at least 50% of their assets in investments producing such
passive income ("passive foreign investment companies"), the Fund could be
subject to U.S. federal income tax and additional interest charges on "excess
distributions" received from such companies or on gain from the disposition of
stock in such companies, even if all income or gain actually received by the
Fund is timely distributed to its shareholders. The Fund would not be able to
pass through to its shareholders any credit or deduction for such a tax. An
election may generally be available that would ameliorate these adverse tax
consequences, but any such election could require the Fund to recognize taxable
income or gain (subject to tax distribution requirements) without the concurrent
receipt of cash. These investments could also result in the treatment of capital
gains from the sale of stock of passive foreign investment companies as ordinary
income. Each Fund will monitor and may limit and/or manage its holdings in
passive foreign investment companies to limit its tax liability or maximize its
return from these investments.
When a Fund utilizes leverage through borrowing or issuing preferred shares, a
failure by the Fund to meet the asset coverage requirements imposed by the 1940
Act or by any rating organization that has rated such leverage or additional
restrictions that may be imposed by certain lenders on the payment of dividends
or distributions potentially could limit or suspend the Fund's ability to make
distributions on its common shares. Such a suspension or limitation could
prevent the Fund from distributing at least 90% of its investment company
taxable income as is required under the Code and therefore might jeopardize the
Fund's qualification for taxation as a regulated investment company and/or might
subject the Fund to the 4% excise tax discussed above. Upon any failure to meet
such asset coverage requirements, a Fund may, in its sole discretion, purchase
or redeem shares of preferred stock in order to maintain or restore the
requisite asset coverage and avoid the adverse consequences to the Fund and its
shareholders of failing to satisfy the distribution requirement. There can be no
assurance, however, that any such action would achieve these objectives. Each
Fund will endeavor to avoid restrictions on its ability to distribute dividends.
If for any taxable year a Fund fails to qualify for treatment as a regulated
investment company under the Code, the Fund will incur a regular Federal
corporate income tax on its taxable income (including capital gain),
irrespective of whether such income has been distributed to shareholders.
Distributions to its shareholders for such year would be taxable as ordinary
dividends to the extent of the Fund's current and accumulated earnings and
profits, if any. Before requalifying as a regulated investment company for a
subsequent taxable year, the Fund would be required to dis-
68
tribute to shareholders any earnings and profits accumulated in the taxable
year(s) for which it did not qualify as a regulated investment company.
If a Fund invests in certain pay-in-kind securities, zero coupon securities,
deferred interest securities or, in general, any other securities with original
issue discount (or with market discount if the Fund elects to include market
discount in income currently), the Fund generally must accrue income on such
investments for each taxable year, which generally will be prior to the receipt
of the corresponding cash payments. However, a Fund must distribute, at least
annually, all or substantially all of its investment company taxable income,
including such accrued income, to shareholders to qualify as a regulated
investment company under the Code and avoid U.S. federal income and excise
taxes. Therefore, a Fund may have to dispose of its portfolio securities under
disadvantageous circumstances to generate cash, or may have to borrow the cash,
to satisfy distribution requirements.
At the time of an investor's purchase of a Fund's shares, a portion of the
purchase price may be attributable to realized or unrealized appreciation in the
Fund's portfolio or undistributed taxable income of the Fund. Consequently,
subsequent distributions by the Fund with respect to these shares from such
appreciation or income may be taxable as ordinary income to such investor even
if the NAV of the investor's shares is, as a result of the distributions,
reduced below the investor's cost for such shares and the distributions
economically represent a return of a portion of the investment.
Sales and other dispositions of a Fund's shares generally are taxable events for
shareholders that are subject to tax. Shareholders should consult their own tax
advisers with reference to their individual circumstances to determine whether
any particular transaction in a Fund's shares is properly treated as a sale for
tax purposes, as the following discussion assumes, and the tax treatment of any
gains or losses recognized in such transactions. In general, if shares of a Fund
are sold, the shareholder will recognize gain or loss equal to the difference
between the amount realized on the sale and the shareholder's adjusted basis in
the shares sold. Such gain or loss generally will be treated as long-term gain
or loss if the shares were held for more than one year and otherwise generally
will be treated as short-term gain or loss. Any loss recognized by a shareholder
upon the sale or other disposition of shares with a tax holding period of six
months or less generally will be treated as a long-term capital loss to the
extent of any amounts treated as distributions of long-term capital gains with
respect to such shares. Losses on sales or other dispositions of shares may be
disallowed under "wash sale" rules in the event of other investments in a Fund
(including those made pursuant to reinvestment of dividends and/or capital gains
distributions) within a period of 61 days beginning 30 days before and ending 30
days after a sale or other disposition of shares. In that event, the basis of
the replacement shares of the Fund will be increased to reflect the disallowed
loss.
Under Treasury regulations, if a shareholder recognizes a loss with respect to
shares of $2 million or more for an individual shareholder, or $10 million or
more for a corporate shareholder, in any single taxable year (or a greater
amount over a combination of years), the shareholder must file with the IRS a
disclosure statement on Form 8886. Direct shareholders of portfolio securities
are in many cases excepted from this reporting requirement but, under current
guidance, shareholders of regulated investment companies are not excepted. The
fact that a loss is reportable under these regulations does not affect the legal
determination of whether or not the taxpayer's treatment of the loss is proper.
Shareholders should consult with their tax advisers to determine the
applicability of these regulations in light of their individual circumstances.
Options written or purchased and futures contracts entered into by a Fund on
certain securities and indices may cause the Fund to recognize gains or losses
from marking-to-market even though such options may not have lapsed, been closed
out, or exercised, or such futures or forward contracts may not have been
performed or closed out. The tax rules applicable to these contracts may affect
the characterization of some capital gains and losses recognized by a Fund as
long-term or short-term. Additionally, a Fund may be required to recognize gain
if an option, futures contract, forward contract, short sale or other
transaction that is not subject to the mark-to-market rules is treated as a
"constructive sale" of an "appreciated financial position" held by the Fund
under Section 1259 of the Code. Any net mark-to-market gains and/or gains from
constructive sales may also have to be distributed to satisfy the distribution
requirements referred to above even though a Fund may receive no corresponding
cash amounts, possibly requiring the Fund to dispose of portfolio securities or
borrow to obtain the necessary cash. Losses on certain options, futures or
forward contracts and/or offsetting positions (portfolio securities or other
positions with respect to which a Fund's risk of loss is substantially
diminished by one or more options, futures or forward contracts) may also be
deferred under the tax straddle rules of the Code, which may also affect the
characterization of capital gains or losses from straddle positions and certain
successor positions as long-term or short-term. Certain tax elections may be
available that would enable a Fund to ameliorate some adverse effects of the tax
rules described in this paragraph. The tax rules applicable to options, futures,
forward contracts and straddles may affect the amount, timing and character of a
Fund's income and gains or losses and hence of its distributions to
shareholders.
69
Dividends of investment company taxable income designated by a Fund and received
by corporate shareholders of the Fund will qualify for the Dividends Received
Deduction to the extent of the amount of qualifying dividends received by the
Fund from domestic corporations for the taxable year. A dividend received by a
Fund will not be treated as a qualifying dividend (i) if the stock on which the
dividend is paid is considered to be "debt-financed" (generally, acquired with
borrowed funds), (ii) if the Fund fails to meet certain holding period
requirements for the stock on which the dividend is paid or (iii) to the extent
that the Fund is under an obligation (pursuant to a short sale or otherwise) to
make related payments with respect to positions in substantially similar or
related property. Moreover, the Dividends Received Deduction may be disallowed
or reduced if the corporate shareholder fails to satisfy the foregoing
requirements with respect to its shares of a Fund or by application of the Code.
The federal income tax treatment of a Fund's investment in preferred securities
or other securities and its transactions involving, among other things, swaps,
caps, floors and collars is uncertain and may be subject to recharacterization
by the IRS. To the extent the tax treatment of such securities or transactions
differs from the tax treatment expected by a Fund, the timing or character of
income recognized by the Fund could be affected and the Fund may be required to
purchase or sell securities, or otherwise change its portfolio, in order to
comply with the tax rules applicable to regulated investment companies under the
Code.
The IRS has taken the position that if a regulated investment company has two or
more classes of shares, it must designate distributions made to each class in
any year as consisting of no more than such class's proportionate share of
particular types of income, including dividends qualifying for the Dividends
Received Deduction (if any) and capital gains. A class's proportionate share of
a particular type of income is determined according to the percentage of total
dividends paid by the regulated investment company during the year to such
class. Consequently, each Fund other than Premium Dividend Fund I intends to
designate distributions made to the common shareholders and the preferred
shareholders of particular types of income (including ordinary income, qualified
dividend income (if any) and capital gains) in accordance with each such class's
proportionate share of such income.
Dividends (including additional dividends, if any) paid on the preferred shares
and dividends paid on the common shares (other than capital gains dividends
described below) will be eligible for the Dividends Received Deduction to the
extent they are designated by a Fund as qualifying for such deduction, except
the aggregate amount of dividends which may be designated by a Fund for any year
cannot exceed the aggregate amount of qualified dividends received by the Fund
in that year for which it would be allowed if it were not a regulated investment
company.
Under current law, for any taxable year of a Fund, ordinary income dividends
paid by the Fund will qualify fully for the Dividends Received Deduction if the
qualified dividends received by the Fund are not less than the net income of the
Fund exclusive of net capital gains (stated differently, if the income of the
Fund other than such dividends or net capital gains does not exceed the expenses
of the Fund). Each Fund intends to operate so as to achieve this result, but
there can be no assurance that it will be achieved. A Fund's "net income"
includes all dividends, interest and other income and short-term capital gains
earned by the Fund on its portfolio holdings, net of the Fund's expenses. The
term "net capital gains" means the excess of net long-term capital gains over
net short-term capital losses.
Under Rev. Rul. 89-81, 1989-1 C.B. 226, distributions on the preferred shares
and the common shares are required to consist proportionately of each type of
income with particular tax characteristics earned by a Fund. Thus, if for a
given taxable year, a particular percentage of the total net income of a Fund
qualifies for the Dividends Received Deduction, then a uniform percentage of the
distributions on the preferred shares and on the common shares of each Fund
other than Premium Dividends Fund I will qualify for such deductions. As a Fund
established prior to the issuance of Rev. Rul 89-81, Premium Dividends Fund I is
not subject to the proportionality requirement of the ruling. Instead, in the
case of Premium Dividend Fund I, if the qualified dividends received by the Fund
are less than its net income, exclusive of net capital gains, then the Fund will
allocate the qualified dividends first to the preferred shares and then to the
common shares, provided that Premium Dividend Fund I receives an opinion of
counsel that such a preferential allocation is permitted under applicable law.
If such an opinion is not received by Premium Dividend Fund I, then the Fund
will allocate the qualifying dividends ratably among the common shares and the
preferred shares, most likely ratably in proportion to the dividends paid on
shares of each. In the event that qualified dividends are allocated ratably
between the preferred shares and the common shares of a Fund, some portion of
the dividends payable on the preferred shares might not qualify for the
Dividends Received Deduction. In such event, the Fund would pay additional
dividends to maintain the Net After-Tax Return of holders of preferred shares.
Payment of any such additional dividends on the preferred shares will reduce the
amount available for payment of dividends on the common shares.
Based in part on the lack of any present intention on the part of any Fund to
redeem or purchase the preferred shares at any time in the future, each Fund
believes that under present law its preferred shares will constitute stock of
the Fund and distributions with respect to the preferred shares (other than
distributions in redemption of the
70
preferred shares that are treated as exchanges under Section 302(b) of the Code)
will constitute dividends to the extent of the Fund's current or accumulated
earnings and profits as calculated for U.S. federal income tax purposes. Such
dividends generally will be taxable as ordinary income to shareholders (other
than qualified dividend income and capital gain dividends). This view relies in
part on a published ruling of the IRS stating that certain preferred stock
similar in many material respects to the preferred shares represents equity. It
is possible, however, that the IRS might take a contrary position asserting, for
example that the preferred shares constitute debt of a Fund. If this position
were upheld, the discussion of the treatment of distributions above would not
apply. Instead distributions by such Fund to shareholders of preferred shares
would constitute interest, whether or not such distributions exceeded the
earnings and profits of the Fund, would be included in full in the income of the
recipient and would be taxed as ordinary income.
If a Fund retains any net capital gain for a taxable year, the Fund may
designate the retained amount as undistributed capital gains in a notice to
shareholders who, if subject to U.S. federal income tax on long-term capital
gains, (i) will be required to include in income for U.S. federal income tax
purposes, as long-term capital gain, their proportionate shares of such
undistributed amount, and (ii) will be entitled to credit their proportionate
shares of the tax paid by the Fund on the undistributed amount against their
U.S. federal income tax liabilities, if any, and to claim refunds to the extent
the credit exceeds such liabilities.
Sales, redemptions and other dispositions of preferred shares generally are
taxable events for shareholders that are subject to tax. Shareholders should
consult their own tax advisers with reference to their individual circumstances
to determine whether any particular transaction in a Fund's shares (including a
redemption of preferred shares) is properly treated as a sale or exchange for
tax purposes, as the following discussion assumes, and the tax treatment of any
gains or losses recognized in such transactions. In general, if preferred shares
are sold, the shareholder will recognize gain or loss equal to the difference
between the amount realized on the sale and the shareholder's adjusted basis in
the shares sold. Such gain or loss generally will be treated as long-term gain
or loss if the shares were held for more than one year and otherwise generally
will be treated as short-term gain or loss. Even if a redemption of preferred
shares were treated as a sale or exchange, any declared but unpaid dividends
distributed to shareholders in connection with the redeemed shares will be
taxable to shareholders as dividends as described above.
Any loss recognized by a shareholder upon the sale or other disposition of
shares with a tax holding period of six months or less generally will be treated
as a long-term capital loss to the extent of any amounts treated as
distributions of long-term capital gain with respect to such shares. Losses on
sales or other dispositions of shares may be disallowed under "wash sale" rules
in the event a shareholder acquires other shares in a Fund (including those
acquired pursuant to reinvestment of dividends and/or capital gains
distributions) within a period of 61 days beginning 30 days before and ending 30
days after a sale or other disposition of shares.
Each Fund is required in certain circumstances to backup withhold on reportable
payments, including dividends, capital gains distributions, and proceeds of
sales or other dispositions of a Fund's shares paid to certain holders of the
Fund's shares who do not furnish the Fund with their correct social security
number or other taxpayer identification number and certain other certifications,
or who are otherwise subject to backup withholding. Backup withholding is not an
additional tax. Any amounts withheld from payments made to a shareholder may be
refunded or credited against such shareholder's U.S. federal income tax
liability, if any, provided that the required information is furnished to the
IRS.
The foregoing is a general and abbreviated summary of the provisions of the Code
and the Treasury regulations currently in effect as they generally affect the
taxation of a Fund and its preferred shareholders. As noted above, these
provisions are subject to change by legislative, judicial or administrative
action, and any such change may be retroactive. A further discussion of the U.S.
federal income tax rules applicable to each Fund can be found in the Statement
of Additional Information, which is incorporated by reference into this Joint
Proxy Statement/Prospectus. Shareholders are urged to consult their tax advisers
regarding specific questions as to U.S. federal, foreign, state and local income
or other taxes.
Governing Law
Each Fund is organized as a business trust under the laws of the Commonwealth of
Massachusetts. Premium Dividend Fund I was organized as a corporation in the
State of Maryland on June 20, 1988, commenced investment operations on October
28, 1988, and was reorganized as a business trust under the laws of the
Commonwealth of Massachusetts on July 18, 1990; Premium Dividend Fund II was
organized on September 26, 1989, and commenced investment operations on December
21, 1989; Select Dividend Trust was organized on May 8, 1990, and commenced
investment operations on July 31, 1990; Global Dividend Fund was organized on
May 28, 1992, and
71
commenced investment operations on August 1, 1992; and Preferred Dividend Fund
was organized on March 22, 1993, and commenced investment operations on June 1,
1993.
Under Massachusetts law, shareholders of each Fund, including holders of the
common shares and any preferred shares, could, in certain circumstances, be held
personally liable for the obligations of a Fund. However, each Agreement and
Declaration of Trust disclaims shareholder liability for acts or obligations of
the Fund. Notice of such disclaimer may be given in any agreement, obligation or
instrument entered into or executed by a Fund or the Trustees on behalf of the
Fund. Each Agreement and Declaration of Trust provides for indemnification out
of Fund property for all loss and expense of any shareholder held personally
liable for the obligations of the Fund. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which a Fund would be unable to meet its obligations.
Each Agreement and Declaration of Trust further provides that obligations of the
Fund are not binding upon the Trustees or officers individually but only upon
the property of the Fund and that the Trustees or officers will not be liable
for actions or failures to act. Nothing in each Agreement and Declaration of
Trust, however, protects a Trustee or officer against any liability to which
such Trustee or officer may be subject by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of such Trustee's or officer's office.
Each Fund is also subject to federal securities laws, including the 1940 Act and
the rules and regulations promulgated by the SEC thereunder, and applicable
state securities laws. Each Fund is registered as a diversified, closed-end
management investment company under the 1940 Act.
Certain Provisions of the Declarations of Trust
Each Fund's Agreement and Declaration of Trust and By-Laws include certain
provisions that may have the effect of limiting the ability of other entities or
persons to acquire control of the Fund or to cause it to engage in certain
transactions or to modify its structure. The affirmative vote of the holders of
at least 75% of the outstanding common shares of each Fund, voting as a separate
class, is required to remove a Trustee elected by the holders of the common
shares from his office during his term or for an amendment of the Agreement and
Declaration of Trust to reduce or eliminate the 75% vote required for such
removal, unless with respect to the former such termination has been authorized
by the affirmative vote of two-thirds of the total number of Trustees elected by
the holders of the common shares then in office, in which case the affirmative
vote of a majority of the outstanding shares of such class is required. Trustees
elected by the holders of the common shares may only be removed by the
shareholders for cause. The affirmative vote of the holders of at least a
majority of the outstanding preferred shares of a Fund, voting as a separate
class, is required for the removal of a Trustee elected by the holders of the
preferred shares, with or without cause, from his office during his term, or for
an amendment of the Agreement and Declaration of Trust to reduce or eliminate
the majority vote required for such removal.
Each Fund's Board is divided into three classes of approximately equal size. The
terms of the Trustees of the different classes are staggered so that
approximately one third of the Board is elected by shareholders each year. Such
classification may prevent replacement of a majority of the Trustees for up to a
two year period.
In addition, the affirmative vote of the holders of at least 67% of the
outstanding common shares and preferred shares of each Fund, each voting as a
separate class, is required to authorize any of the following actions: (i)
merger or consolidation of a Fund, (ii) sale of all or substantially all of the
assets of a Fund, (iii) liquidation or dissolution of a Fund or (iv) amendment
of the Agreement and Declaration of Trust to reduce the 67% vote required to
authorize the actions in (i) through (iii), unless with respect to any of the
foregoing actions in (i) through (iii), such action has been authorized by the
affirmative vote of two-thirds of the total number then in office, in which case
the affirmative vote of at least a majority of the outstanding common shares and
preferred shares, each voting as a separate class, is required to authorize the
actions in (i) through (iii). Global Dividend Fund's voting rights with respect
to mergers or consolidations differs from the other Funds in that so long as its
DARTS are rated by Moody's and S&P, the Fund will not merge or consolidate into
or with any other corporation or entity, unless it has received written
confirmation from Moody's and/or S&P, as the case may be, that such action would
not impair the ratings then assigned to the DARTS.
For all Funds other than Preferred Dividend Fund, conversion to an open-end
investment company would require the approval of the holders of the Fund's
outstanding common shares, voting together as a single class, and the holders of
the Fund's preferred shares, voting as a separate class. With respect to all
Funds other than Preferred Dividend Fund, the affirmative vote of the holders of
at least 75% of the outstanding common shares and preferred shares of a Fund,
each voting as a separate class, is required to authorize (i) a Fund's
conversion from a closed-end to an open-end investment company or (ii) amendment
of the Agreement and Declaration of Trust to reduce the
72
75% vote required to authorize conversion, unless with respect to the former,
such action has been authorized by the affirmative vote of two-thirds of the
total number of Trustees then in office, in which case the affirmative vote of
at least a majority of the outstanding shares of each class is required to
authorize the action in (i).
With respect to Preferred Dividend Fund, the affirmative vote of the holders of
at least a majority of the outstanding common shares and preferred shares of the
Fund, voting as a single class, is required to authorize the Fund's conversion
from a closed-end to an open-end investment company, provided that with respect
to the foregoing, such action has been authorized by the affirmative vote of two
thirds of the total numbers of Trustees then in office. In the event that
conversion from a closed-end to an open-end investment company is approved by
less than two thirds of the total number of Trustees then in office, a majority
of the Trustees then in office and the affirmative vote of the holders of at
least 75% of the outstanding common shares and preferred shares of Preferred
Dividend Fund, voting as a single class, is required to (i) authorize the Fund's
conversion from a closed-end to an open-end investment company or (ii) amend the
Agreement and Declaration of Trust to reduce the 75% vote required to authorize
conversion.
The Trustees of each Fund have determined that the voting requirements described
above, which are greater than the minimum requirements under the 1940 Act, are
in the best interests of each Fund and its shareholders generally. Refer to the
Agreement and Declaration of Trust and By-Laws of each Fund, on file with the
SEC, for the full text of these provisions. These provisions 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 of a Fund in a tender offer or similar transaction.
Conversion to Open-End Funds
Each Fund may be converted to an open-end investment company at any time by a
vote of the outstanding common shares and preferred shares as stated in that
Fund's Agreement and Declaration of Trust and By-Laws. See "Certain Provisions
of the Declarations of Trust."
If a Fund converted to an open-end investment company, it would be required to
redeem all preferred shares then outstanding, and the Fund's common shares would
no longer be listed on the NYSE. If a Fund were converted to an open-end
investment company, it is also likely that new common shares would be sold at
NAV plus a sales load. Conversion to open-end status would also require a Fund
to modify certain investment restrictions and policies including those related
to the issuance of senior securities, borrowing money and illiquid securities.
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
permitted under the 1940 Act) at their NAV, less such redemption charge, if any,
as might be in effect at the time of redemption. In order to avoid maintaining
large cash positions or liquidating favorable investments to meet redemptions,
open-end companies typically engage in a continuous offering of their shares.
Open-end companies are thus subject to periodic asset in-flows and out-flows
that can complicate portfolio management. A Fund's Board may at any time propose
conversion of a Fund to open-end status, depending upon its judgment regarding
the advisability of such action in light of circumstances then prevailing.
Voting Rights
Except as otherwise indicated in this Joint Proxy Statement/Prospectus or as
otherwise required by applicable law, holders of the preferred shares of each
Fund have equal voting rights with holders of common shares of each Fund (one
vote per share) and will vote together with holders of common shares as a single
class.
When holders of the preferred shares are entitled to vote, each holder is
entitled to cast one vote per preferred share. For purposes of any right of
holders of the preferred shares to vote on any matter, whether such right is
created by the Fund's Agreement and Declaration of Trust, the By-Laws, by
statute or otherwise, no holder of preferred shares will be entitled to vote and
no preferred shares will be deemed to be outstanding for the purpose of voting
or determining the number of shares entitled to vote or of shares deemed
outstanding for quorum purposes, as the case may be, sufficient funds for the
redemption of such shares have been deposited with the preferred shares paying
agent and irrevocable instructions and authority to pay the redemption price to
such holder of preferred shares for that purpose and the requisite notice of
redemption has been given.
The common shares and the preferred shares of each Fund vote as separate classes
on amendments to the Agreement and Declaration of Trust or By-Laws that would
adversely affect their respective interests (other than an amendment to the
By-Laws of Preferred Dividend Fund to incorporate the requirements of any
nationally recognized statistical rating organization in connection with the
rating of the preferred shares). So long as preferred shares of a Fund are
outstanding: (i) the Fund may not be voluntarily liquidated, dissolved, wound
up, merged or consolidated
73
and may not sell all or substantially all of its assets, without the approval of
the holders of at least 67% of the preferred shares and the common shares, each
voting as a separate class; (ii) the Fund may not take any action adversely
affecting either the preferred shares or the common shares without the approval
of at least a majority of the outstanding shares of such class; provided that,
in the case of Preferred Dividend Fund, neither the approval of the holders of
preferred shares nor the holders of the common shares shall be required in the
event the By-Laws are amended to incorporate the requirements of any Rating
Agency in connection with any rating of the preferred shares by any Rating
Agency, whether such Rating Agency is in addition to or in substitution of
Moody's or in connection with any requirements that may be from time to time
imposed by Moody's, provided any such amendment is approved by at least a
majority of the Trustees then in office; (iii) the affirmative vote of the
lesser of (x) the holders of more than 50% of the preferred shares then
outstanding and the holders of more than 50% of the common shares then
outstanding, each voting as a separate class or (y) in the case of each Fund
other than Premium Dividend Fund II, the holders of at least 67% of the
preferred shares and the holders of at least 67% of the common shares, each
voting as a separate class, present at a meeting if more than 50% of the
outstanding shares of each class are represented in person or by proxy at such
meeting, is required to approve any action requiring a vote of security holders
under Section 13(a) of the 1940 Act, including a change to the Fund's
fundamental investment policies; (iv) the approval of at least a majority of
Trustees in the case of Preferred Dividend Fund only, and 75% of the outstanding
preferred shares and common shares, each voting as a separate class for all
Funds other than Preferred Dividend Fund, and voting as a single class in the
case of Preferred Dividend Fund, is required to convert the Fund from a
closed-end investment company to an open-end investment company; and (v) the
approval of a majority of the outstanding preferred shares, voting as a separate
class, is required to amend, alter or repeal any of the preferences, rights or
powers or to increase or decrease the number of preferred shares authorized to
be issued or to issue (x) in the case of Premium Dividend Fund I, Premium
Dividend Fund II, Select Dividend Trust and Global Dividend Fund any additional
series of preferred shares, and (y) in the case of Global Dividend Fund and
Preferred Dividend Fund, another class of equity securities with a dividend or
liquidation preferred payable senior to or in parity with the preferred shares;
provided however, that if any of the actions specified in either (i) or (iv)
above are recommended by two-thirds of the total number of Trustees then in
office, then the approval of at least a majority of the outstanding preferred
shares and common shares, each voting as a separate class (except with respect
to (iv) in the case of Preferred Dividend Fund, in which case the holders of
preferred shares and common shares shall vote as a single class), shall be
sufficient authorization. Global Dividend Fund's voting rights with respect to
mergers or consolidations differs from the other Funds in that so long as its
DARTS are rated by Moody's and S&P, the Fund will not merge or consolidate into
or with any other corporation or entity, unless it has received written
confirmation from Moody's and/or S&P, as the case may be, that such action would
not impair the ratings then assigned to the DARTS. The common shares and the
preferred shares of each Fund will also vote separately to the extent otherwise
required under Massachusetts law or the 1940 Act as in effect from time to time.
Holders of preferred shares of each Fund, voting separately as a single class,
are entitled to elect two of the Fund's Trustees and the remaining Trustees are
elected by holders of the common shares voting separately as a single class.
However, 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 separately as a single class, will be
entitled to elect, until such time as the accumulated and unpaid dividends have
been paid or provided for, additional Trustees who, together with the two
Trustees ordinarily elected by them, will be a majority of the Fund's Trustees.
Such voting right will continue unless and until all accumulated and unpaid
dividends (including additional dividends, if any) on the then outstanding
preferred shares, including the accumulated and unpaid dividends for the current
dividend period shall have been paid or declared and a sum sufficient set apart
for the payment of such dividends, at which time the additional voting right
described in the preceding paragraph shall cease, subject, however, to its
revesting in holders of the preferred shares upon the further occurrence of
accumulated dividends on any outstanding preferred shares being unpaid in an
amount equal to two full years' dividends. If a Fund pays, or declares and sets
apart for payment, in full, all dividends payable on all outstanding preferred
shares before holders of the preferred shares have exercised their right to
elect additional Trustees of the Fund, such holders will be deemed not to have
acquired such additional voting right.
The term of office of all persons who are Trustees of a Fund at the time of a
special meeting of holders of the preferred shares at which additional Trustees
will be elected will continue, notwithstanding the election of additional
Trustees at such meeting by such holders. The persons elected by holders of the
preferred shares, together with the incumbent Trustees elected by holders of the
preferred shares or the common shares, will constitute the duly elected Trustees
of a Fund. Upon the expiration of the right to elect additional Trustees, the
term of office of the additional Trustees will terminate automatically and only
the incumbent Trustees (including the two Trustees previously elected by the
holders of the preferred shares) will constitute the duly elected Trustees.
74
The Trustees elected by holders of the common shares will (subject to the 1940
Act and other applicable law) be subject to removal for cause only by the vote
of holders of 75% of the outstanding common shares, provided, however, that if
such removal is recommended by two-thirds of the total number of Trustees then
in office elected by the holders of the common shares, the vote of the holders
of a majority of the common shares then outstanding shall be sufficient
authorization. The Trustees elected by holders of the preferred shares will
(subject to the provisions of the 1940 Act and other applicable law) be subject
to removal, with or without cause, by the vote of the holders of a majority of
the outstanding preferred shares. Any vacancy on the Board occurring by reason
of such removal or otherwise may be filled (subject to the provisions of the
1940 Act and other applicable law) by a vote of a majority of the remaining
Trustees, or the remaining Trustee, previously elected by holders of the common
shares or the preferred shares, respectively, or by a vote of holders of the
common shares or the preferred shares, as the case may be.
The Trustees of each Fund have determined that the voting requirements described
above, which are greater than the minimum requirements under the 1940 Act, are
in the best interests of each Fund and its shareholders generally. Refer to the
Agreement and Declaration of Trust and By-Laws of each Fund, on file with the
SEC, for the full text of these provisions. These provisions 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 of a Fund through a tender offer or similar transaction.
Past Performance of Each Fund
As shown in the table below, the performance of Premium Dividend Fund II has
exceeded that of the other Funds for 1, 3 and 10-year periods. Each Fund's
performance at market price may differ from its results at NAV. Although market
price performance generally reflects investment results, it may also be
influenced by several factors, including changes in investor perceptions of each
Fund or its investment adviser, market conditions, fluctuations in supply and
demand for each Fund's shares and changes in each Fund's distributions.
Total Returns as of October 31, 2006
Premium Premium Select Global Preferred
Dividend Fund I Dividend Fund II Dividend Trust Dividend Fund Dividend Fund
------------------------------------------------------------------------------------------------------------------------------------
NAV Market NAV Market NAV Market NAV Market NAV Market
Price Price Price Price Price
------------------------------------------------------------------------------------------------------------------------------------
1 year 15.33% 12.94% 15.91% 8.11% 15.48% 15.99% 14.44% 17.96% 10.78% 12.32%
3 years 11.77% 4.30% 12.55% 7.16% 11.97% 3.83% 11.86% 8.15% 9.84% 8.90%
5 years 8.32% 5.50% 9.05% 8.28% 8.34% 5.14% 8.98% 7.58% 9.09% 9.16%
10 years 8.57% 6.56% 8.76% 8.16% 8.19% 6.93% 8.66% 8.24% 8.45% 7.62%
75
Financial Highlights
PREMIUM DIVIDEND FUND I. The following schedule presents financial highlights
for one common share of the Fund outstanding throughout the periods indicated.
Period ended 9-30-02(1) 9-30-03(1) 9-30-04(1) 9-30-05(1) 9-30-06
----------------------------------------------------------------------------------------------------------------------
Per share operating performance
----------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 9.74 $ 8.30 $ 8.82 $ 9.25 $ 9.85
Net investment income(2) 0.78 0.69 0.64 0.65 0.67
Net realized and unrealized gain
(loss) on investments (1.49) 0.54 0.56 0.66 0.04
Distributions to DARTS (0.08) (0.06) (0.05) (0.11) (0.16)
Total from investment operations (0.79) 1.17 1.15 1.20 0.55
Less distributions to common shareholders
From net investment income (0.65) (0.65) (0.72) (0.60) (0.53)
Net asset value, end of period $ 8.30 $ 8.82 $ 9.25 $ 9.85 $ 9.87
Per share market value, end of period $ 9.15 $ 9.24 $ 9.38 $ 8.90 $ 8.63
Total return at market value(3) (%) 12.03 8.91 9.76 1.09 3.27
----------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
----------------------------------------------------------------------------------------------------------------------
Net assets applicable to common
shares, end of period (in millions) $ 125 $ 134 $ 141 $ 151 $ 151
Ratio of net investment income to
average net assets(4) (%) 1.79 1.90 1.70 1.65 1.61
Ratio of net investment income to
average net assets(5) (%) 8.42 8.33 7.06 6.69 7.07
Portfolio turnover (%) 11 10 16 17 30
----------------------------------------------------------------------------------------------------------------------
SENIOR SECURITIES
----------------------------------------------------------------------------------------------------------------------
Total value of DARTS outstanding
(in millions) $ 68 $ 69 $ 69 $ 69 $ 69
Involuntary liquidation preference
per unit (in thousands) $ 100 $ 100 $ 100 $ 100 $ 100
Average market value per unit
(in thousands) $ 100 $ 100 $ 100 $ 100 $ 100
Asset coverage per unit(6) $280,462 $287,811 $304,418 $320,275 $318,822
(1) Audited by previous auditor.
(2) Based on the average of shares outstanding.
(3) Assumes dividend reinvestment.
(4) Ratios calculated on the basis of expenses relative to the average net
assets of common shares. Without the exclusion of preferred shares, the
ratio of expenses would have been 1.20%, 1.23%, 1.14%, 1.13% and 1.09%,
respectively.
(5) Ratios calculated on the basis of net investment income relative to the
average net assets of common shares. Without the exclusion of preferred
shares, the ratio of net investment income would have been 5.65%, 5.39%,
4.73%, 4.57% and 4.80%, respectively.
(6) Calculated by subtracting the Fund's total liabilities from the Fund's
total assets and dividing such amount by the number of DARTS outstanding as
of the applicable 1940 Act Evaluation Date, which may differ from the
financial reporting date.
76
PREMIUM DIVIDEND FUND II. The following schedule presents financial highlights
for one common share of the Fund outstanding throughout the periods indicated.
Period ended 10-31-02(1) 10-31-03(1) 10-31-04(1) 10-31-05(1) 10-31-06
-------------------------------------------------------------------------------------------------------------------------
Per share operating performance
-------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 12.06 $ 10.01 $ 10.99 $ 11.73 $ 11.78
Net investment income(2) 0.99 0.87 0.84 0.85 0.88
Net realized and unrealized gain
(loss) on investments (2.14) 1.21 0.80 0.14 1.11
Distributions to DARTS Series A and B (0.12) (0.08) (0.09) (0.17) (0.25)
Total from investment operations (1.27) 2.00 1.55 0.82 1.74
Less distributions to common shareholders
From net investment income (0.78) (1.02) (0.81) (0.77) (0.65)
Net asset value, end of period $ 10.01 $ 10.99 $ 11.73 $ 11.78 $ 12.87
Per share market value, end of period $ 9.40 $ 11.14 $ 11.19 $ 11.05 $ 11.26
Total return at market value(3) (%) (7.55) 30.87 8.06 5.35 8.11
-------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
-------------------------------------------------------------------------------------------------------------------------
Net assets applicable to common
shares, end of period (in millions) $ 150 $ 165 $ 177 $ 177 $ 194
Ratio of net investment income to
average net assets(4) (%) 1.91 1.91 1.78 1.67 1.67
Ratio of net investment income to
average net assets(5) (%) 8.66 8.45 7.38 6.96 7.36
Portfolio turnover (%) 10 9 9 11 24
-------------------------------------------------------------------------------------------------------------------------
SENIOR SECURITIES
-------------------------------------------------------------------------------------------------------------------------
Total value of DARTS Series A outstanding
(in millions) $ 50 $ 50 $ 50 $ 50 $ 50
Total value of DARTS Series B outstanding
(in millions) $ 50 $ 50 $ 50 $ 50 $ 50
Involuntary liquidation preference
per unit (in thousands) $ 100 $ 100 $ 100 $ 100 $ 100
Average market value per unit
(in thousands) $ 100 $ 100 $ 100 $ 100 $ 100
Asset coverage per unit(6) $247,689 $264,239 $272,034 $276,340 $292,301
(1) Audited by previous auditor.
(2) Based on the average of shares outstanding.
(3) Assumes dividend reinvestment.
(4) Ratios calculated on the basis of expenses relative to the average net
assets of common shares. Without the exclusion of preferred shares, the
ratio of expenses would have been 1.20%, 1.16%, 1.12%, 1.08% and 1.07%,
respectively.
(5) Ratios calculated on the basis of net investment income relative to the
average net assets of common shares. Without the exclusion of preferred
shares, the ratio of net investment income would have been 5.46%, 5.14%,
4.66%, 4.50% and 4.74%, respectively.
(6) Calculated by subtracting the Fund's total liabilities from the Fund's
total assets and dividing such amount by the number of DARTS outstanding as
of the applicable 1940 Act Evaluation Date, which may differ from the
financial reporting date.
77
SELECT DIVIDEND TRUST. The following schedule presents financial highlights for
one common share of the Fund outstanding throughout the periods indicated.
Period ended 6-30-02(1) 6-30-03(1) 6-30-04(1) 6-30-05(1) 6-30-06
-------------------------------------------------------------------------------------------------------------------------
Per share operating performance
-------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 15.43 $ 13.77 $ 13.73 $ 13.36 $ 15.19
Net investment income(2) 1.18 1.08 0.96 1.03 1.00
Net realized and unrealized gain
(loss) on investments (1.61) 0.06 (0.17) 1.94 (1.06)
Distributions to AMPS (0.15) (0.10) (0.08) (0.15) (0.23)
Total from investment operations (0.58) 1.04 0.71 2.82 (0.29)
Less distributions to common shareholders
From net investment income (1.08) (1.08) (1.08) (0.99) (0.82)
Net asset value, end of period $ 13.77 $ 13.73 $ 13.36 $ 15.19 $ 14.08
Per share market value, end of period $ 13.69 $ 14.72 $ 13.65 $ 13.79 $ 12.07
Total return at market value(3) (%) (0.45) 16.82 0.23 8.46 (6.65)
-------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
-------------------------------------------------------------------------------------------------------------------------
Net assets applicable to common
shares, end of period (in millions) 136 137 133 152 141
Ratio of net investment income to
average net assets(4) (%) 1.77 1.90 1.78 1.72 1.70
Ratio of net investment income to
average net assets(5) (%) 7.99 8.62 7.04 7.17 6.89
Portfolio turnover (%) 15 2 18 36 26
-------------------------------------------------------------------------------------------------------------------------
SENIOR SECURITIES
-------------------------------------------------------------------------------------------------------------------------
Total value of AMPS outstanding
(in millions) $ 70 $ 70 $ 70 $ 70 $ 70
Involuntary liquidation preference
per unit (in thousands) $ 100 $ 100 $ 100 $ 100 $ 100
Average market value per unit
(in thousands) $ 100 $ 100 $ 100 $ 100 $ 100
Asset coverage per unit(6) $290,311 $294,629 $288,521 $316,085 $300,063
(1) Audited by previous auditor.
(2) Based on the average of shares outstanding.
(3) Assumes dividend reinvestment.
(4) Ratios calculated on the basis of expenses relative to the average net
assets of common shares. Without the exclusion of preferred shares, the
ratio of expenses would have been 1.20%, 1.22%, 1.18%, 1.16% and 1.14%,
respectively.
(5) Ratios calculated on the basis of net investment income relative to the
average net assets of common shares. Without the exclusion of preferred
shares, the ratio of net investment income would have been 5.40%, 5.52%,
4.65%, 4.82% and 4.64%, respectively.
(6) Calculated by subtracting the Fund's total liabilities from the Fund's
total assets and dividing such amount by the number of DARTS outstanding as
of the applicable 1940 Act Evaluation Date, which may differ from the
financial reporting date.
78
GLOBAL DIVIDEND FUND. The following schedule presents financial highlights for
one common share of the Fund outstanding throughout the periods indicated.
Period ended 7-31-02(1) 7-31-03(1) 7-31-04(1) 7-31-05(1) 7-31-06
-------------------------------------------------------------------------------------------------------------------------
Per share operating performance
-------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 13.82 $ 11.62 $ 12.36 $ 12.76 $ 14.48
Net investment income(2) 1.12 0.98 0.94 0.99 0.99
Net realized and unrealized gain
(loss) on investments (2.20) 0.84 0.51 1.82 (0.66)
Distributions to DARTS (0.15) (0.11) (0.08) (0.17) (0.25)
Total from investment operations (1.23) 1.71 1.37 2.64 0.08
Less distributions to common shareholders
From net investment income (0.97) (0.97) (0.97) (0.92) (0.82)
Net asset value, end of period $ 11.62 $ 12.36 $ 12.76 $ 14.48 $ 13.74
Per share market value, end of period $ 11.13 $ 12.40 $ 12.45 $ 13.14 $ 11.83
Total return at market value(3) (%) (5.06) 20.79 8.31 13.03 (3.67)
-------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
-------------------------------------------------------------------------------------------------------------------------
Net assets applicable to common
shares, end of period (in millions) $ 97 $ 103 $ 107 $ 121 $ 115
Ratio of net investment income to
average net assets(4) (%) 1.94 2.03 1.90 1.86 1.79
Ratio of net investment income to
average net assets(5) (%) 8.44 8.35 7.23 7.19 7.21
Portfolio turnover (%) 17 5 7 19 24
-------------------------------------------------------------------------------------------------------------------------
SENIOR SECURITIES
-------------------------------------------------------------------------------------------------------------------------
Total value of DARTS outstanding
(in millions) $ 60 $ 60 $ 60 $ 60 $ 60
Involuntary liquidation preference
per unit (in thousands) $ 100 $ 100 $ 100 $ 100 $ 100
Average market value per unit
(in thousands) $ 100 $ 100 $ 100 $ 100 $ 100
Asset coverage per unit(6) $254,633 $271,743 $275,341 $300,181 $289,424
(1) Audited by previous auditor.
(2) Based on the average of shares outstanding.
(3) Assumes dividend reinvestment.
(4) Ratios calculated on the basis of expenses relative to the average net
assets of common shares. Without the exclusion of preferred shares, the
ratio of expenses would have been 1.26%, 1.26%, 1.22%, 1.22% and 1.18%,
respectively.
(5) Ratios calculated on the basis of net investment income relative to the
average net assets of common shares. Without the exclusion of preferred
shares, the ratio of net investment income would have been 5.48%, 5.18%,
4.65%, 4.73% and 4.73%, respectively.
(6) Calculated by subtracting the Fund's total liabilities from the Fund's
total assets and dividing such amount by the number of DARTS outstanding as
of the applicable 1940 Act Evaluation Date, which may differ from the
financial reporting date.
79
PREFERRED DIVIDEND FUND. The following schedule presents financial highlights
for one common share of the Fund outstanding throughout the periods indicated.
Period ended 5-31-02(1) 5-31-03(1) 5-31-04(1) 5-31-05(1) 5-31-06
-------------------------------------------------------------------------------------------------------------------------
Per share operating performance
-------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 12.96 $ 12.39 $ 13.06 $ 12.97 $ 14.41
Net investment income(2) 1.18 1.08 1.02 1.13 1.05
Net realized and unrealized gain
(loss) on investments (0.73) 0.56 0.08 1.32 (1.00)
Distributions to DARTS (0.16) (0.11) (0.08) (0.15) (0.24)
Total from investment operations 0.29 1.53 1.02 2.30 (0.19)
Less distributions to common shareholders
From net investment income (0.86) (0.86) (1.11) (0.86) (0.86)
Net asset value, end of period $ 12.39 $ 13.06 $ 12.97 $ 14.41 $ 13.36
Per share market value, end of period $ 12.47 $ 13.07 $ 12.00 $ 13.58 $ 11.95
Total return at market value(3) (%) 13.76 12.50 (0.24) 20.77 (6.11)
-------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
-------------------------------------------------------------------------------------------------------------------------
Net assets applicable to common
shares, end of period (in millions) $ 90 $ 95 $ 94 $ 105 $ 97
Ratio of net investment income to
average net assets(4) (%) 1.96 2.11 1.88 1.81 1.90
Ratio of net investment income to
average net assets(5) (%) 9.09 9.21 7.60 8.19 7.52
Portfolio turnover (%) 16 9 7 11 16
-------------------------------------------------------------------------------------------------------------------------
SENIOR SECURITIES
-------------------------------------------------------------------------------------------------------------------------
Total value of DARTS outstanding
(in millions) $ 53 $ 53 $ 53 $ 53 $ 53
Involuntary liquidation preference
per unit (in thousands) $ 100 $ 100 $ 100 $ 100 $ 100
Average market value per unit
(in thousands) $ 100 $ 100 $ 100 $ 100 $ 100
Asset coverage per unit(6) $270,318 $277,801 $276,094 $298,017 $283,075
(1) Audited by previous auditor.
(2) Based on the average of shares outstanding.
(3) Assumes dividend reinvestment.
(4) Ratios calculated on the basis of expenses relative to the average net
assets of common shares. Without the exclusion of preferred shares, the
ratio of expenses would have been 1.26%, 1.30%, 1.22%, 1.19% and 1.25%,
respectively.
(5) Ratios calculated on the basis of net investment income relative to the
average net assets of common shares. Without the exclusion of preferred
shares, the ratio of net investment income would have been 5.84%, 5.70%,
4.94%, 5.38% and 4.96%, respectively.
(6) Calculated by subtracting the Fund's total liabilities from the Fund's
total assets and dividing such amount by the number of DARTS outstanding as
of the applicable 1940 Act Evaluation Date, which may differ from the
financial reporting date.
80
Proposal to Approve the Agreement and Plan of Reorganization
Description of the Reorganizations
You are being asked to approve an Agreement and Plan of Reorganization, a form
of which is attached to this Joint Proxy Statement/Prospectus as Exhibit A.
Additional information about the Reorganization and the Agreement is set forth
below under "Further Information on the Reorganization." Each Agreement provides
for a Reorganization on the following terms:
o Each Reorganization is scheduled to occur at 5:00 p.m., Eastern Time,
on the relevant dividend payment date immediately following the
shareholders' meeting as follows:
Fund Closing Date
--------------------------------------------------
Premium Dividend Fund I Monday, May 7, 2007
Select Dividend Trust Wednesday, May 16, 2007
Preferred Dividend Fund Tuesday, May 29, 2007
Global Dividend Fund Monday, June 4, 2007
Each Acquiring Fund will transfer all of its assets to the Acquiring
Fund and the Acquiring Fund will assume each Acquired Fund's
liabilities. This will result in the addition of each Acquired Fund's
assets to the Acquiring Fund's portfolio. The NAV of each Fund will be
computed as of 4:00 p.m., Eastern Time, on the business day
immediately preceding the relevant closing date of each
Reorganization.
o The Acquiring Fund will issue and cause to be listed on the NYSE
additional Acquiring Fund Common Shares in an amount equal to the
value of each Acquired Fund's net assets attributable to its common
shares. As part of the liquidation of the Acquired Funds, these shares
will immediately be distributed to common shareholders of record of
each Acquired Fund in proportion to their holdings held immediately
prior to the Reorganization, less the costs of the Reorganization
(though common shareholders may receive cash for fractional shares).
As a result, common shareholders of each Acquired Fund will end up as
common shareholders of the Acquiring Fund.
o The Acquiring Fund will issue Acquiring Fund DARTS, Series C to
Premium Dividend Fund I. The aggregate liquidation preference of
Acquiring Fund DARTS, Series C received in the Reorganization will
equal the aggregate liquidation preference of DARTS, Series A of
Premium Dividend Fund I held immediately prior to the Reorganization.
As part of the liquidation of Premium Dividend Fund I, the Acquiring
Fund DARTS, Series C will be distributed to Premium Dividend Fund I's
holders of DARTS, Series A in proportion to their holdings immediately
prior to the Reorganization. As a result, holders of DARTS, Series A
of Premium Dividend Fund I will end up as holders of Acquiring Fund
DARTS, Series C.
o The Acquiring Fund will issue Acquiring Fund DARTS, Series D to Select
Dividend Trust. The aggregate liquidation preference of Acquiring Fund
DARTS, Series D received in the Reorganization will equal the
aggregate liquidation preference of AMPS Series A of Select Dividend
Trust held immediately prior to the Reorganization. As part of the
liquidation of Select Dividend Trust, the Acquiring Fund DARTS, Series
D will be distributed to holders of AMPS Series A of Select Dividend
Trust in proportion to their holdings immediately prior to the
Reorganization. As a result, holders of AMPS Series A of Select
Dividend Trust will end up as holders of Acquiring Fund DARTS, Series
D.
o The Acquiring Fund will issue Acquiring Fund DARTS, Series E to
Preferred Dividend Fund. The aggregate liquidation preference of
Acquiring Fund DARTS, Series E received in the Reorganization will
equal the aggregate liquidation preference of ARPS of Preferred
Dividend Fund held immediately prior to the Reorganization. As part of
the liquidation of Preferred Dividend Fund, the Acquiring Fund DARTS,
Series E will be distributed to holders of ARPS of Preferred Dividend
Fund in proportion to their holdings immediately prior to the
Reorganization. As a result, holders of ARPS of Preferred Dividend
Fund will end up as holders of Acquiring Fund DARTS, Series E.
o The Acquiring Fund will issue Acquiring Fund DARTS, Series F to Global
Dividend Fund. The aggregate liquidation preference of Acquiring Fund
DARTS, Series F received in the Reorganization will equal the
aggregate liquidation preference of DARTS of Global Dividend Fund held
immediately prior to the Reorganization. As part of the liquidation of
Global Dividend Fund, the Acquiring Fund DARTS, Series F will be
distributed to holders of DARTS of Global Dividend Fund in proportion
to their holdings immediately prior to the Reorganization. As a
result, holders of DARTS of Global Dividend Fund will end up as
holders of Acquiring Fund DARTS, Series F.
o After the shares are issued, the existence of each Acquired Fund will
be terminated.
81
The distribution of Acquiring Fund Common Shares and Acquiring Fund DARTS will
be accomplished by opening new accounts on the books of the Acquiring Fund in
the names of the common and preferred shareholders of the Acquired Funds and
transferring to those shareholder accounts the Acquiring Fund Common Shares and
the Acquiring Fund DARTS previously credited on those books to the accounts of
the Acquired Funds. Each newly-opened account on the books of the Acquiring Fund
for the former common shareholders of the Acquired Funds will represent the
respective pro rata number of Acquiring Fund Common Shares (rounded down, in the
case of fractional shares held other than in a Dividend Reinvestment Plan
account, to the next largest number of whole shares) due such shareholder. No
fractional Acquiring Fund Common Shares will be issued (except for shares held
in a Plan account). In the event of fractional shares in an account other than a
Plan account, the Acquiring Fund's transfer agent will aggregate all such
fractional Acquiring Fund Common Shares and sell the resulting whole shares on
the NYSE for the account of all holders of such fractional interests, and each
such holder will be entitled to the pro rata share of the proceeds from such
sale upon surrender of the Acquired Fund common share certificates. Similarly,
each newly-opened account on the books of the Acquiring Fund for the former
preferred shareholders of each Acquired Fund would represent the respective pro
rata number of Acquiring Fund DARTS due such shareholder. See "Further
Information on the Reorganizations -- Additional Terms of the Agreement and Plan
of Reorganization" below for a description of the procedures to be followed by
the Acquired Funds' shareholders to obtain Acquiring Fund Common Shares or
Acquiring Fund DARTS (and cash in lieu of fractional shares, if any).
Reasons for the Proposed Reorganizations
The Board of each Acquired Fund believes that the proposed Reorganizations will
be advantageous to the shareholders of each Acquired Fund for several reasons.
The Board considered the following matters, among others, in approving the
proposal.
First, that following the Reorganizations, the substantially larger trading
market in common shares of the Acquiring Fund as compared to that of each
Acquired Fund prior to the Reorganizations, may provide for enhanced market
liquidity which may reduce the extent of trading discounts that would be
experienced in a substantially smaller trading market under otherwise similar
circumstances. Trading discounts can result from many different factors and
there is no assurance that a larger trading market for common shares will have
the effect of reducing trading discounts.
Second, that the Reorganization would permit each Acquired Fund's shareholders
to pursue similar investment goals in a larger fund. Each Acquired Fund (other
than Preferred Dividend Fund) focuses on dividend-paying preferred and common
stocks and, in the case of Preferred Dividend Fund, preferred stocks. In
addition, the Acquiring Fund and Acquired Funds have certain overlapping
portfolio holdings. The greater asset size of the combined fund may allow it,
relative to each Acquired Fund, to obtain better net prices on securities trades
and achieve greater diversification of portfolio holdings.
Third, Select Dividend Trust, Global Dividend Fund and Preferred Dividend Fund
will benefit from a reduction in their administration fee (i.e., from 0.15% to
0.10%). Premium Dividend Fund I's administration fee will remain the same at
0.10%. As a result of the Reorganization, shareholders of the Acquired Funds
will experience a reduction in the total amount of fees, as a percentage of
average net assets, that they indirectly pay. Shareholders of each Acquired Fund
other than Select Dividend Trust will also experience lower combined total
expenses and dividend payments on preferred shares as a result of the
Reorganizations. Shareholders of Select Dividend Trust will experience somewhat
higher combined total expenses and dividend payments on preferred shares as a
result of a higher dividend rate on preferred shares borne by common
shareholders. This higher historical dividend rate reflects the more recent
dividend reset by the Acquiring Fund, which reflects recent increases in
short-term interest rates.
Fourth, the annual effective rate of the combined fund's management fee is
expected to be slightly lower than the management fee rate of Select Dividend
Trust, Global Dividend Fund and Preferred Dividend Fund and, for Premium
Dividend Fund I, the management fee rate is expected to slightly increase.
Fifth, that the Acquiring Fund has performed better than the other Funds for
one-, three- and ten-year periods. While past performance cannot predict future
results, the Trustees believe there are no reasons why the Acquiring Fund will
not continue to generate strong returns.
Sixth, that a combined fund offers economies of scale that may lead to lower per
share expenses. Each Fund incurs NYSE listing fees, printing fees, costs for
legal, auditing, custodial and administrative services, and miscellaneous fees.
Many of these expenses are duplicative, and there may be an opportunity to
reduce each Acquired Fund's expense ratio over time because of the economies of
scale if the Funds are combined.
Seventh, that on the closing date of the Reorganization with respect to each
Acquired Fund, the Reorganization will result in the exchange of shares between
the Acquiring Fund and each Acquired Fund which will be based on their
82
relative NAVs (i.e., the Acquired Funds will get their NAV's worth of the
Acquiring Fund's common shares). However, the Acquiring Fund Common Shares
received in the Reorganizations may trade at a market discount from NAV
following the Reorganizations so that an Acquired Fund common shareholder is not
able to sell these shares for the NAV received.
The Board of each Acquired Fund considered that the Reorganization presents an
excellent opportunity for the Acquiring Fund to acquire substantial investment
assets without the obligation to pay commissions or other transaction costs that
a Fund normally incurs when purchasing securities. This opportunity provides an
economic benefit to the Acquiring Fund and its shareholders.
The boards of each Fund also considered that the Adviser and MFC Global (U.S.)
will benefit from the Reorganizations. For example, the Adviser and MFC Global
(U.S.) may achieve cost savings due to the Fund's lower fixed costs, which may
result in reduced costs resulting from a consolidated portfolio management
effort. The boards believe, however, that these savings will not amount to a
significant economic benefit to the Adviser or MFC Global (U.S.).
Comparative Fees and Expense Ratios
The Acquiring Fund's pro forma annual operating expenses would be lower than
each Acquired Fund's current annual operating expenses. A full comparison of
advisory fee rates and expense ratios is included above.
Comparative Performance
The Trustees also considered details of the relative performance of the Funds
and the Acquiring Fund.
Board's Evaluation and Recommendation
For the reasons described above, the Board of each Acquired Fund, including the
Trustees who are not "interested persons" (as defined in the 1940 Act) of an
Acquired Fund in each respective Reorganization or the Adviser ("Independent
Trustees"), approved the Reorganization. In particular, the Trustees determined
that each Reorganization is in the best interests of each Acquired Fund and that
the interest of Acquired Fund shareholders would not be diluted as a result of
the Reorganization. Similarly, the Board of the Acquiring Fund, including the
Independent Trustees, approved each Reorganization. They also determined each
Reorganization is in the best interests of the Acquiring Fund and that the
interests of the Acquiring Fund's shareholders would not be diluted as a result
of each Reorganization.
----------------------------------------------------------------------
The Trustees of each Acquired Fund recommend that shareholders of
the Acquired Funds vote FOR each proposal to approve an Agreement and
Plan of Reorganization.
----------------------------------------------------------------------
Further Information on the Reorganizations
Tax Status of the Reorganizations
The following is a general summary of the material anticipated U.S. federal
income tax consequences of the Reorganization. The discussion is based upon the
Code, Treasury regulations, court decisions, published positions of the IRS and
other applicable authorities, all as in effect on the date hereof and all of
which are subject to change or differing interpretations (possibly with
retroactive effect). The discussion is limited to U.S. persons who hold shares
of an Acquired Fund as capital assets for U.S. federal income tax purposes
(generally, assets held for investment). This summary does not address all of
the U.S. federal income tax consequences that may be relevant to a particular
shareholder or to shareholders who may be subject to special treatment under
U.S. federal income tax laws. No ruling has been or will be obtained from the
IRS regarding any matter relating to the Reorganizations. No assurance can be
given that the IRS would not assert, or that a court would not sustain, a
position contrary to any of the tax aspects described below. Prospective
investors must consult their own tax advisers as to the U.S. federal income tax
consequences of the Reorganizations, as well as the effects of state, local and
non-U.S. tax laws.
83
It is a condition to closing the Reorganization that the Acquired Funds and the
Acquiring Fund receive an opinion from Kirkpatrick & Lockhart Preston Gates
Ellis LLP, dated as of the closing date of the Reorganization, regarding the
characterization of such Reorganization as a "reorganization" within the meaning
of Section 368(a) of the Code. As such a reorganization, the U.S. federal income
tax consequences of the Reorganization can be summarized as follows:
o No gain or loss will be recognized by an Acquired Fund or the
Acquiring Fund upon the transfer to the Acquiring Fund of
substantially all of the assets of the Acquired Fund in exchange for
Acquiring Fund Common Shares and Acquiring Fund DARTS and the
assumption by the Acquiring Fund of substantially all of the
liabilities of the Acquired Fund and the subsequent liquidation of the
Acquired Fund.
o No gain or loss will be recognized by a shareholder of an Acquired
Fund who exchanges, as the case may be, all of his, her or its
Acquired Fund common shares for Acquiring Fund Common Shares pursuant
to a Reorganization (except with respect to cash received in lieu of a
fractional share, as discussed below) or all of his, her or its
Acquired Fund preferred shares for Acquiring Fund DARTS pursuant to
the Reorganization.
o The aggregate tax basis of the Acquiring Fund Common Shares or
Acquiring Fund DARTS, as the case may be, received by a shareholder of
an Acquired Fund pursuant to a Reorganization will be the same as the
aggregate tax basis of the shares of the Acquired Fund surrendered in
exchange therefor (reduced by any amount of tax basis allocable to a
fractional share for which cash is received).
o The holding period of the Acquiring Fund Common Shares or Acquiring
Fund DARTS, as the case may be, received by a shareholder of an
Acquired Fund pursuant to the Reorganization will include the holding
period of the shares of the Acquired Fund surrendered in exchange
therefor.
o A shareholder of an Acquired Fund that receives cash in lieu of a
fractional Acquiring Fund Common Share pursuant to the Reorganization
will recognize capital gain or loss with respect to the fractional
share in an amount equal to the difference between the amount of cash
received for the fractional share and the portion of such
shareholder's tax basis in its Acquired Fund common shares that is
allocable to the fractional share. The capital gain or loss will be
long-term if the holding period for such Acquired Fund common shares
is more than one year as of the date of the exchange.
o The Acquiring Fund's tax basis in an Acquired Fund's assets received
by the Acquiring Fund pursuant to the Reorganization will, in each
instance, equal the tax basis of such assets in the hands of such
Acquired Fund immediately prior to such Reorganization, and the
Acquiring Fund's holding period of such assets will, in each instance,
include the period during which the assets were held by such Acquired
Fund.
o The Acquiring Fund intends to continue to be taxed under the rules
applicable to regulated investment companies as defined in Section 851
of the Code, which are the same rules currently applicable to each of
the Acquired Funds and their shareholders.
The opinion described above will be based on U.S. federal income tax law in
effect on the closing date of the Reorganization. In rendering its opinion,
Kirkpatrick & Lockhart Preston Gates Ellis LLP will also rely upon certain
representations of the management of the Acquiring Fund and the Acquired Funds
and assume, among other things, that the Reorganizations will be consummated in
accordance with each Agreement and Plan of Reorganization and as described
herein. An opinion of counsel is not binding on the IRS or any court.
Additional Terms of the Agreement and Plan of Reorganization
Certain terms of each Agreement and Plan of Reorganization are described above.
The following is a summary of certain additional terms of each Agreement and
Plan of Reorganization. This summary and any other description of the terms of
each Agreement and Plan of Reorganization contained in this Joint Proxy
Statement/Prospectus are qualified in their entirety by Exhibit A, which is the
Form of Agreement and Plan of Reorganization that is proposed for the
Reorganization in its entirety.
Surrender of Share Certificates. If your shares are represented by one or more
share certificates before the closing date of the applicable Reorganization, you
must either surrender the certificate to your Fund(s) or deliver to your Fund(s)
a lost certificate affidavit, in the form of an accompanied by the surety bonds
that your Fund(s) may require (collectively, an "Affidavit"). On the closing
date of each Reorganization, all certificates that have not been surrendered
will be canceled, will no longer evidence ownership of your Fund's shares and
will evidence ownership of the Acquiring Fund's Common Shares. Until such share
certificates have been so surrendered, no dividends payable to the holders of
record of Acquired Fund common shares as of any date subsequent to the closing
date will be reinvested pursuant to the Acquiring Fund's Dividend Reinvestment
Plan, but will instead be paid in cash. Once such Acquired Fund share
certificates have been surrendered, a holder of shares of an Acquired Fund who
currently
84
elects to receive dividends in cash will continue to receive dividends in cash;
all holders who currently elect to participate in the Dividend Reinvestment Plan
of a Fund will have their dividends automatically reinvested in shares of the
Acquiring Fund. Shareholders may not redeem or transfer Acquiring Fund shares
received in the Reorganization until they have surrendered their Fund share
certificates or delivered an Affidavit. The Acquiring Fund will not issue share
certificates in the Reorganization. Upon consummation of the Reorganization,
holders of Acquired Fund common shares will be entitled to receive cash in lieu
of any fractional Acquiring Fund Common Shares held other than in a Dividend
Reinvestment Plan Account.
Preferred shares are held in "street name" by the Depository Trust Company and
all transfers will be accomplished by book entry.
Conditions to Closing the Reorganization. The obligation of each Acquired Fund
to consummate the Reorganization is subject to the satisfaction of certain
conditions, including the performance by the Acquiring Fund of all of its
obligations under the Agreement and the receipt of all consents, orders and
permits necessary to consummate the Reorganization (see Agreement, Section 8).
The obligation of the Acquiring Fund to consummate the Reorganization is subject
to the satisfaction of certain conditions, including each Acquired Fund's
performance of all of its obligations under the Agreement, the receipt of
certain documents and financial statements from each Acquired Fund and the
receipt of all consents, orders and permits necessary to consummate the
Reorganization (see Agreement, Section 9).
The obligations of the Acquired Funds and the Acquiring Fund are subject to
approval of the Agreement by the necessary vote of the outstanding shares of the
Acquired Funds, in accordance with the provisions of each Acquired Fund's
Agreement and Declaration of Trust and By-Laws. The Funds' obligations are also
subject to the receipt of a favorable opinion of Kirkpatrick & Lockhart Preston
Gates Ellis LLP as to the federal income tax consequences of the Reorganization
(see Agreement, Sections 8(f) and 9(f)).
Termination of the Agreement. The Board of an Acquired Fund and the Acquiring
Fund may terminate the Agreement by mutual consent (even if shareholders of the
Acquired Fund have already approved it) at any time before the closing date of
the Reorganization, if the Boards believe that proceeding with the
Reorganization would no longer be advisable.
Expenses of the Reorganization. In the event the Reorganizations are approved
and completed, the expenses of the Reorganizations will be shared by the
Acquired Funds and the Acquiring Fund in proportion to and up to the amount of
their respective first year's projected annual expense savings as a result of
the Reorganization. The Adviser will bear the balance of these expenses. The
expenses of the Reorganization will not be borne by the preferred shareholders
of any Fund. In the event a Reorganization is not completed, the costs
associated with such Reorganization will be borne by the Acquiring Fund and the
remaining Acquired Funds whose shareholders have approved their respective
Reorganizations. Neither the Funds nor the Adviser will pay any expenses of
shareholders arising out of or in connection with the Reorganization.
Payment of Undistributed Income in Advance of Reorganizations
Each Fund generally retains an amount of earned net income that is not
distributed in regular dividend payments in order to provide a reserve to
regularize dividend payments over time. Each Acquired Fund intends to declare
and pay a special dividend on common shares in advance of the Reorganization of
that Fund distributing such reserved income. The record date for such special
dividend will be a date following the approval of the Reorganization of such
Acquiring Fund's common and preferred shareholders. If the Reorganization is not
approved for an Acquiring Fund, no such special dividend will be declared or
paid for that Acquired Fund. Similarly, if common and preferred shareholders of
the Acquiring Fund approve the issuance of additional common shares and
preferred shares in connection with the Reorganizations, the Acquiring Fund
intends to declare and pay a special dividend on common shares in advance of the
first Reorganization distributing such reserved income. The record date for such
special dividend will be a date following the approval of the issuance of
additional common shares and preferred shares in connection with the
Reorganizations. If such approval is not obtained, no such special dividend will
be declared or paid by the Acquiring Fund or any Acquired Fund.
85
Capitalization
With respect to each Proposal, the following tables set forth the capitalization
of each Fund as of October 31, 2006 and the pro forma combined capitalization of
the Acquiring Fund as if all proposed Reorganizations had occurred on that date,
as well as the pro forma combined capitalization of the Acquiring Fund as if
each Reorganization had occurred on that date absent any of the other
Reorganizations. Because each Acquired Fund's participation in the
Reorganization is not contingent on the participation of the other Acquired
Funds, many Fund combinations are possible. It is expected that the range of
resulting pro forma capitalization will be captured in the tables contained
herein because the capitalization would be highest if all Acquired Funds
approved and implemented the Reorganization and would be lowest if each Acquired
Fund was the sole Acquired Fund to approve the Reorganization. The tables should
not be relied upon to determine the amount of Acquiring Fund shares that will
actually be received and distributed.
If the Reorganization of your Fund(s) had taken place on October 31, 2006:
(Unaudited)
ACTUAL PRO FORMA
-----------------------------------------------------------------------------
Premium Premium Select Global Preferred Premium
Dividend Dividend Dividend Dividend Dividend Dividend
Fund I Fund II Trust Fund Fund Fund II
-----------------------------------------------------------------------------------------------------------------------
Net assets consist of
(amounts in thousands): $ 155,842 $193,598 $154,356 $121,135 $103,400 $ 727,917
Common Shares (no par value)* 15,293 15,047 10,010 8,345 7,257 56,606
Paid in surplus $ 143,177 $168,307 $143,162 $113,165 $ 99,436 $ 667,247
Net unrealized appreciation $ 20,071 $ 30,358 $ 15,384 $ 12,107 $ 5,328 $ 83,248
Accumulated undistributed net
investment income $ 97 $ 533 $ 58 $ 259 ($906) $ 533
Accumulated net realized gain (loss) ($7,503) ($5,600) ($4,248) ($4,396) ($458) ($23,111)
Net assets applicable to common
shares $ 155,842 $193,598 $154,356 $121,135 $103,400 $ 727,917
Preferred Shares and accrued
dividends (no par value, with
liquidation preference of
$100,000)* $ 68,580 $100,355 $ 70,053 $ 60,210 $ 52,721 $ 351,919
Net assets including preferred
shares $ 224,422 $293,953 $224,409 $181,345 $156,121 $1,079,836
Net asset value per common share $ 10.19 $ 12.87 $ 15.42 $ 14.52 $ 14.25 $ 12.86
* Based on the number of outstanding shares listed in the table under
"Outstanding Shares and Quorum" in the section entitled "Information
Concerning the Meeting" below.
If the Reorganization of your Fund(s) had taken place on October 31, 2006:
(Unaudited)
ACTUAL PRO FORMA
------------------------------------------------------
Premium Premium Premium Dividend
Dividend Fund I Dividend Fund II Fund II
--------------------------------------------------------------------------------------------------------------
Net assets consist of (amounts in thousands): $155,842 $193,598 $ 349,343
Common Shares (no par value)* 15,293 15,047 27,159
Paid in surplus $143,177 $168,307 $ 311,484
Net unrealized appreciation $ 20,071 $ 30,358 $ 50,429
Accumulated undistributed net investment income $ 97 $ 533 $ 533
Accumulated net realized gain (loss) ($7,503) ($5,600) ($13,103)
Net assets applicable to common shares $155,842 $193,598 $ 349,343
Preferred Shares and accrued dividends (no par value,
with liquidation preference of $100,000)* $ 68,580 $100,355 $ 168,935
Net assets including preferred shares $224,422 $293,953 $ 512,278
Net asset value per common share $ 10.19 $ 12.87 $ 12.86
* Based on the number of outstanding shares listed in the table under
"Outstanding Shares and Quorum" in the section entitled "Information
Concerning the Meeting" below.
86
If the Reorganization of your Fund(s) had taken place on October 31, 2006:
(Unaudited)
ACTUAL PRO FORMA
------------------------------------------------------
Select Dividend Premium Premium Dividend
Trust Dividend Fund II Fund II
--------------------------------------------------------------------------------------------------------------
Net assets consist of (amounts in thousands): $154,356 $193,598 $347,896
Common Shares (no par value)* 10,010 15,047 27,043
Paid in surplus $143,162 $168,307 $311,469
Net unrealized appreciation $ 15,384 $ 30,358 $ 45,742
Accumulated undistributed net investment income $ 58 $ 533 $ 533
Accumulated net realized gain (loss) ($4,248) ($5,600) ($9,848)
Net assets applicable to common shares $154,356 $193,598 $347,896
Preferred Shares and accrued dividends (no par value,
with liquidation preference of $100,000)* $ 70,053 $100,355 $170,408
Net assets including preferred shares $224,409 $293,953 $518,304
Net asset value per common share $ 15.42 $ 12.87 $ 12.86
* Based on the number of outstanding shares listed in the table under
"Outstanding Shares and Quorum" in the section entitled "Information
Concerning the Meeting" below.
If the Reorganization of your Fund(s) had taken place on October 31, 2006:
(Unaudited)
ACTUAL PRO FORMA
------------------------------------------------------
Global Dividend Premium Premium Dividend
Fund Dividend Fund II Fund II
--------------------------------------------------------------------------------------------------------------
Net assets consist of (amounts in thousands): $121,135 $193,598 $314,474
Common Shares (no par value)* 8,345 15,047 24,461
Paid in surplus $113,165 $168,307 $281,472
Net unrealized appreciation $ 12,107 $ 30,358 $ 42,465
Accumulated undistributed net investment income $ 259 $ 533 $ 533
Accumulated net realized gain (loss) ($4,396) ($5,600) ($9,996)
Net assets applicable to common shares $121,135 $193,598 $314,474
Preferred Shares and accrued dividends (no par value,
with liquidation preference of $100,000)* $ 60,210 $100,355 $160,565
Net assets including preferred shares $181,345 $293,953 $475,039
Net asset value per common share $ 14.52 $ 12.87 $ 12.86
* Based on the number of outstanding shares listed in the table under
"Outstanding Shares and Quorum" in the section entitled "Information
Concerning the Meeting" below.
If the Reorganization of your Fund(s) had taken place on October 31, 2006:
(Unaudited)
ACTUAL PRO FORMA
------------------------------------------------------
Preferred Premium Premium Dividend
Dividend Fund Dividend Fund II Fund II
--------------------------------------------------------------------------------------------------------------
Net assets consist of (amounts in thousands): $103,400 $193,598 $296,998
Common Shares (no par value)* 7,257 15,047 23,083
Paid in surplus $ 99,436 $168,307 $267,743
Net unrealized appreciation $ 5,328 $ 30,358 $ 35,686
Accumulated undistributed net investment income ($906) $ 533 $ 533
Accumulated net realized gain (loss) ($458) ($5,600) ($6,964)
Net assets applicable to common shares $103,400 $193,598 $296,998
Preferred Shares and accrued dividends (no par value,
with liquidation preference of $100,000)* $ 52,721 $100,355 $153,076
Net assets including preferred shares $156,121 $293,953 $450,074
Net asset value per common share $ 14.25 $ 12.87 $ 12.86
87
Management of the Funds
Trustees and Officers
Each Fund's Board provides broad supervision over the affairs of each Fund. The
officers of each Fund are responsible for the Fund's operations. The Trustees
and officers of the Funds, together with their principal occupations during the
past five years, are listed in the Statement of Additional Information. Each of
the Trustees serves as a Trustee of each of the other leveraged closed-end
investment companies for which the Adviser serves as investment adviser.
The Adviser, Subadviser and Administrator
Each Fund has contracted with John Hancock Advisers, LLC, located at 601
Congress Street, Boston, Massachusetts 02210, to act as its investment adviser.
The Adviser serves as the investment adviser to John Hancock Preferred Income
Fund, John Hancock Preferred Income Fund II, and John Hancock Preferred Income
Fund III, all leveraged dual-class closed-end investment companies. The Adviser
was organized in 1968 and had, as of November 30, 2006, approximately $31.4
billion in assets under management. The Adviser is a wholly owned subsidiary of
John Hancock Financial Services, Inc., a subsidiary of Manulife Financial
Corporation ("MFC").
The Adviser has been managing closed-end funds since 1971 and has a long history
of delivering regular dividends through several market cycles. The Adviser is an
industry leader in preferred stock management and is the only firm to actively
manage eight closed-end preferred stock funds.
Effective December 31, 2005, the investment management teams of the Adviser were
reorganized into Sovereign Asset Management LLC, a wholly owned indirect
subsidiary of John Hancock Life Insurance Company ("JHLICo"), a subsidiary of
MFC. Effective October 1, 2006, Sovereign Asset Management LLC changed its name
to MFC Global Investment Management (U.S.), LLC. MFC Global (U.S.), located at
101 Huntington Avenue, Boston, Massachusetts 02199, was organized in 1979 and as
of November 30, 2006, had approximately $26.6 billion in assets under
management. The Adviser remains the principal advisor on each Fund, and MFC
Global (U.S.) acts as subadviser under the supervision of the Adviser. The
restructuring did not have an impact on the Funds, which continue to be managed
using the same investment philosophy and process. The Funds are not responsible
for payment of the subadvisory fees.
Under the terms of each investment advisory agreement between each Fund and the
Adviser (each, an "Advisory Agreement"), each Fund has retained the Adviser to
provide overall investment advice and to manage the investment of each Fund's
assets and to place orders for the purchase and sale of its portfolio
securities. The Adviser is responsible for obtaining and evaluating research,
economic and statistical data and, subject to the supervision of the each Fund's
Board, for formulating and implementing investment programs in furtherance of
each Fund's investment objective. The Adviser will furnish each Fund the
services of such members of its organization as may be duly elected officers of
a Fund.
The Adviser and each Fund have entered into a Sub-Advisory Agreement with MFC
Global (U.S.) under which MFC Global (U.S.), subject to the review of the
Trustees and the overall supervision of the Adviser, is responsible for managing
the investment operations of the Fund and the composition of each Fund's
portfolio and furnishing each Fund with advice and recommendations with respect
to investments, investment policies and the purchase and sale of securities.
Pursuant to its Advisory Agreements and Sub-Advisory Agreements, the Adviser and
MFC Global (U.S.) are not liable for any error of judgment or mistake of law or
for any loss suffered by a Fund in connection with the matters to which their
respective Agreements relate, except a loss resulting from willful misfeasance,
bad faith or gross negligence on the part of the Adviser or MFC Global (U.S.) in
the performance of their duties or from their reckless disregard of the
obligations and duties under the applicable Agreements.
The Adviser will also serve as the administrator to each Fund (the
"Administrator") pursuant to an agreement between the Fund and the Administrator
(the "Administration Agreement"). Under the terms of each Administration
Agreement, the Administrator provides administrative services to a Fund (to the
extent such services are not provided to a Fund pursuant to other agreements)
including (a) providing supervision of the Fund's non-investment operations, (b)
providing the Fund with personnel to perform such executive, administrative and
clerical services as are reasonably necessary to provide effective
administration of the Fund, (c) arranging for the preparation, at the Fund's
expense, of the Fund's tax returns, reports to shareholders, and reports filed
with the SEC and other regulatory authorities, (d) providing the Fund with
adequate office space and certain related office equipment and services and (e)
maintaining all of the Fund's records other than those maintained pursuant to
such agreements.
88
Compensation and Expenses
Under the Advisory Agreements between the Adviser and Select Dividend Trust,
Global Dividend Fund and Preferred Dividend Fund, each Fund pays a monthly
management fee to the Adviser at an annual rate of 0.80% of the Fund's average
weekly net assets plus the value attributable to the preferred shares
(collectively, "managed assets"). Under the Advisory Agreements between the
Adviser and Premium Dividend Fund I and Premium Dividend Fund II, each Fund pays
a monthly management fee to the Adviser at an annual rate of 0.50% of the Fund's
managed assets plus 5.00% of the Fund's weekly gross income. The Adviser's total
fees under the Advisory Agreements with Premium Dividend Fund I and Premium
Dividend Fund II are limited to 1.00% annually of each Fund's average weekly
managed assets. A discussion regarding the basis for the Board of Preferred
Dividend Fund, Select Dividend Trust, Global Dividend Fund, Premium Dividend
Fund I and Premium Dividend Fund II approving each Advisory Agreement is
available in their annual reports for the periods ending May 31, 2006, June 30,
2006, July 31, 2006, September 30, 2006 and October 31, 2006, respectively.
Pursuant to the Sub-Advisory Agreement, the Adviser will pay to the Sub-Adviser
a monthly fee at an annual rate of 0.20% of each Fund's average daily net
assets. The payment of the sub-advisory fee to MFC Global (U.S.) is not an
additional payment by the Fund and the Fund has no obligation to MFC Global
(U.S.) to pay the sub-advisory fee.
Each Fund pays the Adviser a monthly administration fee at an annual rate
specified below based on each Fund's average weekly managed assets:
Fund Administration Fee
---------------------------- -------------------
Premium Dividend Fund I 0.10%
Premium Dividend Fund II 0.10%
Select Dividend Trust 0.15%
Global Dividend Fund 0.15%
Preferred Dividend Fund 0.15%
The average weekly net assets are determined for the purpose of calculating the
advisory fee and the administration fee by taking the average of all the weekly
determinations of net assets (total assets less all liabilities, which
liabilities do not include the aggregate liquidation preference of any
outstanding preferred shares) during a given calendar month. The fees are
payable for each calendar month as soon as practicable after the end of that
month. In addition to the payments to the Adviser under the Advisory Agreement
and to the Administrator under the Administration Agreement described above,
each Fund pays certain other costs, including, but not limited to, any and all
expenses, taxes and governmental fees incurred by the Fund; the compensation and
expenses of Trustees who are not interested persons of the Adviser, and of
independent advisers, independent contractors, consultants, managers and other
unaffiliated agents employed by a Fund other than through the Adviser; the fees
of any Rating Agency rating the preferred shares of a Fund; legal, accounting
and auditing fees and expenses of each Fund; the fees or disbursements of
custodians and depositories of the Fund's assets, transfer agents, disbursing
agents, plan agents and registrars; the cost of preparing and mailing dividends,
distributions, reports, notices and proxy materials to shareholders of each
Fund; brokers' commissions and underwriting fees; and the expense of periodic
calculations of the NAV of the common shares of a Fund.
Duration and Termination; Non-Exclusive Services
Unless earlier terminated pursuant to its terms, each Advisory Agreement and
Sub-Advisory Agreement will remain in effect for two years from their respective
dates of execution and may each be continued from year to year thereafter if
such continuation is specifically approved at least annually (i) by the Board or
by the vote of a majority, as defined in the 1940 Act, of the holders of the
outstanding preferred shares and the common shares, voting together as a single
class, and (ii) by the vote of a majority of the Trustees who are not parties to
the Advisory Agreement or the Subadvisory Agreement or interested persons, as
defined in the 1940 Act, of any such party, by votes cast in person at a meeting
called for the purpose of voting on such approval. Each Advisory Agreement and
Sub-Advisory Agreement provides that it will terminate automatically if assigned
and that it may be terminated without penalty by the Trustees, the vote of a
majority of the outstanding voting securities of the applicable Fund, or by the
Adviser or Sub-Adviser, as the case may be, on sixty days' written notice.
Portfolio Management
Day-to-day management of each Fund's portfolio is the responsibility of Gregory
K. Phelps and Mark T. Maloney.
Gregory K. Phelps is a Senior Vice President and Portfolio Manager at MFC Global
(U.S.) and has served in these capacities since 2005. Prior to 2005, Mr. Phelps
served as Senior Vice President and Portfolio Manager at the Adviser since 1995.
Mr. Phelps has over 25 years of experience managing preferred securities within
closed-end
89
funds and in researching securities in the utility, bank, and oil and gas
industries. Mr. Phelps has been a member of the investment team that manages the
Funds since 1995.
Mark T. Maloney is a Vice President and Portfolio Manager at MFC Global (U.S.)
and has served in these capacities since 2005. Prior to 2005, Mr. Maloney served
as Vice President and Portfolio Manager at the Adviser since 1982. Mr. Maloney
has over 9 years of investment experience focusing in the utility, bank, and oil
and gas industries. Mr. Maloney has been a member of the investment team that
manages the Funds since 1997.
The Statement of Additional Information includes additional information about
the portfolio managers, including information about their compensation, accounts
they manage other than the Funds and their ownership of Fund shares, if any.
Portfolio Transactions with Affiliates
Pursuant to procedures determined by the Trustees and consistent with the above
policy of obtaining best net results, a Fund may execute portfolio transactions
with or through brokers affiliated with the Adviser and/or MFC Global (U.S.)
("Affiliated Brokers"). Affiliated Brokers may act as broker for a Fund on
exchange transactions, subject, however, to the general policy of the Fund set
forth above and the procedures adopted by the Trustees pursuant to the 1940 Act.
Commissions paid to an Affiliated Broker must be at least as favorable as those
which the Trustees believe to be contemporaneously charged by other brokers in
connection with comparable transactions involving similar securities being
purchased or sold. A transaction would not be placed with an Affiliated Broker
if a Fund would have to pay a commission rate less favorable than the Affiliated
Broker's contemporaneous charges for comparable transactions for its other most
favored, but unaffiliated, customers except for accounts for which the
Affiliated Broker acts as clearing broker for another brokerage firm, and any
customers of the Affiliated Broker not comparable to the Fund as determined by a
majority of the Trustees who are not interested persons (as defined in the 1940
Act) of the Fund, the Adviser, the Sub-Adviser or the Affiliated Broker. Because
the Adviser or MFC Global (U.S.) that is affiliated with the Affiliated Broker
has, as an investment adviser to the Fund, the obligation to provide investment
management services, which includes elements of research and related investment
skills such research and related skills will not be used by the Affiliated
Broker as a basis for negotiating commissions at a rate higher than that
determined in accordance with the above criteria.
The Adviser's indirect parent, the John Hancock Life Insurance Company, is the
indirect sole shareholder of Signator Investors, Inc., a broker-dealer
("Signator" or an "Affiliated Broker"). The Adviser's indirect parent, Manulife
Financial, is the parent of another broker-dealer, John Hancock Distributors LLC
(until December 31, 2004, Manulife Financial Securities, LLC) ("JH Distributors"
or "Affiliated Broker").
Other Service Providers
The Bank of New York, One Wall Street, New York, NY 10286, is the custodian for
each of the Funds. Mellon Investor Services, Newport Office Center VII, 480
Washington Boulevard, Jersey City, NJ 07310, is the transfer agent, registrar
and dividend disbursing agent for the common shares of each Fund. Deutsche Bank
Trust Company Americas, 280 Park Avenue, New York, NY 10017 is the Auction
Agent, transfer agent, registrar, dividend disbursing agent and redemption agent
for the preferred shares of each Fund other than Preferred Dividend Fund. BONY
serves as Auction Agent, transfer agent, registrar, dividend disbursing agent
and redemption agent for the ARPS of Preferred Dividend Fund.
PROPOSAL 3: ELECTION OF TRUSTEES
Each Fund's Board of Trustees consists of nine members. Holders of the common
shares of each Fund are entitled to elect seven Trustees and holders of the
preferred shares of each Fund are entitled to elect two Trustees. Messrs. Boyle,
Carlin, Chapman, Cunningham, Ladner, Moore and Pruchansky are subject to
election by holders of the common shares of each Fund. Mr. Dion and Ms. McGill
Peterson are subject to election by holders of the preferred shares of each
Fund.
Each Board of Trustees is divided into three staggered term classes containing
three Trustees. The term of one class expires each year and no term continues
for more than three years after the applicable election. Each class of Trustees
will stand for election at the conclusion of its respective three-year term.
Classifying the Trustees in this manner may prevent replacement of a majority of
the Trustees for up to a two-year period.
As of the date of this proxy, each nominee for election currently serves as
Trustee of each Fund. Each of the nominees has consented to his or her
nomination and has agreed to serve if elected. If, for any reason, any nominee
should not be available for election or able to serve as a Trustee, the proxies
will exercise their voting power in favor
90
of such substitute nominee, if any, as the Funds' Trustees may designate. The
Funds have no reason to believe that it will be necessary to designate a
substitute nominee.
For each Fund, Messrs. Pruchansky and Boyle are the current nominees for
election by the common shareholders and Ms. McGill Peterson is the current
nominee for election by the preferred shareholders.
91
Information Concerning Trustees
The following table sets forth certain information regarding the nominees for
election to each Board. The table shows each Trustee's principal occupation or
employment and other directorships during the past five years and the number of
John Hancock funds overseen by the Trustee. The table also lists the Trustees
who are not currently standing for election. The terms of Messrs. Carlin,
Chapman and Cunningham will expire at the 2008 annual meeting and the terms of
Messrs. Dion, Ladner and Moore will expire at the 2009 annual meeting.
Number of
John Hancock
Name, (Age), Address(1) Principal Occupations and other Directorships Trustee Funds
and Position with the Funds During the Past Five Years Since Overseen
------------------------------------------------------------------------------------------------------------------------------------
Nominees for Election
Term to Expire in 2010
------------------------------------------------------------------------------------------------------------------------------------
James R. Boyle* Chairman and Director, John Hancock Advisers, LLC (the "Adviser"), 2005(A-E) 259
Born: 1959 The Berkeley Financial Group, LLC ("The Berkeley Group") (holding
Non-Independent Trustee company) and John Hancock Funds, LLC (since 2005); President, John
Hancock Insurance Group; Executive Vice President, John Hancock
Life Insurance Company (since June, 2004); Senior Vice President,
The Manufacturers Life Insurance Company (U.S.A.) (until 2004).
Steven R. Pruchansky Chairman and Chief Executive Officer, Greenscapes of Southwest 1992(A-D) 64
Born: 1944 Florida, Inc. (since 2000); Director and President, Greenscapes of 1993(E)
Independent Trustee Southwest Florida, Inc. (until 2000); Managing Director, JonJames,
LLC (real estate) (since 2001); Director, First Signature Bank &
Trust Company (until 1991); Director, Mast Realty Trust (until
1994); President, Maxwell Building Corp. (until 1991).
Patti McGill Peterson+ Executive Director, Council for International Exchange of Scholars 2002(A-E) 64
Born: 1943 and Vice President, Institute of International Education (since
Independent Trustee 1998); Senior Fellow, Cornell Institute of Public Affairs, Cornell
University (until 1998); Former President of Wells College and St.
Lawrence University; Director, Niagara Mohawk Power Corporation
(until 2003); Director, Ford Foundation, International Fellowships
Program (since 2002); Director, Lois Roth Endowment (since
2002); Director, Council for International Exchange (since 2003).
------------------------------------------------------------------------------------------------------------------------------------
Trustees not Standing for Election
Term to Expire in 2009
------------------------------------------------------------------------------------------------------------------------------------
Ronald R. Dion+ Chairman and Chief Executive Officer, R.M. Bradley & Co., Inc.; 1998(A-E) 64
Born 1946 Director, The New England Council and Massachusetts Roundtable;
Chairman and Trustee, North Shore Medical Center; Director, Boston Stock
Independent Trustee Exchange; Director, BJ's Wholesale Club, Inc. and a corporator of
the Eastern Bank; Trustee, Emmanuel College; Director, Boston
Municipal Research Bureau; Member of the Advisory Board, Carroll
Graduate School of Management at Boston College.
Charles L. Ladner Chairman and Trustee, Dunwoody Village, Inc. (retirement services) 1992 (A-D) 64
Born: 1938 (until 2003); Senior Vice President and Chief Financial Officer, UGI 1993(E)
Independent Trustee Corporation (public utility holding company) (retired 1998); Vice
President and Director for AmeriGas, Inc. (retired 1998); Director
of AmeriGas Partners, L.P. (gas distribution) (until 1997); Director,
EnergyNorth, Inc. (until 1995); Director, Parks and History
Association (until 2007).
John A. Moore President and Chief Executive Officer, Institute for Evaluating 2002(A-E) 64
Born: 1939 Health Risks, (nonprofit institution) (until 2001); Senior Scientist,
Independent Trustee Sciences International (health research) (until 2003); Former
Assistant Administrator & Deputy Administrator, Environmental
Protection Agency; Principal, Hollyhouse (consulting)(since 2000);
Director, CIIT Center for Health Science Research (nonprofit
research) (since 2002).
92
Number of
John Hancock
Name, (Age), Address(1) Principal Occupations and other Directorships Trustee Funds
and Position with the Funds During the Past Five Years Since Overseen
------------------------------------------------------------------------------------------------------------------------------------
Trustees not Standing for Election
Term to Expire in 2008
------------------------------------------------------------------------------------------------------------------------------------
James F. Carlin Director and Treasurer, Alpha Analytical Laboratories (chemical 1988(A) 64
Born 1940 analysis) (since 1985); Part Owner and Treasurer, Lawrence Carlin 1989(B)
Independent Trustee Insurance Agency, Inc. (since 1995); Part Owner and Vice 1990(C)
President, Mone Lawrence Carlin Insurance Agency, Inc. (until 1992(D)
2005); Director/Treasurer, Rizzo Associates (engineering) (until 1993(E)
2000); Chairman and CEO, Carlin Consolidated, Inc. (management/
investments) (since 1987); Director/Partner, Proctor Carlin & Co.,
Inc. (until 1999); Trustee, Massachusetts Health and Education Tax
Exempt Trust (since 1993); Director of the following: Uno
Restaurant Corp. (until 2001), Arbella Mutual (insurance) (until
2000), HealthPlan Services, Inc. (until 1999), Flagship Healthcare,
Inc. (until 1999), Carlin Insurance Agency, Inc. (until 1999);
Chairman, Massachusetts Board of Higher Education (until 1999).
Richard P. Chapman Jr. President and Chief Executive Officer, Brookline Bancorp, Inc. 2005(A-E) 64
Born: 1935 (lending) (since 1972); Chairman and Director, Lumber Insurance
Independent Trustee Co. (insurance) (until 2000); Chairman and Director, Northeast
Retirement Services, Inc. (retirement administration) (since 1998).
Vice Chairman, Northeastern University Board of Trustees
(since 2004).
William H. Cunningham Former Chancellor, University of Texas System and former 1994(A-E) 64
Born: 1944 President of the University of Texas, Austin, Texas; Chairman and
Independent Trustee CEO, IBT Technologies (until 2001); Director of the following:
Hire.com (until 2004), STC Broadcasting, Inc. and Sunrise
Television Corp. (until 2001), Symtx, Inc. (electronic manufacturing)
(since 2001), Adorno/Rogers Technology, Inc. (until 2004), Pinnacle
Foods Corporation (until 2003), rateGenius (until 2003), Lincoln
National Corporation (insurance) (since 2006), Jefferson-Pilot
Corporation (diversified life insurance company) (until 2006), New
Century Equity Holdings (formerly Billing Concepts) (until 2001),
eCertain (until 2001), ClassMap.com (until 2001), Agile Ventures
(until 2001), AskRed.com (until 2001), Southwest Airlines,
Introgen and Viasystems Group, Inc. (electronic manufacturer)
(until 2003); Advisory Director, Interactive Bridge, Inc. (college
fundraising) (until 2001); Advisory Director, Q Investments (until
2003); Advisory Director, JP Morgan Chase Bank (formerly Texas
Commerce Bank -- Austin), LIN Television (since 2002), WilTel
Communications (until 2003) and Hayes Lemmerz International,
Inc. (diversified automotive parts supply company) (since 2003).
* "Interested person" (as defined in the 1940 Act) of the Funds and the
Adviser.
+ Trustee representing the holders of the preferred shares.
(A) Premium Dividend Fund I
(B) Premium Dividend Fund II
(C) Select Dividend Trust
(D) Global Dividend Fund
(E) Preferred Dividend Fund
93
Executive Officers
The table below lists the executive officers of the Funds:
Name, (Age), Address(1)
and Position with the Funds Principal Occupation(s) during the Past 5 Years Officer Since
------------------------------------------------------------------------------------------------------------------------------------
Keith F. Hartstein Senior Vice President, Manulife Financial Corporation (since 2004); Director, 2005
Born: 1956 President and Chief Executive Officer, the Adviser, The Berkeley Group, John
President and Chief Hancock Funds, LLC (since 2005); Director, MFC Global Investment
Executive Officer Management (U.S.), LLC ("MFC Global (U.S.)") (since 2005); Director, John
Hancock Signature Services, Inc. (since 2005); President and Chief Executive
Officer, John Hancock Investment Management Services, LLC (since 2006);
President and Chief Executive Officer, John Hancock Funds II, John Hancock
Funds III, and John Hancock Trust; Director, Chairman and President, NM
Capital Management, Inc. (since 2005); Chairman, Investment Company
Institute Sales Force Marketing Committee (since 2003); Director, President and
Chief Executive Officer, MFC Global (U.S.) (2005-2006); Executive Vice
President, John Hancock Funds, LLC (until 2005).
Gordon Shone Treasurer, John Hancock Funds (since 2006); John Hancock Funds II, John 2006
Born: 1956 Hancock Funds III and John Hancock Trust (since 2005); Vice President and
Treasurer Chief Financial Officer, John Hancock Trust (2003-2005); Senior Vice President,
John Hancock Life Insurance Company (U.S.A.) (since 2001); Vice President,
John Hancock Investment Management Services, Inc. and John Hancock
Advisers, LLC (since 2006), The Manufacturers Life Insurance Company (U.S.A.)
(1998 to 2000).
Francis V. Knox, Jr. Vice President and Chief Compliance Officer, John Hancock Investment 2005
Born: 1947 Management Services, LLC, the Adviser and MFC Global (U.S.) (since 2005);
Chief Compliance Officer Chief Compliance Officer, John Hancock Funds, John Hancock Funds II, John
Hancock Funds III and John Hancock Trust (since 2005); Vice President and
Assistant Treasurer, Fidelity Group of Funds (until 2004); Vice President and
Ethics & Compliance Officer, Fidelity Investments (until 2001).
John G. Vrysen Senior Vice President, Manulife Financial Corporation (since 2006); Director, 2005
Born: 1955 Executive Vice President and Chief Financial Officer, the Adviser, The Berkeley
Chief Financial Officer Group and John Hancock Funds, LLC (since 2005); Executive Vice President
and Chief Financial Officer, John Hancock Investment Management Services,
LLC (since 2005), Vice President and Chief Financial Officer, MFC Global (U.S.)
(since 2005); Director, John Hancock Signature Services, Inc. (since 2005); Chief
Financial Officer, John Hancock Funds, John Hancock Funds II, John Hancock
Funds III, John Hancock Trust (since 2005); Vice President and General
Manager, Fixed Annuities, U.S. Wealth Management (until 2005); Vice President,
Operations Manulife Wood Logan (2000-2004).
Thomas M. Kinzler Vice President and Counsel for John Hancock Life Insurance Company (U.S.A.) 2006
Born: 1955 (since 2006); Secretary and Chief Legal Officer, John Hancock Funds, John
Secretary and Hancock Funds II, John Hancock Funds III and John Hancock Trust (since 2006);
Chief Legal Officer Vice President and Associate General Counsel for Massachusetts Mutual Life
Insurance Company (1999-2006); Secretary and Chief Legal Counsel for MML
Series Investment Fund (2000-2006); Secretary and Chief Legal Counsel for
MassMutual Institutional Funds (2000-2004); Secretary and Chief Legal Counsel
for MassMutual Select Funds and MassMutual Premier Funds (2004-2006).
(1) Business address for Independent and Non-Independent Trustees and Officers
is 601 Congress Street, Boston, Massachusetts 02210.
94
Each Fund's Board of Trustees currently has four standing committees (each a
"Committee"): the Audit and Compliance Committee, the Governance Committee, the
Contracts/Operations Committee and the Investment Performance Committee. Each
Committee is comprised of Independent Trustees who are not "interested persons"
as defined in the 1940 Act.
The current membership of each Committee is set forth below.
Audit and Compliance Governance Contracts/Operations Investment Performance
--------------------------------------------------------------------------------------------------------------
Messrs. Chapman, Ladner, All Independent Trustees Messrs. Carlin, Cunningham, All Independent Trustees
Moore and Ms. Peterson Dion and Pruchansky
All members of each Fund's Audit and Compliance Committee are independent under
the New York Stock Exchange's Revised Listing Rules and each member is
financially literate with at least one having accounting or financial management
expertise. The Board has adopted a written charter for the Audit and Compliance
Committee, which is attached as Attachment 1 to the proxy statement filed with
the SEC on February 3, 2006 for the annual meeting held on March 22, 2006. The
Audit and Compliance Committee recommends to the full Board the appointment of
outside auditors for the Funds, monitors and oversees the audits of the Funds,
communicates with both independent auditors and internal auditors on a regular
basis and provides a forum for the auditors to report and discuss any matters
they deem appropriate at any time. Each Audit and Compliance Committee reports
that it has (i) reviewed and discussed each Fund's audited financial statements
with management; (ii) discussed with the independent auditors the matters
relating to the quality of each Fund's financial reporting as required by SAS
61; (iii) received written disclosures and an independence letter from the
independent auditors required by Independent Standards Board Standard No. 1, and
discussed with the auditors their independence; and (iv) based on these
discussions, recommended to the Board that each Fund's financial statements be
included in each Fund's annual report for the last fiscal year. The Audit and
Compliance Committee's Report is set forth below under "Additional Information"
All of the Independent Trustees are members of the Governance Committee. The
Governance Committee makes recommendations to the Board on issues related to
corporate governance applicable to the Independent Trustees and to the
composition and operation of the Board and recommends nominees to serve as
members of the Board. Among other duties, the Governance Committee determines
the compensation paid to the Independent Trustees. All members of the Governance
Committee are independent under the New York Stock Exchange's Revised Listing
Rules and are Independent Trustees. The Board has adopted a written charter for
the Governance Committee, which is attached as Attachment 3 to the proxy
statement filed with the SEC on February 3, 2006 for the annual meeting held on
March 22, 2006. The Governance Committee selects and nominates for elections
candidates for Independent Trustees. The Trustees who are not Independent
Trustees and the Officers of the Fund are nominated and selected by the Board.
In reviewing a potential nominee and in evaluating the renomination of current
Independent Trustees, the Governance Committee expects to apply the following
criteria: (i) the nominee's reputation for integrity, honesty and adherence to
high ethical standards; (ii) the nominee's business acumen, experience and
ability to exercise sound judgments; (iii) a commitment to understand the Fund
and the responsibilities of a trustee of an investment company; (iv) a
commitment to regularly attend and participate in meetings of the Board and its
Committees, (v) the ability to understand potential conflicts of interest
involving management of the Fund and to act in the interests of all
shareholders; and (vi) the absence of a real or apparent conflict of interest
that would impair the nominee's ability to represent the interests of all the
shareholders and to fulfill the responsibilities of an Independent Trustee. The
Governance Committee does not necessarily place the same emphasis on each
criteria and each nominee may not have each of these qualities.
As long as an existing Independent Trustee continues, in the opinion of the
Governance Committee, to satisfy the criteria listed above, the Committee
generally would favor the renomination of an existing Trustee rather than a new
candidate. Consequently, while the Governance Committee will consider nominees
recommended by shareholders to serve as Trustees, the Governance Committee may
only act upon such recommendations if there is a vacancy on the Board or the
Governance Committee determines that the selection of a new or additional
Trustee is in the best interests of the Funds. In the event that a vacancy
arises or a change in Board membership is determined to be advisable, the
Governance Committee will, in addition to any shareholder recommendations,
consider candidates identified by other means, including candidates proposed by
members of the Governance Committee. The Governance Committee may retain a
consultant to assist the Committee in a search for a qualified candidate.
Any shareholder recommendation must be submitted in compliance with all of the
pertinent provisions of Rule 14a-8 under the 1934 Act and a Fund's by-laws to be
considered by the Governance Committee. In evaluating a nominee recommended by a
shareholder, the Governance Committee, in addition to the criteria discussed
above, may consider
95
the objectives of the shareholder in submitting that nomination and whether such
objectives are consistent with the interests of all shareholders. If the Board
determines to include a shareholder's candidate among the slate of its
designated nominees, the candidate's name will be placed on the Fund's proxy
card. If the Board determines not to include such candidate among its designated
nominees and the shareholder has satisfied the requirements of Rule 14a-8, the
shareholder's candidate will be treated as a nominee of the shareholder who
originally nominated the candidate. In that case, the candidate will not be
named on the proxy card distributed with the Fund's proxy statement. Each of the
nominees for election as Trustee was recommended by the Governance Committee.
The Contracts/Operations Committee oversees the initiation, operation and
renewal of the various contracts between the Fund and other entities. These
contracts include advisory, custodial and transfer agency agreements and
arrangements with other service providers.
The Investment Performance Committee monitors and analyzes the investment
performance of the Funds generally, consults with the Adviser as necessary if a
Fund is considered to require special attention, and reviews fund peer groups
and other comparative standards as necessary.
Each Board of Trustees held five meetings during each Fund's fiscal year. With
respect to each Fund, no Trustee attended fewer than 75% of the aggregate of:
(1) the total number of meetings of the Trustees of the Fund; and (2) the total
number of meetings held by all Committees of the Trustees on which they served.
The Funds hold joint meetings of the Trustees and all Committees.
Trustee Ownership
The following table provides a dollar range indicating each Trustee's ownership
of equity securities of the Funds as well as aggregate holdings of shares of
equity securities of all John Hancock funds overseen by the Trustee, as of
January 25, 2007.
Trustee Holdings(1)
Premium Dividend Fund I Premium Dividend Fund II Select Dividend Trust
Trustee Shares Dollar Range Shares Dollar Range Shares Dollar Range
--------------------------------------------------------------------------------------------------------------------
Independent Trustees
--------------------------------------------------------------------------------------------------------------------
James F. Carlin 4,150 $10,001 - $50,000 1,200 $10,001 - $50,000 1,000 $10,001 - $50,000
Richard P. Chapman, Jr. -- -- -- -- -- --
William H. Cunningham -- -- -- -- -- --
Ronald R. Dion 100 $1 - $10,000 -- -- 65 $1 - $10,000
Charles L. Ladner 390 $1 - $10,000 200 $1 - $10,000 200 $1 - $10,000
Dr. John A. Moore 100 $1 - $10,000 100 $1 - $10,000 100 $1 - $10,000
Patti McGill Peterson 153 $1 - $10,000 130 $1 - $10,000 102 $1 - $10,000
Steven R. Pruchansky 116 $1 - $10,000 200 $1 - $10,000 100 $1 - $10,000
--------------------------------------------------------------------------------------------------------------------
Non-Independent Trustee
--------------------------------------------------------------------------------------------------------------------
James R. Boyle -- -- -- -- -- --
All John Hancock
Global Dividend Fund Preferred Dividend Fund Funds Overseen
Trustee Shares Dollar Range Shares Dollar Range Dollar Range
--------------------------------------------------------------------------------------------------------------------
Independent Trustees
James F. Carlin 100 $1 - $10,000 100 $1 - $10,000 Over $100,000
Richard P. Chapman, Jr. -- -- -- -- Over $100,000
William H. Cunningham -- -- -- -- Over $100,000
Ronald R. Dion 100 $1 - $10,000 65 $1 - $10,000 Over $100,000
Charles L. Ladner 235 $1 - $10,000 200 $1 - $10,000 Over $100,000
Dr. John A. Moore 100 $1 - $10,000 100 $1 - $10,000 Over $100,000
Patti McGill Peterson 108 $1 - $10,000 -- -- Over $100,000
Steven R. Pruchansky 300 $1 - $10,000 275 $1 - $10,000 Over $100,000
--------------------------------------------------------------------------------------------------------------------
Non-Independent Trustee
--------------------------------------------------------------------------------------------------------------------
James R. Boyle -- -- -- -- --
96
(1) The amounts reflect the aggregate dollar range of equity securities
beneficially owned by the Trustees in the Funds and in all John Hancock
funds overseen by each Trustee. For each Trustee, the amounts reflected
include share equivalents of certain John Hancock funds in which the
Trustee is deemed to be invested pursuant to the Deferred Compensation Plan
for Independent Trustees, as more fully described under "Remuneration of
Trustees and Officers." The information as to beneficial ownership is based
on statements furnished to the Funds by the Trustees. Each of the Trustees
has all voting and investment powers with respect to the shares indicated.
None of the Trustees beneficially owned individually, and the Trustees and
executive officers of the Funds as a group did not beneficially own, in
excess of one percent of the outstanding shares of any Fund.
Compliance with Section 16(a) Reporting Requirements
Section 16(a) of the 1934 Act requires a Fund's executive officers, Trustees and
persons who own more than 10% of a Fund's shares ("10% Shareholders") to file
reports of ownership and changes in ownership with the SEC. Executive officers,
Trustees and 10% Shareholders are also required by SEC regulations to furnish
each Fund with copies of all Section 16(a) forms they file. Based solely on a
review of the copies of these reports furnished to the Funds and representations
that no other reports were required to be filed, each Fund believes that during
the past fiscal year its executive officers, Trustees and 10% Shareholders
complied with all applicable Section 16(a) filing requirements.
Remuneration of Trustees and Officers
The following table provides information regarding the compensation paid by the
Funds and the other investment companies in the John Hancock fund complex to the
Independent Trustees for their services for each Fund's most recently completed
fiscal year. Any non-Independent Trustees and each of the officers of the Funds
are interested persons of the Adviser, are compensated by the Adviser and/or its
affiliates, and receive no compensation from the Funds for their services.
Total
Compensation
Premium Premium Select Global from Fund
Dividend Dividend Dividend Dividend Preferred and Fund
Trustee Fund I(1) Fund II(2) Trust(3) Fund(4) Dividend(5) Complex (6)
------------------------------------------------------------------------------------------------------------------
James F. Carlin $1,097 $1,418 $1,288 $ 873 $ 969 $ 125,250
Richard P. Chapman, Jr.*+ $1,105 $1,429 $1,292 $ 877 $ 971 $ 126,250
William H. Cunningham* $ 970 $1,264 $1,194 $ 790 $ 911 $ 193,250
Ronald R. Dion* $ 686 $ 891 $ 720 $ 496 $ 494 $ 265,250
Charles L. Ladner $ 579 $ 731 $ 768 $ 448 $ 644 $ 194,250
Dr. John A. Moore* $1,297 $1,677 $1,447 $1,003 $1,058 $ 146,000
Pattie McGill Peterson $ 570 $ 736 $ 781 $ 458 $ 596 $ 126,500
Steven R. Pruchansky* $ 871 $1,139 $1,092 $ 709 $ 781 $ 145,250
-------------------------------------------------------------------------------
TOTALS $7,175 $9,285 $8,582 $5,654 $6,424 $1,322,000
(1) Compensation is for fiscal year ended September 30, 2006
(2) Compensation is for fiscal year ended October 31, 2006
(3) Compensation is for fiscal year ended June 30, 2006
(4) Compensation is for fiscal year ended July 31, 2006
(5) Compensation is for fiscal year ended May 31, 2006
(6) The total compensation paid by the John Hancock fund complex to the
Independent Trustees for the calendar year ended December 31, 2006. All the
Independent Trustees were Trustees of 53 funds in the John Hancock fund
complex were Trustees of funds except Mr. Cunningham and Mr. Ladner who
were Trustees of 158 funds.
* As of December 31, 2006, the value of the aggregate accrued deferred
compensation amount from all funds in the John Hancock fund complex for Mr.
Chapman was $83,757, Mr. Cunningham was $170,724, Mr. Dion was $579,423,
Dr. Moore was $325,331, Mr. Pruchansky was $330,220, Mr. Ladner was $85,935
and Ms. McGill Peterson was $70,782 under the John Hancock Deferred
Compensation Plan for Independent Trustees (the "Plan"). Under the Plan, an
Independent Trustee may elect to have deferred fees invested by a Fund in
shares of one or more funds in the John Hancock fund complex, and the
amount paid to the Trustees under the Plan will be determined based upon
the performance of such investments. Deferral of Trustees' fees does not
obligate any Fund to retain the services of any Trustee or obligate any
Fund to pay any particular level of compensation to the Trustee.
+ Mr. Chapman is retiring March 20, 2007.
97
Material Relationships of the Independent Trustees
As of December 31, 2006, none of the Independent Trustees, nor any immediate
family member, owns shares of the Adviser or is a principal underwriter of the
Funds, nor does any such person own shares of a company controlling, controlled
by or under common control with the Adviser or a principal underwriter of the
Funds.
There have been no transactions by the Funds since the beginning of the Funds'
last two fiscal years, nor are there any transactions currently proposed, in
which the amount exceeds $60,000 and in which any Trustee of the Funds or any
immediate family members has or will have a direct or indirect material
interest, nor have any of the foregoing persons been indebted to the Funds in an
amount in excess of $60,000 at any time since that date.
No Independent Trustee, nor any immediate family member has had, in the past
five years, any direct or indirect interest, the value of which exceeds $60,000,
in the Adviser, a principal underwriter of the Funds or in a person (other than
a registered investment company) directly or indirectly controlling, controlled
by or under common control with, the Adviser or principal underwriter of the
Funds. Moreover, no Independent Trustee or immediate family member has, or has
had in the last two fiscal years of the Funds, any direct or indirect
relationships or material interest in any transaction or in any currently
proposed transaction, in which the amount involved exceeds $60,000, in which the
following persons were or are a party: the Funds, an officer of the Funds, any
investment company sharing the same investment adviser or principal underwriter
as the Funds or any officer of such a company, any investment adviser or
principal underwriter of the Funds or any officer of such a party, any person
directly or indirectly controlling, controlled by or under common control with
the Adviser or principal underwriter of the Funds, or any officer of such a
person.
Within the last two completed fiscal years of the Funds, no officer of any
investment adviser or principal underwriter of the Funds or of any person
directly or indirectly controlling, controlled by or under common control with
the Adviser or principal underwriter of the Funds, has served as a director on a
board of a company, where any of the Independent Trustees or nominees of the
Funds, or immediate family members of such persons, has served as an officer.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Trustees of each Fund, including a majority of each Fund's Independent
Trustees, have selected PricewaterhouseCoopers LLC ("PricewaterhouseCoopers")
located at 125 High Street, Boston MA 02110, to act as independent registered
public accounting firm for each Fund's 2007 fiscal year.
The Funds' 2007 fiscal year ends are:
Premium Dividend I -- September 30, 2007;
Premium Dividend II -- October 31, 2007;
Select Dividend -- June 30, 2007;
Global Dividend -- July 31, 2007; and
Preferred Dividend -- May 31, 2007.
Representatives from PricewaterhouseCoopers are not expected to be present at
the shareholders' meeting.
On March 8, 2005, each of the Funds engaged PricewaterhouseCoopers as its
independent public accountants for the Funds' 2006 fiscal years and dismissed
Deloitte & Touche LLP ("Deloitte & Touche") from such position. The decision to
change accountants was recommended by each Fund's Audit Committee and approved
by each Fund's Board. The reports of Deloitte & Touche on each Fund's financial
statements for the years 2004 and 2005 fiscal years did not contain any adverse
opinion, disclaimer of opinion or qualification or modification as to
uncertainty, audit scope or accounting principles.
During each Fund's 2004 and 2005 fiscal years, no Fund had any disagreement with
Deloitte & Touche on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, with disagreement(s), if
not resolved to the satisfaction of Deloitte & Touche, would have caused
Deloitte & Touche to make a reference to the subject matter of the disagreement
in connection with its reports on the financial statements of the Funds.
Further, Deloitte & Touche did not advise any of the Funds: that internal
controls necessary to develop reliable financial statements did not exist; that
Deloitte & Touche received information that made it unwilling to rely on
management's representations or that made it unwilling to be associated with the
financial statements prepared by management; that Deloitte & Touche would need
to expand significantly the scope of its audit; or that it received any
information requiring further investigation. No Fund consulted with
PricewaterhouseCoopers during its 2004 or 2005 fiscal years.
98
The following table sets forth the aggregate fees billed by Deloitte & Touche
for each Fund's 2005 fiscal year and by PricewaterhouseCoopers for each Fund's
2006 fiscal year for professional services rendered for: (i) the audit of the
Fund's annual financial statements and the review of financial statements
included in the Fund's reports to stockholders, (ii) assurance and related
services that are reasonably related to the audit of the Fund's financial
statements, (iii) tax compliance, tax advice or tax planning and (iv) all
services other than (i), (ii) and (iii). The table also discloses the aggregate
fees paid during the 2005 and 2006 calendar years to Deloitte & Touche and
PricewaterhouseCoopers, respectively, by John Hancock Advisers, LLC and any
entity controlling, controlled by or under common control with, John Hancock
Advisers, LLC to the extent that the engagement relates directly to the
operations and financial reporting of registered investment companies (the
"Adviser and Adviser Affiliates").
Audit-Related
Audit Fees Fees Tax Fees All Other Fees
--------------------------------------------------------------------------------
2005(1) 2006(2) 2005(1) 2006(2) 2005(1) 2006(2) 2005(1) 2006(2)
--------------------------------------------------------------------------------------------------------------------
Premium Dividend Fund I $32,800 $24,650 $4,000 $3,000 $2,400 $3,500 $ 0 $0
Premium Dividend Fund II $32,800 $24,650 $4,000 $3,000 $2,400 $3,500 $ 0 $0
Select Dividend Trust $32,800 $24,650 $4,000 $3,000 $2,400 $3,500 $ 0 $0
Global Dividend Fund $32,800 $24,650 $4,000 $3,000 $2,400 $3,500 $ 0 $0
Preferred Dividend Fund $32,800 $24,650 $4,000 $3,000 $2,400 $3,500 $ 0 $0
The Adviser and Adviser Affiliates $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $2,200 $0
(1) For each Fund's 2005 fiscal year, Deloitte & Touche served as the principal
accountant.
(2) For each Fund's 2006 fiscal year, PricewaterhouseCoopers served as the
principal accountant.
Each Fund's Audit Committee has adopted procedures to pre-approve audit and
non-audit services for the Funds and the Adviser and Adviser Affiliates. These
procedures identify certain types of audit and non-audit services that are
anticipated to be provided by PricewaterhouseCoopers during a calendar year and,
provided the services are within the scope and value standards set forth in the
procedures, pre-approve those engagements. The scope and value criteria are
reviewed annually. These procedures require both audit and non-audit sources to
be approved by the Audit Committee prior to PricewaterhouseCoopers being
engaged.
In recommending PricewaterhouseCoopers as the Funds' independent accountants,
the Audit Committee has considered the compensation provided to
PricewaterhouseCoopers for audit and non-audit services to the Adviser and
Adviser Affiliates and has determined that such compensation is not incompatible
with maintaining PricewaterhouseCoopers' independence. The aggregate amount of
non-audit fees paid by the Funds, the Adviser and an Advisor Affiliate that
provide services to the Funds, which includes amounts described above were
$97,200 and $32,500 for the years ending December 31, 2005 and 2006. All such
non-audit services were pre-approved in accordance with the Funds' policy.
Additional Information
The Audit Committee reviewed and discussed the audited financial statements with
management of Funds. The Audit Committee also discussed with the independent
registered public accounting firm the matters required to be discussed by SAS 61
(Codification of Statements on Auditing Standards), as modified or supplemented.
The Audit Committee received the written disclosures and the letter from the
independent registered public accounting firm required by Independence Standards
Board Standard No. 1 (Independence Standards Board Standard No. 1, Independence
Discussions with Audit Committees), as modified or supplemented and discussed
with the independent registered public accounting firm their independence.
Based on the review and discussions referred to above, the Audit Committee
recommended to the Board of Trustees that the audited financial statements be
included in the Fund's annual report to shareholders for the fiscal year ended
September 30, 2006 for filing with the Securities and Exchange Commission. As
mentioned, the audit committee consists of Messrs. Chapman, Ladner Moore (Chair)
and Ms. Peterson.
Legal Proceedings
There are no material pending legal proceedings to which any Trustee or
affiliated person is a party adverse to the Funds or any of its affiliated
persons or has a material interest adverse to the Funds or any of its affiliated
persons. In addition, there have been no legal proceedings that are material to
an evaluation of the ability or integrity of any Trustee or executive officer of
the Funds within the past five years.
99
Voting Information and Required Vote
Each Fund common and preferred share is entitled to one vote.
Approval of Proposal 1(a) requires the affirmative vote of a majority of the
votes cast on the proposal, provided that the total votes cast on the proposal
represents over 50% in interest of all securities entitled to vote on the
matter.
Approval of Proposal 1(b) requires the affirmative vote of the holders of at
least a majority of the DARTS then outstanding, voting separately as a class.
Approval of Proposal 2 requires, with respect to each Fund, the vote of the
holders of at least a majority of the preferred shares then outstanding, and the
holders of at least a majority of the common shares then outstanding, each
voting as a separate class.
Proposal 3 requires, with respect to each Fund, a plurality of the votes cast by
the common shares and the preferred shares, voting as separate classes, of a
Fund to elect the common shares' and preferred shares' respective nominees of
that Fund. A "plurality" means that the three nominees up for election by the
common shares or preferred shares receiving the greatest number of votes of the
common shares or preferred shares, as the case may be, will be elected as
Trustees, regardless of the number of votes cast. Common and Preferred Classes
vote separately on this proposal. Proposal 3 is considered a routine matter on
which brokers holding shares in "street name" may vote without instruction under
the rules of the New York Stock Exchange.
The following table summarizes how the quorum and voting requirements are
determined:
Shares Quorum Voting
In General All shares "present" in person or by Shares "present" in person will be voted
proxy are counted towards a quorum. in person at the meeting. Shares present
by proxy will be voted in accordance
with instructions.
Proxy with no Voting Instruction Considered "present" at meeting. Voted "for" a proposal.
(other than Broker Non-Vote)
Broker Non-Vote* Considered "present" at meeting. Not voted. Same effect as a vote
"against" a proposal.
Vote to Abstain Considered "present" at meeting. Not voted. Same effect as a vote
"against" a proposal.
Proportionately Voted Preferred Shares Considered "present" at meeting. Voted in proportion to preferred
with No Voting Instruction shares for which the broker received
instructions.
* Broker Non-Votes shall not include preferred shares which the broker is
permitted to proportionately vote in accordance with applicable law or
rules of a national securities exchange.
If either the issuance of additional common shares or additional series of DARTS
of the Acquiring Fund is not approved, none of the Reorganizations will occur.
An unfavorable vote on a proposed Reorganization by the shareholders of one
Acquired Fund will not affect the implementation of a Reorganization by another
Acquired Fund, if such Reorganization is approved by the shareholders of such
Acquired Fund and the issuance of additional common shares and preferred shares
is approved by the shareholders of the Acquiring Fund. If the required approval
of shareholders is not obtained with respect to a proposal, the Fund subject to
the proposal will continue to engage in business and the respective Board will
consider what further action may be appropriate.
Shareholders who object to the proposed Reorganization(s) will not be entitled
under Massachusetts law or the relevant Agreement and Declaration of Trust, as
amended, of each Fund to demand payment for, or an appraisal of, their shares.
However, shareholders should be aware that the Reorganizations as proposed are
not expected to result in recognition of gain or loss to shareholders for
federal income tax purposes and that shares of each Fund may be sold at any time
prior to the consummation of the proposed Reorganizations.
Certain Voting Information Regarding Preferred Shares. Pursuant to the rules of
the NYSE, preferred shares of each Fund held in "street name" may be voted under
certain conditions by broker-dealer firms and counted for purposes of
establishing a quorum of that Fund if no instructions are received one business
day before the meeting or, if adjourned, one business day before the day to
which the meeting is adjourned. These conditions include, among others, that (i)
at least 30% of a Fund's preferred shares outstanding have voted on the
proposal, and (ii) less than 10% of a Fund's preferred shares outstanding have
voted against such proposal. In such instance, the broker-dealer
100
firm will vote such uninstructed Fund's preferred shares on the proposal in the
same proportion as the votes cast by all Fund preferred shareholders who voted
on such proposal. Each Fund will include shares held of record by broker-dealers
as to which such authority has been granted in its tabulation of the total
number of shares present for purposes of determining whether the necessary
quorum of shareholders of such Fund exists.
Information Concerning the Meeting
Expenses and Methods of Solicitation
In addition to the mailing of these proxy materials, proxies may be solicited by
telephone, by fax or in person by the Trustees, officers and employees of your
Fund; by personnel of your Fund's investment adviser, John Hancock Advisers, LLC
and its transfer agent, Mellon Investor Services; or by broker-dealer firms.
Persons holding shares as nominees will be reimbursed by the relevant Fund, upon
request, for their reasonable expenses in sending soliciting material to the
principals of the accounts. The costs of the annual meeting, including the
solicitation of proxies for the election of Trustees, will be borne equally by
the Funds. Costs associated with the Reorganizations, including a portion of the
proxy solicitation expenses incurred in connection with the Reorganizations,
will be borne by common shareholders of the Acquired Funds and the Acquiring
Fund in proportion to and up to the amount of their first year's projected
annual expense savings as a result of the Reorganizations. The Adviser will bear
the balance of the Reorganization costs.
Mellon Investor Services LLC has been retained to assist in the solicitation of
proxies at a cost of approximately $6,000 per Fund plus reasonable expenses.
Revoking Proxies
Each Fund shareholder signing and returning a proxy has the power to revoke it
at any time before it is exercised:
o By filing a written notice of revocation with Mellon Investor
Services, Newport Office Center VII, 480 Washington Boulevard, Jersey
City, NJ 07310, or
o By returning a duly executed proxy with a later date before the time
of the meeting, or
o If a shareholder has executed a proxy but is present at the meeting
and wishes to vote in person, by notifying the secretary of your Fund
(without complying with any formalities) at any time before it is
voted.
Being present at the meeting alone does not revoke a previously executed and
returned proxy.
Outstanding Shares and Quorum
As of February 12, 2007 (the "record date"), the number of shares of beneficial
interest of each Fund outstanding was as follows:
FUND SHARES OUTSTANDING
---------------------------------------------------
Premium Dividend Fund I
Common Shares 15,292,571
DARTS, Series A 685
Premium Dividend Fund II
Common Shares 15,046,539
DARTS, Series A 500
DARTS, Series B 500
Select Dividend Trust
Common Shares 10,010,393
AMPS, Series A 700
Global Dividend Fund
Common Shares 8,344,700
DARTS 600
Preferred Dividend Fund
Common Shares 7,257,200
ARPS 525
Only shareholders of record on the record date are entitled to notice of and to
vote at the meeting. A majority of the outstanding shares of each Fund that are
entitled to vote will be considered a quorum for the transaction of business.
101
Other Business
Each Fund's Board knows of no business to be presented for consideration at the
meeting. If other business is properly brought before the meeting, proxies will
be voted according to the best judgment of the persons named as proxies.
Adjournments
If a quorum is not present in person or by proxy at the time any session of the
meeting is called to order, the persons named as proxies may vote those proxies
that have been received to adjourn the meeting to a later date. If a quorum is
present but there are not sufficient votes in favor of a proposal, the persons
named as proxies may propose one or more adjournments of the meeting to permit
further solicitation of proxies concerning the proposal. Any adjournment will
require the affirmative vote of a majority of a Fund's shares at the session of
the meeting to be adjourned. If an adjournment of the meeting is proposed
because there are not sufficient votes in favor of a proposal, the persons named
as proxies will vote those proxies favoring the proposal in favor of
adjournment, and proxies voted against a proposal will be voted against
adjournment.
Telephone Voting
In addition to soliciting proxies by mail, by fax or in person, your Fund may
also arrange to have votes recorded by telephone by officers and employees of
your Fund or by personnel of the Adviser or MFC Global (U.S.) or transfer agent
or a third party solicitation firm. The telephone voting procedure is designed
to verify a shareholder's identity, to allow a shareholder to authorize the
voting of shares in accordance with the shareholder's instructions and to
confirm that the voting instructions have been properly recorded. If these
procedures were subject to a successful legal challenge, these telephone votes
would not be counted at the meeting. Your Fund has not obtained an opinion of
counsel about telephone voting, but is currently not aware of any challenge.
o A shareholder will be called on a recorded line at the telephone
number in a Fund's account records and will be asked to provide the
shareholder's social security number or other identifying information.
o The shareholder will then be given an opportunity to authorize proxies
to vote his or her shares at the meeting in accordance with the
shareholder's instructions.
o A toll-free number will be available in case the voting information
contained in the confirmation is incorrect.
Alternatively, a shareholder may call the Funds' Voice Response Unit to vote:
o Read the proxy statement and have your proxy card at hand.
o Call the toll-free number located on your proxy card.
o Follow recorded instructions.
With both methods of telephone voting, to ensure that the shareholder's
instructions have been recorded correctly, the shareholder will also receive a
confirmation of the voting instructions.
If the shareholder decides after voting by telephone to attend the meeting, the
shareholder can revoke the proxy at that time and vote the shares at the
meeting.
Internet Voting
Holders of common shares of each Fund will also have the opportunity to submit
their voting instructions via the Internet by utilizing a program provided
through a vendor. Voting via the Internet will not affect your right to vote in
person if you decide to attend the meeting. Do not mail the proxy card if you
are voting via the Internet. To vote via the Internet, you will need the
"control number" that appears on your proxy card. These Internet voting
procedures are designed to authenticate shareholder identities, to allow
shareholders to give their voting instructions, and to confirm that
shareholders' instructions have been recorded properly. If you are voting via
the Internet, you should understand that there may be costs associated with
electronic access, such as usage charges from Internet access providers and
telephone companies, that must be borne to you.
102
To vote via the Internet:
o Read the proxy statement and have your proxy card(s) at hand.
o Go to the Web Site listed on the proxy card.
o Enter the "control number" found on your proxy card.
o Follow the instructions on the Web Site. Please call us at
1-800-843-0090 if you have any problems.
o To ensure that your instructions have been recorded correctly, you
will receive a confirmation of your voting instructions immediately
after your submission and also by e-mail, if chosen.
Shareholders' Proposals
Shareholder proposals, including nominees for Trustee, intended to be presented
at a Fund's annual meeting in 2008 must be received by the secretary of that
Fund at its offices at 601 Congress Street, Boston, Massachusetts 02110, after
October 29, 2007, but no later than November 28, 2007, for inclusion in that
Fund's proxy statement and form of proxy relating to that meeting (subject to
certain exceptions).
Ownership of Shares of the Funds
To the knowledge of each Fund, as of February 12, 2007, the following persons
owned of record or beneficially 5% or more of the outstanding shares of common
stock or preferred shares of each Fund, respectively:
Premium Dividend Fund I
--------------------------------------------------------------------------------------------------------
Names and Addresses of Owners of More than 5% of Shares Common Shares DARTS, Series A
The Commerce Group, Inc. 17.4%
211 Main Street, Webster, MA 01570
Premium Dividend Fund II
--------------------------------------------------------------------------------------------------------
Names and Addresses of Owners of More than 5% of Shares Common Shares DARTS, Series A
The Commerce Group, Inc. 45.0% DARTS, Series B
211 Main Street, Webster, MA 01570
Select Dividend Trust
--------------------------------------------------------------------------------------------------------
Names and Addresses of Owners of More than 5% of Shares Common Shares AMPS, Series A
The Commerce Group, Inc. 6.828%
211 Main Street, Webster, MA 01570
Global Dividend Fund
--------------------------------------------------------------------------------------------------------
Names and Addresses of Owners of More than 5% of Shares Common Shares DARTS
The Commerce Group, Inc. 25.3%
211 Main Street, Webster, MA 01570
Preferred Dividend Fund
--------------------------------------------------------------------------------------------------------
Names and Addresses of Owners of More than 5% of Shares Common Shares ARPS
The Commerce Group, Inc. 20.4%
211 Main Street, Webster, MA 01570
As of February 12, 2007, the Trustees and officers of the Acquiring Fund owned
in the aggregate less than 1% of the outstanding Acquiring Fund Common Shares
and owned no Acquiring Fund DARTS.
As of February 12, 2007, the Trustees and officers of Premium Dividend Fund I
owned in the aggregate less than 1% of the outstanding Premium Dividend Fund I
common shares and owned no Premium Dividend Fund I DARTS.
As of February 12, 2007, the Trustees and officers of Select Dividend Trust
owned in the aggregate less than 1% of the outstanding Select Dividend Trust
common shares and owned no Select Dividend Trust AMPS.
As of February 12, 2007, the Trustees and officers of Global Dividend Fund owned
in the aggregate less than 1% of the outstanding Global Dividend Fund common
shares and owned no] Global Dividend Fund DARTS.
As of February 12, 2007, the Trustees and officers of Preferred Dividend Fund
owned in the aggregate less than 1% of the outstanding Preferred Dividend Fund
common shares and owned no Preferred Dividend Fund ARPS.
103
Experts
The financial highlights and financial statements of (i) Premium Dividend Fund
I, for the periods ended September 30, 2006, (ii) Premium Dividend Fund II, for
the periods ended October 31, 2006, (iii) Select Dividend Trust, for the periods
ended June 30, 2006 and December 31, 2006, (iv) Global Dividend Fund, for the
periods ended July 31, 2006, and (v) Preferred Dividend Fund for the periods
ended May 31, 2006 and November 30, 2006, are incorporated by reference into
this Joint Proxy Statement and Prospectus. The financial statements for each
Fund's fiscal year ended 2005 (but not for semi-annual periods) and financial
highlights have been independently audited by the registered public accounting
firm Deloitte & Touche, as stated in their reports appearing in the statement of
additional information. The financial statements for each Fund's fiscal year
ended 2006 (but not for semi-annual periods) and financial highlights have been
independently audited by the registered public accounting firm
PricewaterhouseCoopers, as stated in their reports appearing in the statement of
additional information. These financial statements and financial highlights have
been included in reliance on their reports given on their authority as experts
in accounting and auditing.
Available Information
Each Fund is subject to the informational requirements of the 1934 Act and the
1940 Act and files reports, proxy statements and other information with the SEC.
These reports, proxy statements and other information filed by the Funds can be
inspected and copied (for a duplication fee) at the public reference facilities
of the SEC at 450 Fifth Street, N.W., Washington, D.C., and at the Midwest
Regional Office (500 West Madison Street, Suite 1400, Chicago, Illinois). Copies
of these materials can also be obtained by mail from the Public Reference
Section of the SEC at 450 Fifth Street, N.W. Washington, D.C. 20549, at
prescribed rates. In addition, copies of these documents may be viewed on-screen
or downloaded from the SEC's Internet site at http://www.sec.gov.
104
EXHIBIT A
FORM OF AGREEMENT AND PLAN OF REORGANIZATION
In order to consummate the Reorganization (as defined in Section 1(b) below) and
in consideration of the promises and the covenants and agreements hereinafter
set forth, and intending to be legally bound, John Hancock Patriot XXXXXX Fund,
a Massachusetts business trust and a registered closed-end investment company,
File No. 811-XXXX (the "Target Fund") and John Hancock Patriot Premium Dividend
Fund II (the "Acquiring Fund" and together with the Target Fund, the "Funds"), a
Massachusetts business trust and a registered closed-end investment company,
File No. 811-05908, each hereby agree as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE ACQUIRING FUND.
The Acquiring Fund represents and warrants to, and agrees with, the Target
Fund that:
(a) The Acquiring Fund is a Massachusetts business trust, with
transferable shares, duly organized, validly existing under, and in
good standing in conformity with, the laws of The Commonwealth of
Massachusetts, and has the power to own all of its assets and to carry
out its obligations under this Agreement. The Acquiring Fund has all
necessary federal, state and local authorizations to carry on its
business as it is now being conducted and to carry out this Agreement.
(b) The Acquiring Fund is duly registered under the Investment Company Act
of 1940, as amended (the "1940 Act") as a diversified, closed-end
management investment company and such registration has not been
revoked or rescinded and is in full force and effect. The Acquiring
Fund has elected and qualified for the special tax treatment afforded
regulated investment companies ("RICs") under Section 851 of the
Internal Revenue Code of 1986, as amended (the "Code") at all times
since its inception and intends to continue to so qualify until
consummation of the reorganization contemplated hereby (the
"Reorganization") and thereafter.
(c) The Acquiring Fund has furnished the Target Fund with the Acquiring
Fund's Annual Report to Shareholders for the fiscal year ended October
31, 2006, and the audited financial statements appearing therein,
having been audited by PricewaterhouseCoopers LLP, independent
registered public accounting firm, fairly present the financial
position of the Acquiring Fund as of the respective dates indicated,
in conformity with accounting principles generally accepted in the
United States applied on a consistent basis.
(d) An unaudited statement of assets, liabilities and capital of the
Acquiring Fund and an unaudited schedule of investments of the
Acquiring Fund, each as of the Valuation Time (as defined in Section
3(e) of this Agreement), will be furnished to the Target Fund, at or
prior to the Closing Date (as defined in Section 7(a) herein), for the
purpose of determining the number of Acquiring Fund Common Shares and
Acquiring Fund DARTS (each as defined in Section 1(e) herein) to be
issued pursuant to Section 3(a) of this Agreement; each will fairly
present the financial position of the Acquiring Fund as of the
Valuation Time in conformity with generally accepted accounting
principles applied on a consistent basis.
(e) The Acquiring Fund has full power and authority to enter into and
perform its obligations under this Agreement. The execution, delivery
and performance of this Agreement has been duly authorized by all
necessary action of its Board of Trustees, and this Agreement
constitutes a valid and binding contract enforceable in accordance
with its terms, subject to the effects of bankruptcy, insolvency,
moratorium, fraudulent conveyance and similar laws relating to or
affecting creditors' rights generally and court decisions with respect
thereto.
(f) There are no material legal, administrative or other proceedings
pending or, to the knowledge of the Acquiring Fund, threatened against
it which assert liability on the part of the Acquiring Fund or which
materially affect its financial condition or its ability to consummate
the Reorganization. The Acquiring Fund is not charged with or, to the
best of its knowledge, threatened with any violation or investigation
of any possible violation of any provisions of any federal, state or
local law or regulation or administrative ruling relating to any
aspect of its business.
(g) The Acquiring Fund is not obligated under any provision of its
Declaration of Trust dated September 26, 1989, as amended, or its
by-laws, as amended, and is not a party to any contract or other
commitment or obligation, and is not subject to any order or decree,
which would be violated by its execution of or performance under this
Agreement, except insofar as the Funds have mutually agreed to amend
such contract or other commitment or obligation to cure any potential
violation as a condition precedent to the Reorganization.
A-1
(h) There are no material contracts outstanding to which the Acquiring
Fund is a party that have not been disclosed in the N-14 Registration
Statement (as defined in subsection (k) below) or that will not
otherwise be disclosed to the Target Fund prior to the Valuation Time.
(i) The Acquiring Fund has no known liabilities of a material amount,
contingent or otherwise, other than those shown on its statements of
assets, liabilities and capital referred to in subsection (c) above,
those incurred in the ordinary course of its business as an investment
company, and those incurred in connection with the Reorganization. As
of the Valuation Time, the Acquiring Fund will advise the Target Fund
in writing of all known liabilities, contingent or otherwise, whether
or not incurred in the ordinary course of business, existing or
accrued as of such time, except to the extent disclosed in the
financial statements referred to in subsection (c) above.
(j) No consent, approval, authorization or order of any court or
government authority or self-regulatory organization is required for
the consummation by the Acquiring Fund of the Reorganization, except
such as may be required under the rules of the New York Stock Exchange
("NYSE"), Securities Act of 1933, as amended (the "1933 Act"), the
Securities Exchange Act of 1934, as amended (the "1934 Act") and the
1940 Act or state securities laws (which term as used herein shall
include the laws of the District of Columbia and Puerto Rico).
(k) The registration statement filed by the Acquiring Fund on Form N-14,
which includes the proxy statement of the Target Fund and the
Acquiring Fund with respect to the transactions contemplated herein
(the "Joint Proxy Statement/Prospectus"), and any supplement or
amendment thereto or to the documents therein (as amended or
supplemented, the "N-14 Registration Statement"), on its effective
date, at the time of the shareholders' meetings referred to in Section
8(a) and Section 9(a) of this Agreement and at the Closing Date,
insofar as it relates to the Acquiring Fund, (i) complied or will
comply in all material respects with the provisions of the 1933 Act,
the 1934 Act and the 1940 Act and the rules and regulations
thereunder, and (ii) did not or will not contain any untrue statement
of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading; and the Joint Proxy Statement/Prospectus included therein
did not or will not contain any untrue statement of a material fact or
omit to state any material fact necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; provided, however, that the representations and
warranties in this subsection only shall apply to statements in or
omissions from the N-14 Registration Statement made in reliance upon
and in conformity with information furnished by the Acquiring Fund for
use in the N-14 Registration Statement.
(l) The Acquiring Fund is authorized to issue an unlimited number of
common shares of beneficial interest, no par value (the "Acquiring
Fund Common Shares"), and an unlimited number of preferred shares of
beneficial interest, no par value. The Board of Trustees of the
Acquiring Fund has designated 598 preferred shares as Dutch Auction
Rate Transferable Securities, Series A and 598 preferred shares as
Dutch Auction Rate Transferable Securities, Series B (collectively,
"Acquiring Fund DARTS"). Each outstanding Acquiring Fund Common Share
and each Acquiring Fund DARTS share is fully paid and, nonassessable,
and has full voting rights and no shareholder of the Acquiring Fund
shall be entitled to any preemptive or other similar rights. In regard
to the statement that the Acquiring Fund Common Shares and Acquiring
Fund DARTS are non-assessable, it is noted that the Acquiring Fund is
an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the
Acquiring Fund.
(m) The Acquiring Fund Common Shares and the Acquiring Fund DARTS to be
issued to the Target Fund pursuant to this Agreement will have been
duly authorized and, when issued and delivered pursuant to this
Agreement, will be legally and validly issued and will be fully paid
and, nonassessable and will have full voting rights, and no
shareholder of the Acquiring Fund will have any preemptive right of
subscription or purchase in respect thereof.
(n) At or prior to the Closing Date, the Acquiring Fund Common Shares to
be transferred to the Target Fund for distribution to the shareholders
of the Target Fund on the Closing Date will be duly qualified for
offering to the public in all states of the United States in which the
sale of shares of the Funds presently are qualified, and there will be
a sufficient number of such shares registered under the 1933 Act and,
as may be necessary, with each pertinent state securities commission
to permit the transfers contemplated by this Agreement to be
consummated.
A-2
(o) At or prior to the Closing Date, the Acquiring Fund DARTS to be
transferred to the Target Fund on the Closing Date will be duly
qualified for offering to the public in all states of the United
States in which the sale of DARTS of the Target Fund presently are
qualified, and there are a sufficient number of Acquiring Fund DARTS
registered under the 1933 Act and with each pertinent state securities
commission to permit the transfers contemplated by this Agreement to
be consummated.
(p) At or prior to the Closing Date, the Acquiring Fund will have obtained
any and all regulatory, trustee and shareholder approvals necessary to
issue the Acquiring Fund Common Shares and the Acquiring Fund DARTS to
the Target Fund.
(q) The Acquiring Fund has filed, or intends to file, or has obtained
extensions to file, all federal, state and local tax returns which are
required to be filed by it, and has paid or has obtained extensions to
pay, all federal, state and local taxes shown on said returns to be
due and owing and all assessments received by it, up to and including
the taxable year in which the Closing Date occurs. All tax liabilities
of the Acquiring Fund have been adequately provided for on its books,
and no tax deficiency or liability of the Acquiring Fund has been
asserted and no question with respect thereto has been raised by the
Internal Revenue Service or by any state or local tax authority for
taxes in excess of those already paid, up to and including the taxable
year in which the Closing Date occurs.
(r) The Acquiring Fund has elected to qualify and has qualified as a RIC
as of and since its inception; has been a RIC under the Code at all
times since the end of its first taxable year when it so qualified;
qualifies and will continue to qualify as a RIC under the Code; and
has satisfied the distribution requirements imposed by the Code for
each of its taxable years. The Acquiring Fund has not at any time
since its inception been liable for, and is not now liable for, and
will not be liable for on the Closing Date, any material income or
excise tax pursuant to Section 852 or Section 4982 of the Code.
2. REPRESENTATIONS AND WARRANTIES OF THE TARGET FUND.
The Target Fund represents and warrants to, and agrees with, the Acquiring
Fund that:
(a) The Target Fund is a Massachusetts business trust, with transferable
shares, duly organized, validly existing in conformity with the laws
of The Commonwealth of Massachusetts, and has the power to own all of
its assets and to carry out this Agreement. The Target Fund has all
necessary federal, state and local authorizations to carry on its
business as it is now being conducted and to carry out this Agreement.
(b) The Target Fund is duly registered under the 1940 Act as a
diversified, closed-end management investment company, and such
registration has not been revoked or rescinded and is in full force
and effect. The Target Fund has elected and qualified for the special
tax treatment afforded RICs under Section 851 of the Code at all times
since its inception, and intends to continue to so qualify through its
taxable year ending upon liquidation.
(c) As used in this Agreement, the term "Target Fund Investments" shall
mean: (i) the investments of the Target Fund shown on the schedule of
its investments as of the Valuation Time furnished to the Acquiring
Fund; and (ii) all other assets owned by the Target Fund or
liabilities incurred as of the Valuation Time.
(d) The Target Fund has full power and authority to enter into and perform
its obligations under this Agreement. The execution, delivery and
performance of this Agreement has been duly authorized by all
necessary action of its Board of Trustees and this Agreement
constitutes a valid and binding contract enforceable in accordance
with its terms, subject to the effects of bankruptcy, insolvency,
moratorium, fraudulent conveyance and similar laws relating to or
affecting creditors' rights generally and court decisions with respect
thereto.
(e) The Target Fund has furnished the Acquiring Fund with the Target
Fund's Annual Report to Shareholders for the fiscal year ended [____],
and the audited financial statements appearing therein, having been
audited by PricewaterhouseCoopers LLP, independent registered public
accounting firm, [and the Target Fund's unaudited Semi-Annual Report
to Shareholders dated ________] fairly present the financial position
of the Target Fund as of the respective dates indicated, in conformity
with accounting principles generally accepted in the United States
applied on a consistent basis.
(f) An unaudited statement of assets, liabilities and capital of the
Target Fund and an unaudited schedule of investments of the Target
Fund, each as of the Valuation Time, will be furnished to the
Acquiring Fund at or prior to the Closing Date for the purpose of
determining the number of shares of Acquiring Fund Common Shares and
Acquiring Fund DARTS to be issued to the Target Fund pursuant to
Section 3 of this
A-3
Agreement; each will fairly present the financial position of the
Target Fund as of the Valuation Time in conformity with generally
accepted accounting principles applied on a consistent basis.
(g) There are no material legal, administrative or other proceedings
pending or, to the knowledge of the Target Fund, threatened against it
which assert liability on the part of the Target Fund or which
materially affect its financial condition or its ability to consummate
the Reorganization. The Target Fund is not charged with or, to the
best of its knowledge, threatened with any violation or investigation
of any possible violation of any provisions of any federal, state or
local law or regulation or administrative ruling relating to any
aspect of its business.
(h) There are no material contracts outstanding to which the Target Fund
is a party that have not been disclosed in the N-14 Registration
Statement or will not otherwise be disclosed to the Acquiring Fund
prior to the Valuation Time.
(i) The Target Fund is not obligated under any provision of its
Declaration of Trust dated [ ], as amended, or its by-laws, as
amended, or a party to any contract or other commitment or obligation,
and is not subject to any order or decree which would be violated by
its execution of or performance under this Agreement, except insofar
as the Funds have mutually agreed to amend such contract or other
commitment or obligation to cure any potential violation as a
condition precedent to the Reorganization.
(j) The Target Fund has no known liabilities of a material amount,
contingent or otherwise, other than those shown on its statements of
assets, liabilities and capital referred to above, those incurred in
the ordinary course of its business as an investment company and those
incurred in connection with the Reorganization. As of the Valuation
Time, the Target Fund will advise the Acquiring Fund in writing of all
known liabilities, contingent or otherwise, whether or not incurred in
the ordinary course of business, existing or accrued as of such time.
(k) The Target Fund has filed, or intends to file, or has obtained
extensions to file, all federal, state and local tax returns which are
required to be filed by it, and has paid or has obtained extensions to
pay, all federal, state and local taxes shown on said returns to be
due and owing and all assessments received by it, up to and including
the taxable year in which the Closing Date occurs. All tax liabilities
of the Target Fund have been adequately provided for on its books, and
no tax deficiency or liability of the Target Fund has been asserted
and no question with respect thereto has been raised by the Internal
Revenue Service or by any state or local tax authority for taxes in
excess of those already paid, up to and including the taxable year in
which the Closing Date occurs.
(l) At both the Valuation Time and the Closing Date, the Target Fund will
have full right, power and authority to sell, assign, transfer and
deliver the Target Fund Investments. At the Closing Date, subject only
to the obligation to deliver the Target Fund Investments as
contemplated by this Agreement, the Target Fund will have good and
marketable title to all of the Target Fund Investments, and the
Acquiring Fund will acquire all of the Target Fund Investments free
and clear of any encumbrances, liens or security interests and without
any restrictions upon the transfer thereof (except those imposed by
the federal or state securities laws and those imperfections of title
or encumbrances as do not materially detract from the value or use of
the Target Fund Investments or materially affect title thereto).
(m) No consent, approval, authorization or order of any court or
governmental authority or self-regulatory organization is required for
the consummation by the Target Fund of the Reorganization, except such
as may be required under the 1933 Act, the 1934 Act, the 1940 Act,
state securities laws or the rules of the NYSE.
(n) The N-14 Registration Statement, on its effective date, at the time of
the shareholders' meetings called to vote on this Agreement and on the
Closing Date, insofar as it relates to the Target Fund (i) complied or
will comply in all material respects with the provisions of the 1933
Act, the 1934 Act and the 1940 Act and the rules and regulations
thereunder, and (ii) did not or will not contain any untrue statement
of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading; and the Joint Proxy Statement/Prospectus included therein
did not or will not contain any untrue statement of a material fact or
omit to state any material fact necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; provided, however, that the representations and
warranties in this subsection shall apply only to statements in or
omissions from the N-14 Registration Statement made in reliance upon
and in conformity with information furnished by the Target Fund for
use in the N-14 Registration Statement.
A-4
(o) The Target Fund is authorized to issue [XXX/an unlimited number of]
common shares of beneficial interest, no par value (the "Target Fund
Common Shares"), and XXX preferred shares of beneficial interest, no
par value ("Target Fund Preferred Shares"). Each outstanding Target
Fund Common Share and each of the outstanding Target Fund Preferred
Share is fully paid and nonassessable, and has full voting rights and
no person is entitled to any preemptive or other similar rights with
respect to Target Fund Common Shares and Target Fund Preferred Shares.
In regard to the statement that Target Fund Common Shares and Target
Fund Preferred Shares are non-assessable, it is noted that the Target
Fund is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders could, under
certain circumstances, be held personally liable for the obligations
of the Target Fund.
(p) All of the issued and outstanding Target Fund Common Shares and Target
Fund Preferred Shares were offered for sale and sold in conformity
with all applicable federal and state securities laws.
(q) The books and records of the Target Fund made available to the
Acquiring Fund and/or its counsel are substantially true and correct
and contain no material misstatements or omissions with respect to the
operations of the Target Fund.
(r) The Target Fund will not sell or otherwise dispose of any of the
Acquiring Fund Common Shares or Acquiring Fund DARTS to be received in
the Reorganization, except in distribution to the shareholders of the
Target Fund, as provided in Section 3 of this Agreement.
(s) The Target Fund has elected to qualify and has qualified as a "RIC"
under the Code as of and since its inception; has been a RIC under the
Code at all times since the end of its first taxable year when it so
qualified; qualifies and will continue to qualify as a RIC under the
Code for its taxable year ending upon its liquidation; and has
satisfied the distribution requirements imposed by the Code for each
of its taxable years. The Target Fund has not at any time since its
inception been liable for, is not now liable for, and will not be
liable for on the Closing Date, any material income excise tax under
Section 852 or Section 4982 of the Code.
3. THE REORGANIZATION.
(a) Subject to receiving the requisite approvals of the shareholders of
the Acquiring Fund and the Target Fund, and to the other terms and
conditions contained herein, the Target Fund agrees to convey,
transfer and deliver to the Acquiring Fund and the Acquiring Fund
agrees to acquire from the Target Fund, on the Closing Date, all of
the Target Fund Investments (including interest accrued as of the
Valuation Time on debt instruments), including the assumption of
substantially all of the liabilities of the Target Fund, in exchange
for that number of Acquiring Fund Common Shares and Acquiring Fund
DARTS provided in Section 4 of this Agreement. Pursuant to this
Agreement, as soon as practicable after the Closing Date, the Target
Fund will distribute all Acquiring Fund Common Shares and Acquiring
Fund DARTS received by it to its shareholders constructively in
exchange for their Target Fund Common Shares and Target Fund Preferred
Shares. Such distributions shall be accomplished by the opening of
shareholder accounts on the share ledger records of the Acquiring Fund
in the amounts due the shareholders of the Target Fund based on their
respective holdings in the Target Fund as of the Valuation Time.
(b) If it is determined that the portfolios of the Target Fund and the
Acquiring Fund, when aggregated, would contain investments exceeding
certain percentage limitations imposed upon the Acquiring Fund with
respect to such investments, the Target Fund, if requested by the
Acquiring Fund, will dispose of a sufficient amount of such
investments as may be necessary to avoid violating such limitations as
of the Closing Date. Notwithstanding the foregoing, (a) nothing herein
will require the Target Fund to dispose of any portfolios, securities
or other investments, if, in the reasonable judgment of the Target
Fund's trustees or investment adviser, such disposition would
adversely affect the tax-free nature of the Reorganization for federal
income tax purposes or would otherwise not be in the best interests of
the Target Fund, and (b) nothing will permit the Target Fund to
dispose of any portfolio securities or other investments if, in the
reasonable judgment of the Acquiring Fund's trustees or investment
adviser, such disposition would adversely affect the tax-free nature
of the Reorganization for federal income tax purposes or would
otherwise not be in the best interests of the Acquiring Fund.
(c) Prior to the Closing Date, the Target Fund shall declare a dividend or
dividends which, together with all such previous dividends, shall have
the effect of distributing to their respective shareholders all of
their respective net investment company taxable income to and
including the Closing Date, if any (computed without regard to any
deduction for dividends paid), and all of its net capital gain, if
any, realized to and including the Closing Date.
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(d) The Target Fund will pay or cause to be paid to the Acquiring Fund any
interest the Target Fund receives on or after the Closing Date with
respect to any of the Target Fund Investments transferred to the
Acquiring Fund hereunder.
(e) The Valuation Time shall be 4:00 P.M., Eastern time, on XXXX, 2007, or
such earlier or later day and time as may be mutually agreed upon in
writing (the "Valuation Time").
(f) Recourse for liabilities assumed from the Target Fund by the Acquiring
Fund in the Reorganization will be limited to the assets acquired by
the Acquiring Fund. The known liabilities of the Target Fund, as of
the Valuation Time, shall be confirmed to the Acquiring Fund pursuant
to Section 2(j) of this Agreement.
(g) The Target Fund will be terminated following the Closing Date by
terminating its registration under the 1940 Act and its organization
under Massachusetts law and will withdraw its authority to do business
in any state where it is required to do so.
(h) The Acquiring Fund will file with the Secretary of State of The
Commonwealth of Massachusetts, as required, any amendment to its
Declaration of Trust and by-laws establishing the powers, rights and
preferences of the Acquiring Fund DARTS prior to the closing of the
Reorganization.
(i) The Acquiring Fund and the Target Fund each understand and acknowledge
that the Acquiring Fund has or intends to enter into similar
Agreements and Plans of Reorganization ("Other Reorganizations") with
[INSERT NAMES OF OTHER TARGET PATRIOT FUNDS] ("Other Target Funds")
pursuant to which the Acquiring Fund (1) would acquire all
substantially all of the assets and assume substantially all of the
liabilities of each of the Other Target Funds, and (2) common and
preferred shareholders of the Other Target Funds will become Common
and DARTS shareholders, respectively, of the Acquiring Fund. The
effective dates of such Other Reorganizations are expected to be in
proximity to the Closing Date, however, they are not expected to occur
simultaneously with the Reorganization or with one another and may
occur at any such time as the Acquiring Fund and each Other Target
Fund may agree. The consummation of the Reorganization is not
conditioned upon the consummation of any such Other Reorganization.
The Acquiring Fund and the Target Fund understand, acknowledge and
agree that any or all of such Other Reorganizations may not occur and
the status of any such Other Reorganization will not have a bearing on
the consummation of the Reorganization.
4. ISSUANCE AND VALUATION OF ACQUIRING FUND COMMON SHARES AND ACQUIRING FUND
DARTS IN THE REORGANIZATION.
(a) Acquiring Fund Common Shares and Acquiring Fund DARTS of an aggregate
net asset value or aggregate liquidation preference, as the case may
be, equal to the value of the Target Fund Investments acquired in the
Reorganization determined as hereinafter provided, shall be issued by
the Acquiring Fund to the Target Fund in exchange for such Target Fund
Investments. The Acquiring Fund will issue to the Target Fund (i) a
number of Acquiring Fund Common Shares, the aggregate net asset value
of which will equal the aggregate net asset value of the Target Fund
Common Shares, determined as set forth below, and (ii) a number of
Acquiring Fund DARTS, the aggregate liquidation preference and value
of which will equal the aggregate liquidation preference and value of
the Target Fund Preferred Shares, determined as set forth below.
(b) The net asset value of the Funds' Common Shares and the liquidation
preference and value of the Target Fund Preferred Shares and the
Acquiring Fund DARTS shall be determined as of the Valuation Time in
accordance with the regular procedures of the investment adviser, and
no formula will be used to adjust the net asset value so determined of
any Fund to take into account differences in realized and unrealized
gains and losses. Values in all cases shall be determined as of the
Valuation Time. The value of the Target Fund Investments to be
transferred to the Acquiring Fund shall be determined pursuant to the
regular procedures of the investment adviser.
(c) Such valuation and determination shall be made by the Acquiring Fund
in cooperation with the Target Fund and shall be confirmed in writing
by the Acquiring Fund to the Target Fund. The net asset value per
share of the Acquiring Fund Common Shares and the liquidation
preference and value per share of the Acquiring Fund DARTS shall be
determined in accordance with such procedures and the Acquiring Fund
shall certify the computations involved. For purposes of determining
the net asset value of each Target Fund Common Share and Acquiring
Fund Common Share, the value of the securities held by the applicable
Fund, plus any cash or other assets (including interest accrued but
not yet received), minus all liabilities (including accrued expenses)
and the aggregate liquidation value of the outstanding shares of
Target
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Fund Preferred Shares or Acquiring Fund DARTS, as the case may be,
shall be divided by the total number of Target Fund Common Shares or
Acquiring Fund Common Shares, as the case may be, outstanding at such
time.
(d) The Acquiring Fund shall issue to the Target Fund Acquiring Fund
Common Shares and the Acquiring Fund DARTS, each registered in the
name of the Target Fund. The Target Fund shall then distribute the
Acquiring Fund Common Shares and the Acquiring Fund DARTS to the
holders of Target Fund Common Shares and Target Fund Preferred Shares
by establishing open accounts for each Target Fund shareholder on the
share ledger records of the Acquiring Fund. Certificates representing
Acquiring Fund Common Shares and Acquiring Fund DARTS will not be
issued to Target Fund shareholders. With respect to any Target Fund
shareholder holding certificates evidencing ownership of Target Fund
Common Shares as of the Closing Date, and subject to the Acquiring
Fund being informed thereof in writing by the Target Fund, the
Acquiring Fund will not permit such shareholder to receive Acquiring
Fund Common Shares or Acquiring Fund DARTS, exchange Acquiring Fund
Common Shares or Acquiring Fund DARTS credited to such shareholder's
account for shares of other investment companies managed by the
Adviser or any of its affiliates, or pledge or redeem such Acquiring
Fund Common Shares or Acquiring Fund DARTS, in any case, until
notified by the Target Fund or its agent that such shareholder has
surrendered his or her outstanding certificates evidencing ownership
of Target Fund Common Shares or Target Fund Preferred Shares or, in
the event of lost certificates, posted adequate bond. The Target Fund,
at its own expense, will request its shareholders to surrender their
outstanding certificates evidencing ownership of Target Fund Common
Shares or Target Fund Preferred Shares, as the case may be, or post
adequate bond therefor.
(e) No fractional shares of Acquiring Fund Common Shares will be issued to
holders of Target Fund Common Shares unless such shares are held in a
Dividend Reinvestment Plan account. In lieu thereof, the Acquiring
Fund's transfer agent, Mellon Investor Services, will aggregate all
fractional Acquiring Fund Common Shares to be issued in connection
with the Reorganization (other than those issued to a Dividend
Reinvestment Plan account) and sell the resulting full shares on the
New York Stock Exchange at the current market price for Acquiring Fund
Common Shares for the account of all holders of such fractional
interests, and each such holder will receive such holder's pro rata
share of the proceeds of such sale upon surrender of such holder's
certificates representing Acquiring Fund Common Shares.
5. PAYMENT OF EXPENSES.
(a) Except as otherwise provided in this Section 5, the costs associated
with the Reorganization will be borne by Common Shareholders of the
Target Fund and the Acquiring Fund in proportion to their projected
annual expense savings as a result of the Reorganization. John Hancock
Advisers, LLC the adviser to the Acquiring Fund and the Target Fund
(the "Adviser"), will bear the balance of the costs of the
Reorganization; provided, however, that the Acquiring Fund and the
Target Fund will each pay any brokerage commissions, deal mark-ups and
similar expenses ("Portfolio Expenses").
(b) In the event the transactions contemplated by this Agreement are not
consummated, then the costs associated with the Reorganization (other
than Portfolio Expenses that the Acquiring Fund and Target Fund may
incur in connection with the purchase or sale of portfolio securities)
will be borne by the Acquiring Fund and the Other Target Funds whose
shareholders have approved the Other Reorganizations in proportion to
their projected annual expense savings as a result of the Other
Reorganizations. The Adviser will bear the balance of such costs.
(c) Notwithstanding any other provisions of this Agreement, if for any
reason the transactions contemplated by this Agreement are not
consummated, neither the Acquiring Fund nor the Target Fund shall be
liable to the other for any damages resulting therefrom, including,
without limitation, consequential damages, except as specifically set
forth above.
(d) Notwithstanding any of the foregoing, costs and expenses will in any
event be paid by the party directly incurring them if and to the
extent that the payment by another party of such costs and expenses
would result in the disqualification of such party as a "regulated
investment company" within the meaning of Subchapter M of the Code.
6. COVENANTS OF THE FUNDS.
(a) Each Fund covenants to operate its business as presently conducted in
the ordinary course of business between the date hereof and the
Closing Date, it being understood that such ordinary course of
business will include regular and customary dividends and
distributions.
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(b) The Target Fund agrees that following the consummation of the
Reorganization, it will terminate in accordance with the laws of The
Commonwealth of Massachusetts and any other applicable law, it will
not make any distributions of any Acquiring Fund Common Shares or
Acquiring Fund DARTS other than to its respective shareholders and
without first paying or adequately providing for the payment of all of
its respective liabilities not assumed by the Acquiring Fund, if any,
and on and after the Closing Date it shall not conduct any business
except in connection with its termination.
(c) The Target Fund undertakes that if the Reorganization is consummated,
it will file an application pursuant to Section 8(f) of the 1940 Act
for an order declaring that the Target Fund has ceased to be a
registered investment company.
(d) The Acquiring Fund will file the N-14 Registration Statement with the
Securities and Exchange Commission (the "Commission") and will use its
best efforts to provide that the N-14 Registration Statement becomes
effective as promptly as practicable. Each Fund agrees to cooperate
fully with the other, and each will furnish to the other the
information relating to itself to be set forth in the N-14
Registration Statement as required by the 1933 Act, the 1934 Act the
1940 Act, and the rules and regulations thereunder and the state
securities laws.
(e) The Acquiring Fund has no plan or intention to sell or otherwise
dispose of the Target Fund Investments, except for dispositions made
in the ordinary course of business.
(f) Each of the Funds agrees that by the Closing Date all of its federal
and other tax returns and reports required to be filed on or before
such date shall have been filed and all taxes shown as due on said
returns either have been paid or adequate liability reserves have been
provided for the payment of such taxes.
(g) The intention of the parties is that the transaction contemplated by
this Agreement will qualify as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code. Neither the Acquiring
Fund nor the Target Fund shall take any action or cause any action to
be taken (including, without limitation, the filing of any tax return)
that is inconsistent with such treatment or results in the failure of
the transaction to qualify as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code. At or prior to the
Closing Date, the Acquiring Fund and the Target Fund will take such
action, or cause such action to be taken, as is reasonably necessary
to enable Kirkpatrick & Lockhart Preston Gates Ellis LLP ("K&L
Gates"), special counsel to the Funds, to render the tax opinion
required herein (including, without limitation, each party's execution
of representations reasonably requested by and addressed to K&L
Gates).
(h) In connection with the covenant in subsection (f) above, the Funds
agree to cooperate with each other in filing any tax return, amended
return or claim for refund, determining a liability for taxes or a
right to a refund of taxes or participating in or conducting any audit
or other proceeding in respect of taxes. The Acquiring Fund agrees to
retain for a period of ten (10) years following the Closing Date all
returns, schedules and work papers and all material records or other
documents relating to tax matters of the Target Fund for each of such
Fund's taxable period first ending after the Closing Date and for all
prior taxable periods.
(i) After the Closing Date, the Target Fund shall prepare, or cause its
agents to prepare, any federal, state or local tax returns required to
be filed by such fund with respect to its final taxable year ending
with its complete liquidation and for any prior periods or taxable
years and further shall cause such tax returns to be duly filed with
the appropriate taxing authorities. Notwithstanding the aforementioned
provisions of this subsection, any expenses incurred by the Target
Fund (other than for payment of taxes) in connection with the
preparation and filing of said tax returns after the Closing Date
shall be borne by such Fund to the extent such expenses have been
accrued by such Fund in the ordinary course without regard to the
Reorganization; any excess expenses shall be borne pursuant to Section
5 herein.
(j) The Target Fund and the Acquiring Fund each agrees to mail to its
respective shareholders of record entitled to vote at the annual
meeting of shareholders at which action is to be considered regarding
this Agreement, in sufficient time to comply with requirements as to
notice thereof, a combined proxy statement and prospectus which
complies in all material respects with the applicable provisions of
Section 14(a) of the 1934 Act and Section 20(a) of the 1940 Act, and
the rules and regulations, respectively, thereunder.
(k) Following the consummation of the Reorganization, the Acquiring Fund
will continue its business as a diversified, closed-end management
investment company registered under the 1940 Act.
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7. CLOSING DATE.
(a) Delivery of the Target Fund Investments, and of the Acquiring Fund
Common Shares and Acquiring Fund DARTS to be issued as provided in
this Agreement, shall be made at such place and time as the Funds
shall mutually agree on the next full business day following the
Valuation Time, or at such other time and date agreed to by the Funds,
the date and time upon which such delivery is to take place being
referred to herein as the "Closing Date." To the extent that any
Target Fund Investments, for any reason, are not transferable on the
Closing Date, the Target Fund shall cause such Target Fund Investments
to be transferred to the Acquiring Fund's account with its custodian
at the earliest practicable date thereafter.
(b) The Target Fund will deliver to the Acquiring Fund on the Closing Date
confirmation or other adequate evidence as to the tax basis of the
Target Fund Investments delivered to the Acquiring Fund hereunder.
(c) As soon as practicable after the close of business on the Closing
Date, the Target Fund shall deliver to the Acquiring Fund a list of
the names and addresses of all of the shareholders of record of the
Target Fund on the Closing Date and the number of Target Fund Common
Shares and Target Fund Preferred Shares owned by each such
shareholder, certified to the best of its knowledge and belief by the
transfer agent for the Target Fund or by its President.
8. CONDITIONS OF THE TARGET FUND.
The obligations of the Target Fund hereunder shall be subject to the
following conditions:
(a) That this Agreement shall have been adopted, and the Reorganization
shall have been approved, by the Board of Trustees of the Target Fund
and by the affirmative vote of the holders of a majority of the
outstanding Target Fund Common Shares and of the outstanding Target
Fund Preferred Shares, each voting separately as a class; and that the
Acquiring Fund shall have delivered to the Target Fund a copy of the
resolution approving this Agreement adopted by the Board of Trustees
of the Acquiring Fund, a certificate setting forth the vote of holders
of Acquiring Fund Common Shares approving the issuance of additional
Acquiring Fund Common Shares, and a certificate setting for the vote
of holders of Acquiring Fund DARTS approving the issuance of
additional Acquiring Fund DARTS, each certified by its Secretary.
(b) That the Target Fund shall have received from the Acquiring Fund a
statement of assets, liabilities and capital, with values determined
as provided in Section 4 of this Agreement, together with a schedule
of such Fund's investments, all as of the Valuation Time, certified on
the Acquiring Fund's behalf by its President (or any Vice President)
or its Treasurer, and a certificate signed by the Fund's President (or
any Vice President) and its Treasurer, dated as of the Closing Date,
certifying that as of the Valuation Time and as of the Closing Date
there has been no material adverse change in the financial position of
the Acquiring Fund since the date of such Fund's most recent Annual or
Semi-Annual Report, as applicable, other than changes in its portfolio
securities since that date or changes in the market value of its
portfolio securities.
(c) That the Acquiring Fund shall have furnished to the Target Fund a
certificate signed by the Acquiring Fund's President (or any Vice
President) or its Treasurer, dated as of the Closing Date, certifying
that, as of the Valuation Time and as of the Closing Date, all
representations and warranties of the Acquiring Fund made in this
Agreement are true and correct in all material respects with the same
effect as if made at and as of such dates, and that the Acquiring Fund
has complied with all of the agreements and satisfied all of the
conditions on its part to be performed or satisfied at or prior to
each of such dates.
(d) That there shall not be any material litigation pending with respect
to the matters contemplated by this Agreement.
(e) The Target Fund shall have received the opinion(s) of K&L Gates,
counsel for the Acquiring Fund, dated as of the Closing Date,
addressed to the Target Fund substantially in the form and to the
effect that:
(i) the Acquiring Fund is duly formed and validly existing under the
laws of its state of organization;
(ii) the Acquiring Fund is registered as a closed-end, management
investment company under the 1940 Act;
(iii) this Agreement and the Reorganization provided for herein and
the execution of this Agreement have been duly authorized and
approved by all requisite action of the Acquiring Fund, and this
Agreement has been duly executed and delivered by the Acquiring
Fund and (assuming this Agreement is a valid and binding
obligation of the other party hereto) is a valid and binding
obligation of the Acquiring Fund;
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(iv) neither the execution or delivery by the Acquiring Fund of this
Agreement nor the consummation by the Acquiring Fund of the
transactions contemplated hereby violate any provision of any
statute or any published regulation or any judgment or order
disclosed to counsel by the Acquiring Fund as being applicable to
the Acquiring Fund;
(v) the Acquiring Fund Common Shares and Acquiring Fund DARTS have
been duly authorized and, upon issuance thereof in accordance
with this Agreement, will be validly issued, fully paid and
nonassessable and no person is entitled to any preemptive or
other similar rights with respect to Acquiring Fund Common Shares
and Acquiring Fund DARTS. In regard to the statement that
Acquiring Fund Common Shares and Acquiring Fund DARTS are
non-assessable, such opinion will note that the Acquiring Fund is
an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts's law, shareholders could, under
certain circumstances, be held personally liable for the
obligations of the Acquiring Fund; and
(vi) to their knowledge and subject to the qualifications set forth
below, the execution and delivery by the Acquiring Fund of this
Agreement and the consummation of the transactions herein
contemplated do not require, under the laws of its state of
organization or any state in which the Acquiring Fund is
qualified to do business or the federal laws of the United
States, the consent, approval, authorization, registration,
qualification or order of, or filing with, any court or
governmental agency or body (except such as have been obtained).
Counsel need express no opinion, however, as to any such consent,
approval, authorization, registration, qualification, order or
filing which may be required as a result of the involvement of
other parties to this Agreement in the transactions herein
contemplated because of their legal or regulatory status or
because of any other facts specifically pertaining to them.
(f) The Target Fund shall have obtained an opinion from K&L Gates dated as
of the Closing Date, addressed to the Target Fund, and based upon such
representations of the parties as K&L Gates may reasonably request,
that the consummation of the transactions set forth in this Agreement
comply with the requirements of a reorganization as described in
Section 368(a) of the Internal Revenue Code.
(g) That all proceedings taken by each of the Funds and its counsel in
connection with the Reorganization and all documents incidental
thereto shall be satisfactory in form and substance to the others.
(h) That the N-14 Registration Statement shall have become effective under
the 1933 Act, and no stop order suspending such effectiveness shall
have been instituted or, to the knowledge of the Acquiring Fund, be
contemplated by the SEC.
9. ACQUIRING FUND CONDITIONS.
The obligations of the Acquiring Fund hereunder shall be subject to the
following conditions:
(a) That this Agreement shall have been adopted, and the Reorganization
shall have been approved, by the Board of Trustees of the Acquiring
Fund and that the issuance of additional Acquiring Fund Common Shares
shall have been approved by the holders of Acquiring Fund Common
Shares by an affirmative vote of a majority of the votes cast,
provided that total votes cast represent over 50% in interest of all
securities entitled to vote on the matter; and that the issuance of
additional Acquiring Fund DARTS shall have been approved by the
holders of Acquiring Fund DARTS by an affirmative vote of at least a
majority of the shares of the DARTS then outstanding; and the Target
Fund shall have delivered to the Acquiring Fund a copy of the
resolution approving this Agreement adopted by the Target Fund's Board
of Trustees, and a certificate setting forth the vote of the holders
of Target Fund Common Shares and Target Fund Preferred Shares
obtained, each certified by its Secretary.
(b) That the Target Fund shall have furnished to the Acquiring Fund a
statement of its assets, liabilities and capital, with values
determined as provided in Section 4 of this Agreement, together with a
schedule of investments with their respective dates of acquisition and
tax costs, all as of the Valuation Time, certified on the Target
Fund's behalf by its President (or any Vice President) or its
Treasurer, and a certificate signed by such Fund's President (or any
Vice President) or its Treasurer, dated as of the Closing Date,
certifying that as of the Valuation Time and as of the Closing Date
there has been no material adverse change in the financial position of
the Target Fund since the date of such Fund's most recent Annual
Report or Semi-Annual Report, as applicable, other than changes in the
Target Fund Investments since that date or changes in the market value
of the Target Fund Investments.
(c) That the Target Fund shall have furnished to the Acquiring Fund a
certificate signed by the Target Fund's President (or any Vice
President) or its Treasurer, dated the Closing Date, certifying that
as of the Valuation
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Time and as of the Closing Date all representations and warranties of
the Target Fund made in this Agreement are true and correct in all
material respects with the same effect as if made at and as of such
dates and the Target Fund has complied with all of the agreements and
satisfied all of the conditions on its part to be performed or
satisfied at or prior to such dates.
(d) That there shall not be any material litigation pending with respect
to the matters contemplated by this Agreement.
(e) That the Acquiring Fund shall have received the opinion of K&L Gates,
counsel for the Target Fund, dated as of the Closing Date, addressed
to the Acquiring Fund, substantially in the form and to the effect
that:
(i) the Target Fund is duly formed and validly existing under the
laws of its state of organization;
(ii) the Target Fund is registered as a closed-end, management
investment company under the 1940 Act;
(iii) this Agreement and the Reorganization provided for herein and
the execution of this Agreement have been duly authorized by all
requisite action of the Target Fund, and this Agreement has been
duly executed and delivered by the Target Fund and (assuming this
Agreement is a valid and binding obligation of the other party
hereto) is a valid and binding obligation of the Target Fund;
(iv) neither the execution or delivery by the Target Fund of this
Agreement nor the consummation by the Target Fund of the
transactions contemplated hereby violate any provision of any
statute, or any published regulation or any judgment or order
disclosed to them by the Target Fund as being applicable to the
Target Fund; and
(v) to their knowledge and subject to the qualifications set forth
below, the execution and delivery by the Target Fund of the
Agreement and the consummation of the transactions herein
contemplated do not require, under the laws of its state of
organization or any state in which the Target Fund is qualified
to do business, or the federal laws of the United States, the
consent, approval, authorization, registration, qualification or
order of, or filing with, any court or governmental agency or
body (except such as have been obtained under the 1933 Act, 1934
Act, the 1940 Act or the rules and regulations thereunder).
Counsel need express no opinion, however, as to any such consent,
approval, authorization, registration, qualification, order or
filing which may be required as a result of the involvement of
other parties to this Agreement in the transactions herein
contemplated because of their legal or regulatory status or
because of any other facts specifically pertaining to them.
(f) That the Acquiring Fund shall have obtained an opinion from K&L Gates,
counsel for the Target Fund, dated as of the Closing Date, addressed
to the Acquiring Fund, and based upon such representation of the
parties as K&L Gates may reasonably request, that the consummation of
the transactions set forth in this Agreement comply with the
requirements of a reorganization as described in Section 368(a) of the
Code.
(g) That the N-14 Registration Statement shall have become effective under
the 1933 Act and no stop order suspending such effectiveness shall
have been instituted or, to the knowledge of the Target Fund, be
contemplated by the SEC.
(h) That all proceedings taken by the Target Fund and its counsel in
connection with the Reorganization and all documents incidental
thereto shall be satisfactory in form and substance to the Acquiring
Fund.
(i) That prior to the Closing Date the Target Fund shall have declared a
dividend or dividends which, together with all such previous
dividends, shall have the effect of distributing to its shareholders
all of its net investment company taxable income for the period to and
including the Closing Date, if any (computed without regard to any
deduction for dividends paid), and all of its net capital gain, if
any, realized to and including the Closing Date.
(j) The NYSE shall have approved the listing of the additional Acquiring
Fund Common Shares to be issued to common shareholders of the Target
Fund in connection with the reorganization.
(k) The Acquiring Fund shall have obtained written confirmation from
Moody's Investors Services, Inc. ("Moody's") and Standard and Poor's
Ratings Group ("S&P") that (i) consummation of the Reorganization will
not impair the ratings assigned by such rating agencies to the
existing Acquiring Fund DARTS, and (ii) the Acquiring Fund DARTS to be
issued pursuant to the Reorganization will be rated "aa2" by Moody's
and "AA" by S&P.
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10. TERMINATION, POSTPONEMENT AND WAIVERS.
(a) Notwithstanding anything contained in this Agreement to the contrary,
this Agreement may be terminated and the Reorganization abandoned at
any time (whether before or after adoption thereof by the shareholders
of the Funds) prior to the Closing Date, or the Closing Date may be
postponed (i) by mutual consent of the Boards of Trustees of the
Funds, (ii) by the Board of Trustees of the Target Fund if any
condition of the Target Fund's obligations set forth in Section 8 of
this Agreement has not been fulfilled or waived by such Board, or
(iii) by the Board of Trustees of the Acquiring Fund if any condition
of the Acquiring Fund's obligations set forth in Section 9 of this
Agreement have not been fulfilled or waived by such Board.
(b) If the transactions contemplated by this Agreement have not been
consummated by [ ] 2007, this Agreement automatically shall terminate
on that date, unless a later date is mutually agreed to by the Boards
of Trustees of the Funds.
(c) In the event of termination of this Agreement pursuant to the
provisions hereof, the same shall become void and have no further
effect, and there shall not be any liability on the part of any Fund
or persons who are their directors, trustees, officers, agents or
shareholders in respect of this Agreement.
(d) At any time prior to the Closing Date, any of the terms or conditions
of this Agreement benefiting a Fund may be waived by the Board of
Trustees of such Fund, if, in the judgment of such Board after
consultation with its counsel, such action or waiver will not have a
material adverse effect on the benefits intended under this Agreement
to the shareholders of their respective fund, on behalf of which such
action is taken.
(e) The respective representations and warranties contained in Sections 1
and 2 of this Agreement shall expire with, and be terminated by, the
consummation of the Reorganization, and neither Fund nor any of its
officers, trustees, agents or shareholders shall have any liability
with respect to such representations or warranties after the Closing
Date. This provision shall not protect any officer, trustee, agent or
shareholder of either Fund against any liability to the entity for
which that officer, trustee, agent or shareholder so acts or to its
shareholders, to which that officer, trustee, agent or shareholder
otherwise would be subject by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties in the
conduct of such office.
(f) If any order or orders of the Commission with respect to this
Agreement shall be issued prior to the Closing Date and shall impose
any terms or conditions which are determined by action of the Boards
of Trustees of the Funds to be acceptable, such terms and conditions
shall be binding as if a part of this Agreement without further vote
or approval of the shareholders of the Funds unless such terms and
conditions shall result in a change in the method of computing the
number of Acquiring Fund Common Shares or Acquiring Fund DARTS to be
issued to the Acquired Fund, in which event, unless such terms and
conditions shall have been included in the proxy solicitation
materials furnished to the shareholders of the Funds prior to the
meetings at which the Reorganization shall have been approved, this
Agreement shall not be consummated and shall terminate unless the
Funds promptly shall call a special meeting of shareholders at which
such conditions so imposed shall be submitted for approval.
11. INDEMNIFICATION.
(a) Each party (an "Indemnitor") shall indemnify and hold the other and
its officers, trustees, agents and persons controlled by or
controlling any of them (each an "Indemnified Party") harmless from
and against any and all losses, damages, liabilities, claims, demands,
judgments, settlements, deficiencies, taxes, assessments, charges,
costs and expenses of any nature whatsoever (including reasonable
attorneys' fees) including amounts paid in satisfaction of judgments,
in compromise or as fines and penalties, and counsel fees reasonably
incurred by such Indemnified Party in connection with the defense or
disposition of any claim, action, suit or other proceeding, whether
civil or criminal, before any court or administrative or investigative
body in which such Indemnified Party may be or may have been involved
as a party or otherwise or with which such Indemnified Party may be or
may have been threatened (collectively, the "Losses") arising out of
or related to any claim of a breach of any representation, warranty or
covenant made herein by the Indemnitor, provided, however, that no
Indemnified Party shall be indemnified hereunder against any Losses
arising directly from such Indemnified Party's willful misfeasance,
bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of such Indemnified Party's position.
(b) The Indemnified Party shall use its best efforts to minimize any
liabilities, damages, deficiencies, claims, judgments, assessments,
costs and expenses in respect of which indemnity may be sought
hereunder. The Indemnified Party shall give written notice to
Indemnitor within the earlier of ten (10) days of receipt of
A-12
written notice to Indemnified Party or thirty (30) days from discovery
by Indemnified Party of any matters which may give rise to a claim for
indemnification or reimbursement under this Agreement. The failure to
give such notice shall not affect the right of Indemnified Party to
indemnity hereunder unless such failure has materially and adversely
affected the rights of the Indemnitor; provided that in any event such
notice shall have been given prior to the expiration of the Survival
Period. At any time after ten (10) days from the giving of such
notice, Indemnified Party may, at its option, resist, settle or
otherwise compromise, or pay such claim unless it shall have received
notice from Indemnitor that Indemnitor intends, at Indemnitor's sole
cost and expense, to assume the defense of any such matter, in which
case Indemnified Party shall have the right, at no cost or expense to
Indemnitor, to participate in such defense. If Indemnitor does not
assume the defense of such matter, and in any event until Indemnitor
states in writing that it will assume the defense, Indemnitor shall
pay all costs of Indemnified Party arising out of the defense until
the defense is assumed; provided, however, that Indemnified Party
shall consult with Indemnitor and obtain Indemnitor's prior written
consent to any payment or settlement of any such claim. Indemnitor
shall keep Indemnified Party fully apprised at all times as to the
status of the defense. If Indemnitor does not assume the defense,
Indemnified Party shall keep Indemnitor apprised at all times as to
the status of the defense. Following indemnification as provided for
hereunder, Indemnitor shall be subrogated to all rights of Indemnified
Party with respect to all third parties, firms or corporations
relating to the matter for which indemnification has been made.
12. OTHER MATTERS.
(a) All covenants, agreements, representations and warranties made under
this Agreement and any certificates delivered pursuant to this
Agreement shall be deemed to have been material and relied upon by
each of the parties, notwithstanding any investigation made by them or
on their behalf.
(b) All notices hereunder shall be sufficiently given for all purposes
hereunder if in writing and delivered personally or sent by registered
mail or certified mail, postage prepaid. Notice to the Target Fund
shall be addressed to the Target Fund c/o John Hancock, 601 Congress
Street, Boston, Massachusetts 02210, Attention: General Counsel, or at
such other address as the Target Fund may designate by written notice
to the Acquiring Fund. Notice to the Acquiring Fund shall be addressed
to the Acquiring Fund c/o 601 Congress Street, Boston, Massachusetts
02210, Attention: General Counsel, or at such other address and to the
attention of such other person as the Acquiring Fund may designate by
written notice to the Target Fund. Any notice shall be deemed to have
been served or given as of the date such notice is delivered
personally or mailed.
(c) This Agreement supersedes all previous correspondence and oral
communications between the parties regarding the Reorganization,
constitutes the only understanding with respect to the Reorganization,
may not be changed except by a letter of agreement signed by each
party and shall be governed by and construed in accordance with the
laws of The Commonwealth of Massachusetts applicable to agreements
made and to be performed in said state.
(d) It is expressly agreed that the obligations of the Acquiring Fund and
the Target Fund hereunder shall not be binding upon any of their
respective trustees, shareholders, nominees, officers, agents, or
employees personally, but shall bind only the trust property of the
respective Fund as provided in such Fund's Declaration of Trust. A
copy of the Declaration of Trust of each of the Acquiring Fund and the
Target Fund is on file with the Secretary of State of The Commonwealth
of Massachusetts. The execution and delivery of this Agreement has
been authorized by the trustees of each Fund and signed by authorized
officers of each Fund, acting as such, and neither such authorization
by such trustees, nor such execution and delivery by such officers
shall be deemed to have been made by any of them individually or to
impose any liability on any of them personally, but shall bind only
the trust property of each Fund as provided in such Fund's Declaration
of Trust.
(e) It is further expressly agreed that this Agreement shall be construed
in accordance with and governed by the laws of The Commonwealth of
Massachusetts.
(f) This Agreement may be executed in any number of counterparts, each of
which, when executed and delivered, shall be deemed to be an original
but all such counterparts together shall constitute but one
instrument.
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IN WITNESS WHEREOF, the parties have hereunto caused this Agreement to be
executed and delivered by their duly authorized officers as of the day and year
first written above.
JOHN HANCOCK PATRIOT PREMIUM DIVIDEND FUND II
______________________________________________
[Name]
[Title] Attest: [Name]
[Title]
JOHN HANCOCK PATRIOT [_______] FUND
______________________________________________
[Name]
[Title] Attest: [Name]
[Title]
A-14
PART B
March 12, 2007
STATEMENT OF ADDITIONAL INFORMATION
RELATING TO THE ACQUISITION OF THE ASSETS AND LIABILITIES OF
JOHN HANCOCK PATRIOT PREMIUM DIVIDEND FUND I
JOHN HANCOCK PATRIOT SELECT DIVIDEND TRUST
JOHN HANCOCK PATRIOT GLOBAL DIVIDEND FUND
AND
JOHN HANCOCK PATRIOT PREFERRED DIVIDEND FUND
(each an "Acquired Fund" and collectively the "Acquired Funds")
BY AND IN EXCHANGE FOR SHARES OF
JOHN HANCOCK PATRIOT PREMIUM DIVIDEND FUND II
(the "Acquiring Fund," together with the Acquired Funds, the "Funds")
DATED March 12, 2007
This Statement of Additional Information is available to the shareholders of
John Hancock Patriot Premium Dividend Fund I ("Premium Dividend Fund I"), John
Hancock Patriot Select Dividend Trust ("Select Dividend Trust"), John Hancock
Patriot Global Dividend Fund ("Global Dividend Fund") and John Hancock Patriot
Preferred Dividend Fund ("Preferred Dividend Fund") in connection with proposed
reorganizations (each a "Reorganization" and collectively the "Reorganizations")
whereby the Acquiring Fund will acquire substantially all of the assets and
assume substantially all of the liabilities of the Acquired Funds in exchange
for an equal aggregate value of newly-issued common shares of beneficial
interest with no par value ("Acquiring Fund Common Shares") and various series
of newly-issued Dutch Auction Rate Transferable Securities preferred stock with
no par value and with liquidation preference of $100,000 per share ("Acquiring
Fund DARTS") corresponding to each Acquired Fund. Each Acquired Fund will (i)
distribute Acquiring Fund Common Shares to its common shareholders and Acquiring
Fund DARTS to its preferred shareholders, (ii) terminate its registration under
the Investment Company Act of 1940, as amended (the "1940 Act") and (iii)
dissolve under applicable state law. Unless otherwise defined herein,
capitalized terms have the meanings given to them in the Joint Proxy
Statement/Prospectus dated March 12, 2007 relating to the proposed
Reorganizations of the Acquired Funds into the Acquiring Fund (the "Proxy
Statement/Prospectus").
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Joint Proxy Statement/Prospectus. A copy of the Joint
Proxy Statement/Prospectus may be obtained, without charge, by writing to John
Hancock Advisers, LLC at 601 Congress Street, Boston, Massachusetts 02210. You
may also obtain a copy of the Joint Proxy Statement/Prospectus on the Securities
and Exchange Commission's web site at (http://www.sec.gov).
TABLE OF CONTENTS
TABLE OF CONTENTS......................................................... 2
ADDITIONAL INFORMATION ABOUT THE FUNDS.................................... 3
General Information.................................................... 3
Additional Investment Information...................................... 3
Fundamental Investment Restrictions.................................... 12
TRUSTEES AND OFFICERS OF THE FUNDS........................................ 15
General................................................................ 15
Board Committees....................................................... 19
Trustee Beneficial Ownership of Securities............................. 20
Compensation........................................................... 21
PROXY VOTING POLICIES..................................................... 22
OWNERSHIP OF SHARES OF THE FUNDS.......................................... 22
INVESTMENT ADVISORY AND OTHER SERVICES.................................... 22
Advisory Agreement..................................................... 22
Subadvisory Agreement.................................................. 23
Custodian.............................................................. 24
Independent Auditors................................................... 24
PORTFOLIO MANAGERS........................................................ 24
Portfolio Managers and Other Accounts Managed.......................... 24
Structure of Compensation.............................................. 26
Ownership of Securities................................................ 27
NET ASSET VALUE........................................................... 27
BROKERAGE ALLOCATION...................................................... 27
U.S. FEDERAL INCOME TAX MATTERS........................................... 29
ADDITIONAL INFORMATION.................................................... 35
FINANCIAL STATEMENTS...................................................... 35
PRO FORMA FINANCIAL STATEMENTS............................................ 36
APPENDIX A - DESCRIPTION OF RATINGS
APPENDIX B - PRO FORMA FINANCIAL STATEMENTS
2
ADDITIONAL INFORMATION ABOUT THE FUNDS
General Information
The Funds
The Acquiring Fund is a diversified, closed-end management investment company
organized under the laws of The Commonwealth of Massachusetts as an
unincorporated business trust pursuant to an Amended and Restated Agreement and
Declaration of Trust dated December 12, 1989.
Premium Dividend Fund I is a diversified, closed-end management investment
company that was organized as a corporation in the State of Maryland on June 20,
1988, and was reorganized as a business trust under the laws of The Commonwealth
of Massachusetts on July 18, 1990.
Preferred Dividend Fund is a diversified, closed end management investment
company that was organized as a business trust under the laws of The
Commonwealth of Massachusetts pursuant to an Agreement and Declaration of Trust
dated March 22, 1993.
Global Dividend Fund is a diversified, closed-end management investment company
that was organized as a business trust under the laws of The Commonwealth of
Massachusetts pursuant to an Agreement and Declaration of Trust dated May 28,
1992.
Select Dividend Trust is a diversified, closed-end management investment company
that was organized under as a business trust under the laws of The Commonwealth
of Massachusetts on May 8, 1990 by an Agreement and Declaration of Trust.
The business office of each Fund is 601 Congress Street, Boston, Massachusetts
02210-2805.
The Adviser and Subadviser
Each Fund has an investment management contract with John Hancock Advisers, LLC
(the "Adviser"), a wholly owned subsidiary of John Hancock Financial Services,
Inc., itself a subsidiary of Manulife Financial Corporation ("MFC"). Effective
December 31, 2005, the investment management teams of the Adviser were
reorganized into MFC Global Investment Management (U.S.), LLC ("MFC Global
(U.S.)" or "Subadviser"), a wholly owned indirect subsidiary of John Hancock
Life Insurance Company ("JHLICo"), a subsidiary of MFC. The Adviser remains the
principal adviser to each Fund, and MFC Global (U.S.) acts as subadviser to each
Fund under the supervision of the Adviser. The reorganization of the management
teams did not have an impact on the Funds, which continue to be managed using
the same investment philosophy and process. The Funds are not responsible for
payment of the subadvisory fees.
Additional Investment Information
The Funds share similar investment objectives and policies. Primary investment
strategies are described in the Joint Proxy/Prospectus Statement. The following
is a description of the various investments the Funds may acquire in, whether as
a primary or secondary strategy, and the specific Funds that may acquire each
type of investment are identified.
Preferred Stocks (All Funds)
Fixed-rate preferred stocks have fixed dividend rates. They can be perpetual,
with no maturity date, or issued with a fixed maturity date. Certain issues of
preferred stock are convertible into other equity securities. Perpetual
preferred stocks provide a fixed dividend throughout the life of the issue, with
no mandatory retirement provisions, but may be callable. Sinking fund preferred
stocks provide for the redemption of a portion of the issue on a regularly
3
scheduled basis with, in most cases, the entire issue being retired at a future
date. The value of fixed rate preferred stocks can be expected to vary inversely
with interest rates.
Adjustable rate preferred stocks have a variable dividend rate which is
determined periodically, typically quarterly, according to a formula based on a
specified premium or discount to the yield on particular U .S. Treasury
securities, typically the highest base-rate yield of one of three U .S. Treasury
securities: the 90-day Treasury bill; the 10-year Treasury note; and either the
20-year or 30-year Treasury bond or other index. The premium or discount to be
added to or subtracted from this base-rate yield is fixed at the time of
issuance and cannot be changed without the approval of the holders of the
adjustable rate preferred stock. Some adjustable rate preferred stocks have a
maximum and a minimum rate and in some cases are convertible into common stock.
Auction rate preferred stocks pay dividends that adjust based upon periodic
auctions. Such preferred stocks are similar to short-term corporate money market
instruments in that an auction rate preferred stockholder has the opportunity to
sell the preferred stock at par in an auction, normally conducted at least every
49 days, through which buyers set the dividend rate in a bidding process for the
next period. The dividend rate set in the auction depends upon market conditions
and the credit quality of the particular issuer. Typically, the auction rate
preferred stock's dividend rate is limited to a specified maximum percentage of
an external commercial paper index as of the auction date. Further, the terms of
auction rate preferred stocks generally provide that they are redeemable by the
issuer at certain times or under certain conditions.
Debt Securities (Preferred Dividend Fund and Global Dividend Fund)
The Funds may invest in debt securities. Debt securities include securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
and custodial receipts therefor; securities issued guaranteed by a foreign
government or any of its political subdivisions, authorities, agencies
instrumentalities or by international or supranational entities; corporate debt
securities including notes, bonds and debentures; certificates of deposit and
bankers' acceptances issued or guaranteed by, or time deposits maintained at,
banks (including U.S. or foreign branches of U.S. banks or U.S. or foreign
branches of foreign banks) having total assets of more than $1 billion;
commercial paper; and mortgage related securities. These securities will be U.S.
dollar denominated and may be of any maturity. The value of debt securities can
be expected to vary inversely with interest rates.
Common Stocks (All Funds)
Each of the Funds invests in common stocks. Common stocks are shares of a
corporation or other entity that entitle the holder to a pro rata share of the
profits of the corporation, if any, without preference over any other
shareholder or class of shareholders, including holders of such entity's
preferred stock and other senior equity. Common stock usually carries with it
the right to vote and frequently an exclusive right to do so. In selecting
common stocks for investment, the Subadviser generally focuses more on the
security's dividend paying capacity than on its potential for appreciation.
Money Market Instruments (All Funds)
The Funds may invest in Money market instruments. Money market instruments
include short-term U.S. Government securities, investment grade commercial paper
(unsecured promissory notes issued by corporations to finance their short-term
credit needs), certificates of deposit and bankers' acceptances. U.S. Government
securities include Treasury notes, bonds and bills, which are direct obligations
of the U.S. Government backed by the full faith and credit of the United States,
and securities issued by agencies and instrumentalities of the U.S. Government,
which may be guaranteed by the U.S. Treasury, may be supported by the issuer's
right to borrow from the Treasury or may be backed by the credit of the federal
agency or instrumentality itself.
Registered Investment Companies (All Funds except for Preferred Dividend Fund)
Each Fund may invest up to 10% of the value of its total assets in
dividend-paying securities of registered investment companies that invest
primarily in investment grade securities. A Fund will not acquire securities of
any one investment company if, immediately thereafter, it would own in the
aggregate more than 3% of such company's total outstanding voting securities or
securities issued by such company would have an aggregate value in excess of
4
5% of the its total assets. In addition, each Fund and all other investment
companies having the same investment adviser will not acquire securities of any
one investment company amounting in the aggregate to more than 10% of such
company's total outstanding voting stock. The Funds intend to invest in both
open- and closed-end investment companies whose distributions qualify for the
Dividends Received Deduction. To the extent that investment advisory and
brokerage expenses of an investment company are reflected in the price of its
shares held in a Fund's portfolio, there will be a duplication of such expenses.
Illiquid Securities (Global Dividend Fund and Preferred Dividend Fund)
The Funds may invest up to 5% of their total assets in securities for which
there is no readily available secondary market, including securities acquired in
private placements, joint ventures and partnerships. Securities issued in
private placements are "restricted securities" which are subject to restrictions
and, possibly, delays on resale. Restricted securities eligible for resale to
qualified institutional buyers pursuant to Rule 144A under the Securities Act of
1933 that are determined to be liquid by the Board of Trustees, or by the
Adviser under guidelines approved by the Trustees, are not subject to this
limitation.
Foreign Securities (All Funds)
The Funds may invest in U.S. dollar denominated securities of foreign issuers.
The securities may include investment grade preferred stocks of foreign
corporations and investment grade debt obligations of a variety of foreign
issuers, including foreign corporations and banks, foreign governments and their
agencies, instrumentalities and political subdivisions, and international and
supranational organizations such as the World Bank and the Asian Development
Bank. As an alternative to investing directly in foreign securities, the Funds
may invest in American Deposit Receipts ("ADRs"), which are instruments issued
by domestic banks representing an interest in securities foreign issuers held by
such banks and entitling the holder of the ADR, to all dividends, interest and
capital gains. The Funds only invest in those ADRs sponsored by the issuer of
the underlying foreign security. With the exception of Global Dividend Fund, no
Fund may invest in Russian securities of any type.
Global Dividend Fund invests at least 65% of its assets in dividend paying
securities of at least three countries including the United States, but may not
invest more than 25% of its total assets in any single country other than the
United States. Global Dividend Fund may invest in Russian securities (i)
denominated in U.S. dollars, (ii) traded on a major exchange and (iii) held
physically outside of Russia. It may invest up to 10% of its total assets in
Russian fixed income securities and up to 5% of its total assets in Russian
equity securities.
Temporary Defensive Strategies (All Funds)
There may be times when, in the managers' judgment, conditions in the securities
markets would make pursuing the Fund's investment strategy inconsistent with
achieving the Fund's investment objective. At such times, the managers may
employ alternative strategies primarily to seek to reduce fluctuations in the
value of the Fund's assets. In implementing defensive strategies, depending on
the circumstances, the Acquiring Fund and Select Dividend Trust may invest any
portion of its portfolio in U.S. Government securities, investment grade
corporate debt securities, high quality, short-term money market instruments and
in cash. Investment income received by a Fund with respect to these investments
will not be eligible for the Dividends Received Deduction when distributed to
shareholders and may increase the amount of additional dividends payable on the
preferred shares. During periods of stock market weakness or uncertain market or
economic conditions, as determined by the Adviser or Subadviser, Premium
Dividend Fund I may substantially increase its investments in the Low Volatility
Sector - consisting predominantly of auction preferred stocks and money market
instruments, as well as certain dividend paying securities which, in the
Adviser's or Subadviser's opinion are currently exhibiting greater price
stability than the securities in the Common and Preferred Stock Sectors. When in
the judgment of the Adviser or Subadviser a temporary defensive posture is
appropriate, Global Dividend Fund may invest its assets without limitation in
U.S. Government obligations, high grade (i.e., rated within the two highest
rating categories by a nationally recognized rating service) corporate debt
securities of domestic issuers, U.S. dollar denominated high rate debt
obligations of foreign issuers, high grade, short-term money market instruments
and cash. In implementing its temporary defensive strategies, depending on the
circumstances, Preferred Dividend Fund may invest an unlimited portion of its
portfolio in U.S. dollar denominated corporate debt securities, short-term money
market instruments, in each case rated within the two highest rating categories
by a nationally recognized statistical rating organization, U .S.
5
Government securities and cash. It is impossible to predict when, or for how
long, a Fund may use these alternative strategies.
Options and Futures Transactions (All Funds except for Preferred Dividend Fund)
The Funds do not purchase or sell financial futures contracts, options on
securities or options on financial futures contracts, but are permitted to do so
under their Investment Restrictions. If a Fund were to engage in such
transactions, it would do so in order to hedge against either a decline in the
value of securities included in the Fund's portfolio or against an increase in
the price of securities which it plans to purchase. In addition, a Fund might
seek to increase the current return of its portfolio by writing covered call or
covered put options. The Funds generally expect that any options and futures
transactions would be conducted on securities exchanges. In certain instances,
however, a Fund would purchase and sell options in the over-the-counter market.
The staff of the Securities and Exchange Commission (the "Commission") considers
over-the-counter options to be illiquid. A 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. There can be no assurance that the Fund would be able
to effect closing transactions at any particular time or at an acceptable price.
The use of options and futures involves the risk of imperfect correlation
between movements in options and futures prices and movements in the prices of
the securities that are being hedged. Expenses and losses incurred as a result
of these hedging strategies would reduce current return. In addition, revenue
derived from financial futures and options transactions will not qualify for the
Dividends Received Deduction.
Preferred Dividend Fund intends to engage in interest rate swap transactions and
to purchase or sell financial futures contracts, options on securities, options
on financial futures contracts or write covered call or covered put options in
order to hedge against either a decline in the value of securities included in
the Fund's portfolio or against an increase in the price of securities which it
plans to purchase or for other hedging or risk management purposes. Gains
realized from such transactions would not be eligible for the Dividends Received
Deduction when distributed to shareholders.
When-Issued and Delayed Delivery Purchases (All Funds)
The Funds may make contracts to purchase securities on a "when-issued" basis,
which means that delivery and payment for the securities take place at a future
date beyond the customary settlement date. The payment obligation and the
interest rate on the securities will be fixed at the time a Fund enters into the
commitment, but interest will not accrue to the Fund until delivery of and
payment for the securities. An amount of cash or short-term U.S. Government
securities equal to the Fund's commitment will be deposited in a segregated
account at the Fund's custodian bank to secure the Fund's obligation. Although
the Funds will generally purchase securities on a when-issued basis with the
intention of actually acquiring the securities for its portfolio (or for
delivery pursuant to options contracts it has entered into), the Funds may
dispose of a security prior to settlement if the Subadviser deems it advisable
to do so. The Funds may realize short-term gains or losses in connection with
such sales. Purchasing securities on a when-issued basis involves a risk of loss
if the value of the security to be purchased declines prior to the settlement
date. This risk is in addition to the risk of a decline in value of the Funds'
other assets. Furthermore, when such purchases are made through a dealer, the
dealer's failure to consummate the sale may result in the loss to the Fund of an
advantageous yield or price.
Securities Loans (All Funds)
The Funds do not currently intend to lend portfolio securities. In the future,
the Funds may seek to obtain additional income by making secured loans of its
portfolio securities with a value of up to 33 1/3% of its total assets. In such
transactions, the borrower pays to a Fund an amount equal to any dividends or
interest received on loaned securities. The Fund retains all or a portion of the
interest received on investment of cash collateral or receives a fee from the
borrower. Collateral for loaned securities may be invested in U.S. Government
securities and other liquid, high grade debt securities. Dividends or dividend
equivalents paid to the Funds with respect to securities loaned, and dividends
paid by the Funds representing other income from securities loans, will not
qualify for the Dividends Received Deduction. All securities loans will be made
pursuant to agreements requiring that the loans be continuously secured by
collateral in cash or short-term debt obligations at least equal at all times to
the market
6
value of the loaned securities. The Funds may pay reasonable finders',
administrative and custodial fees in connection with loans of its portfolio
securities. Although voting rights or rights to consent accompanying loaned
securities pass to the borrower, the Funds retain the right to call the loans at
any time on reasonable notice and will do so in order that the securities may be
voted by the Funds with respect to matters materially affecting the Funds'
investment. The Funds may also call a loan in order to sell the securities
involved. Lending portfolio securities involves risks of delay in recovery of
the loaned securities or, in some cases, loss of rights in the collateral should
the borrower commence an action relating to bankruptcy, insolvency or
reorganization. Accordingly, loans of portfolio securities will be made only to
borrowers considered by the Subadviser to be creditworthy under guidelines
adopted by the Board of Trustees.
Repurchase Agreements (All Funds)
The Funds may engage in repurchase agreements with broker-dealers, banks and
other financial institutions. A repurchase agreement is a contract pursuant to
which a Fund, against receipt of securities of at least equal value, agrees to
advance a specified sum to the financial institution which in turn agrees to
reacquire the securities at a mutually agreed upon time and price. Repurchase
agreements, which are usually for periods of one week or less, enable the Funds
to invest cash reserves at fixed rates of return. The Funds may enter into
repurchase agreements, provided that the their respective custodians always have
possession of securities serving as collateral whose market value at least
equals the amount of the repurchase obligation. To minimize the risk of loss,
the Funds enter into repurchase agreements only with financial institutions
considered by the Subadviser to be creditworthy under guidelines adopted by the
Board of Trustees. If an institution enters an insolvency proceeding, the
resulting delay in liquidation of the securities serving as collateral could
cause the Funds some loss, as well as legal expense, should the value of the
securities decline prior to liquidation. The Acquiring Fund, Premium Dividend
Fund I and Select Dividend Trust may invest up to 5% of their net assets in
repurchase agreements.
Borrowings (Preferred Dividend Fund and Global Dividend Fund)
The Funds reserve the right to borrow funds to the extent permitted by their
investment restrictions. Borrowing is a form of leverage and, in that respect,
entails risks comparable to those associated with the issuance of the Preferred
Shares. In addition, borrowing could reduce the portion of the Funds' otherwise
qualifying dividends that could be designated as qualifying for the Dividends
Received Deduction. While a Fund's borrowings exceed 5% of its net assets, the
Fund will not purchase additional portfolio securities.
Restricted Securities (Direct Placements) (All Funds)
The Acquiring Fund, Premium Dividend Fund I and Select Dividend Trust may invest
up to 20% of their net assets in securities purchased in direct placements.
Preferred Dividend Fund and Global Dividend Fund may invest up to 5% and 20% of
its total assets, respectively, in securities for which there is no readily
available secondary market, including securities acquired in private placements,
joint ventures and partnerships. Securities obtained by means of direct
placement are highly illiquid due to statutory or contractual restrictions on
resale. Accordingly, such securities are often referred to as restricted
securities. There is usually no readily available market for the resale of
restricted securities, which may generally be resold only in a privately
negotiated transaction with a limited number of purchasers or in a public
offering registered under the Securities Act of 1933. Such securities are
therefore unlike securities that are traded in the open market, which can be
expected to be sold immediately if the market is adequate. This lack of
liquidity creates special risks. In addition, restricted securities normally are
not rated. Direct placements of securities have frequently resulted in higher
yields to purchasers and more restrictive covenants to issuers, which may
provide greater protection for the purchaser, than comparable registered
securities. Because it has averted the expense and delay involved in a public
offering of its securities, an issuer is often willing to create more attractive
features in its securities issued in direct placements. Also, adverse conditions
in the public securities markets may at certain times preclude a public offering
of an issuer's securities.
Industry and Issuer Concentration (All Funds)
Under normal conditions, the Funds may concentrate their assets in specific
industries. The Acquiring Fund, Premium Dividend Fund I and Select Dividend
Trust invest more than more than 65% of their total assets in securities issued
by companies in the utilities industry. Global Dividend Fund invests at least
25% of its total assets
7
in securities issued by companies in the utilities industry. In addition, each
Fund other than Premium Dividend Fund I, may invest up to 25% of its total
assets in any one industry with the exception of any industry in which the
Fund's investment policy specifically permits greater concentration. Premium
Dividend Fund I may only invest up to 20% of its total assets in any one
industry, excluding utilities. Accordingly, the Funds may be subject to the
risks of such concentration and, in particular, will be affected by developments
in the utilities industry.
Additional Risk Information
Investing in each of the Funds involves certain risks, and each of the Funds are
subject to substantially similar risks. Primary risks of investing in the Funds
are described in the Proxy/Prospectus Statement. The following is a description
of certain of the risks inherent in investing in the Funds, whether as a primary
or a secondary risk. The Funds that are subject to each risk described below are
identified.
Risks of Concentration in the Utilities Industries (All Funds)
Risks that are intrinsic to the utility industries include:
o difficulty in obtaining an adequate return on invested capital,
o difficulty in financing large construction programs during an
inflationary period,
o restrictions on operations and increased cost and delays
attributable to environmental considerations and regulation,
o difficulty in raising capital in adequate amounts on reasonable
terms in periods of high inflation and unsettled capital markets,
o technological innovations that may render existing plants, equipment
or products obsolete,
o the potential impact of natural or man-made disasters,
o increased costs and reduced availability of certain types of fuel,
o occasionally reduced availability and high costs of natural gas for
resale,
o the effects of energy conservation,
o inexperience with and potential losses resulting from a developing
deregulatory environment, including losses and regulatory issues in
connection with energy trading,
o the effects of a national energy policy, and
o lengthy delays and greatly increased costs and other problems
associated with the design, construction, licensing, regulation and
operation of nuclear facilities for electric generation, including,
among other considerations, the problems associated with the use of
radioactive materials and the disposal of radioactive wastes.
There are substantial differences between the regulatory practices and policies
of various jurisdictions, and any given regulatory agency may make major shifts
in policy from time to time. There is no assurance that regulatory authorities
will, in the future, grant rate increases or that such increases will be
adequate to permit the payment of dividends on common stocks. Additionally,
existing and possible future regulatory legislation may make it even more
difficult for these utilities to obtain adequate relief. Certain of the issuers
of securities may own or operate nuclear generating facilities. Governmental
authorities may from time to time review existing policies and impose additional
requirements governing the licensing, construction and operation of nuclear
power plants. Prolonged changes in climatic conditions can also have a
significant impact on both the revenues of an electric and gas utility as well
as the expenses of a utility, particularly a hydro-based electric utility.
Utility companies in the United States and in foreign countries are generally
subject to regulation. In the United States, most utility companies are
regulated by state and/or federal authorities. Such regulation is intended to
ensure appropriate standards of service and adequate capacity to meet public
demand. Generally, prices are also regulated in the United States and in foreign
countries with the intention of protecting the public while ensuring that the
rate of return earned by utility companies is sufficient to allow them to
attract capital in order to grow and continue to
8
provide appropriate services. There can be no assurance that such pricing
policies or rates of return will continue in the future.
The nature of regulation of the utility industries is evolving both in the
United States and in foreign countries. In recent years, changes in regulation
in the United States increasingly have allowed utility companies to provide
services and products outside their traditional geographic areas and lines of
business, creating new areas of competition within the industries. In some
instances, utility companies are operating on an unregulated basis. Because of
trends toward deregulation and the evolution of independent power producers as
well as new entrants to the field of telecommunications, non-regulated providers
of utility services have become a significant part of their respective
industries.
Foreign utility companies are also subject to regulation, although such
regulations may or may not be comparable to those in the United States. Foreign
utility companies may be more heavily regulated by their respective governments
than utilities in the United States and, as in the United States, generally are
required to seek government approval for rate increases. In addition, many
foreign utilities use fuels that may cause more pollution than those used in the
United States, which may require such utilities to invest in pollution control
equipment to meet any proposed pollution restrictions. Foreign regulatory
systems vary from country to country and may evolve in ways different from
regulation in the United States.
The revenues of domestic and foreign utility companies generally reflect the
economic growth and development in the geographic areas in which they do
business. The Subadviser takes into account anticipated economic growth rates
and other economic developments when selecting securities of utility companies.
Risks of Concentration in the Electric Industry (All Funds)
The electric utility industry consists of companies that are engaged principally
in one of more of the following activities: the generation, transmission, sale
and distribution of electric energy, although many also provide other
energy-related services. Electric utility companies have historically been
subject to the risks associated with increases in fuel and other operating
costs, high interest costs on borrowings needed for capital construction
programs, costs associated with compliance with environmental and safety
regulations and changes in the regulatory climate.
The construction and operation of nuclear power facilities are subject to
increased scrutiny by, and evolving regulations of, the Nuclear Regulatory
Commission and state agencies having comparable jurisdiction. Increased scrutiny
might result in higher operating costs and higher capital expenditures, with the
risk that the regulators may disallow inclusion of these costs in rate
authorizations or the risk that a company may not be permitted to operate or
complete construction of a facility. In addition, operators of nuclear power
plants may be subject to significant costs for disposal of nuclear fuel and for
decommissioning such plants.
The introduction of competition into the industry as a result of deregulation
may result in lower revenue, lower credit ratings, increased default risk, and
lower electric utility security prices. Such increased competition may also
cause long-term contracts, which electric utilities previously entered into to
buy power, to become "stranded assets" which have no economic value. Any loss
associated with such contracts must be absorbed by ratepayers and investors. In
addition, in anticipation of increasing competition, some electric utilities
have acquired electric utilities overseas to diversify, enhance earnings and
gain experience in operating in a deregulated environment. In some instances,
such acquisitions have involved significant borrowings, which have burdened the
acquirer's balance sheet. There is no assurance that current deregulation
proposals will be adopted. However, deregulation in any form could significantly
impact the electric utilities industry. Following deregulation of the energy
markets in certain states, a number of companies have engaged in energy trading
and incurred substantial losses. Certain of these energy trading businesses have
been accused of employing improper accounting practices and have been required
to make significant restatements of their financial results. In addition,
several energy companies have been accused of attempting to manipulate the price
and availability of energy in certain states.
9
Risks of Concentration in the Telecommunications Industry (All Funds)
The telecommunications industry today includes both traditional telephone
companies, with a history of broad market coverage and highly regulated
businesses, and cable companies, which began as small, lightly regulated
businesses focused on limited markets. The telecommunications segment includes
companies that distribute telephone services and provide access to the telephone
networks as well as non-regulated activities such as cellular telephone
services, paging, data processing, equipment retailing, computer software and
hardware services. The presence of unregulated companies in this industry and
the entry of traditional telephone companies into unregulated or less regulated
businesses provide significant investment opportunities with companies which may
increase their earnings at faster rates than had been allowed in traditional
regulated businesses. Still, increasing competition, technological innovations
and other structural changes could adversely affect the profitability of such
utilities and the growth rate of their dividends. Given mergers, the development
of new products and potential legislation and enforcement changes, it is likely
that both traditional telephone companies and cable companies will soon provide
a greatly expanded range of utility services, including two-way video and
informational services to both residential, corporate and governmental
customers.
Risks of Concentration in the Gas Industry (All Funds)
The gas industry includes gas transmission companies and gas distribution
companies. In the United States, interstate transmission companies are regulated
by the Federal Energy Regulatory Commission, which is reducing its regulation of
the industry. Many companies have diversified into oil and gas exploration and
development, making returns more sensitive to energy prices.
Risks of Concentration in the Water Industry (All Funds)
Water supply utilities are companies that collect, purify, distribute and sell
water. In the United States and around the world the industry is highly
fragmented because most of the water utilities are owned by local authorities.
Companies in this industry are generally mature and are experiencing little or
no per capita volume growth.
There can be no assurance that the positive developments noted above, including
those relating to privatization and changing regulation, will occur or that risk
factors other than those noted above will not develop in the future.
Foreign Securities Risk (All Funds)
Investments in foreign securities offer potential benefits not available from
investments solely in securities of domestic issuers but also involve certain
risks that are not typically associated with investment in domestic securities.
There may be less publicly available information about a foreign issuer than
about a domestic issuer. Foreign issuers generally are not subject to
accounting, auditing and financial reporting standards comparable to those
applicable to domestic issuers. Most foreign securities markets may have
substantially less trading volume and are subject to less government supervision
than U.S. securities markets, and securities of many foreign issuers may be less
liquid and more volatile than securities of comparable domestic issuers. In
addition, there is generally less government regulation of securities exchanges,
securities dealers, and listed and unlisted companies in foreign countries than
in the United States. Foreign markets also have different clearance and
settlement procedures, and in certain markets, there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods during which a portion of the
assets of a Fund is uninvested and no return is earned thereon. Inability of a
Fund to make intended security purchases due to settlement problems could cause
the Fund to miss attractive investment opportunities. Inability to dispose of
portfolio securities due to settlement problems could result either in losses to
a Fund due to subsequent declines in value of the portfolio securities or, if
the Fund has entered into a contract to sell the securities, could result in
possible liability to the purchaser. Costs associated with transactions in
foreign securities are generally higher than costs associated with transactions
in U.S. securities. In addition, with respect to certain foreign countries,
there is a possibility of expropriation or confiscatory taxation, imposition of
withholding taxes on dividend or interest payments, limitations on the removal
of funds or other assets of a Fund and political or social instability or
diplomatic developments which could affect investments in those countries.
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, resources, self-sufficiency and balance of payments
position. The securities markets, values of securities, yields and risks
associated with securities markets in different countries may change
independently of each other. Dividends paid with respect to foreign securities
will not qualify for the
10
Dividends Received Deduction when distributed to shareholders. Certain
investments in foreign securities by a Fund may be subject to foreign
withholding taxes, which would reduce the total return on such investments and
the amounts available for distribution to holders of the Common Shares. The
Funds do not expect to qualify for an election that would enable the holders of
the Common Shares to use such amounts as credits or deductions against their
U.S. Federal income taxes.
Risks of Concentration in the Banking Industry (Global Dividend Fund)
Under normal market conditions Global Dividend Fund invests a portion (although
less than 25%) of its total assets in securities issued by domestic and foreign
companies engaged in the banking industry, including bank holding companies. Due
to Global Dividend Fund's investments in such industry, Global Dividend Fund
will have exposure to the risk factors which are characteristic of such
investments. In particular, the value of and investment return on Global
Dividend Fund's shares may be affected by economic or regulatory developments in
or related to the banking industry. Sustained increases in interest rates can
adversely affect the availability and cost of funds for lending activities of
banks, and a deterioration in general economic conditions could increase the
exposure of banks to credit losses. The banking industry is also subject to the
effects of concentration of loan portfolios in particular businesses such as
real estate, energy, agriculture or high technology-related companies, national
and local regulation, and competition within such industry. In addition, Global
Dividend Fund's investments in commercial banks located in several foreign
countries are subject to additional risks due to the combination in such banks
of commercial banking and diversified securities activities.
Other Types of Investment Risk (All Funds)
The Funds are subject to general risks associated with their investment
strategies. These risks are detailed below:
Correlation Risk. The risk that changes in the value of a hedging instrument
will not match those of the asset being hedged (hedging is the use of one
investment to offset the effects of another investment). Incomplete correlation
can result in unanticipated risks (e.g., short sales, financial futures and
options; securities and index options, currency contracts).
Credit Risk. The risk that the issuer of a security, or the counterparty to a
contract, will default or otherwise become unable to honor a financial
obligation (e.g., borrowing; reverse repurchase agreements, repurchase
agreements, securities lending, non-investment-grade securities, financial
futures and options; securities and index options).
Information Risk. The risk that key information about a security or market is
inaccurate or unavailable (e.g., non-investment-grade securities, foreign
equities).
Interest Rate Risk. The risk of market losses attributable to changes in
interest rates. With fixed-rate securities, a rise in interest rates typically
causes a fall in values, while a fall in rates typically causes a rise in values
(e.g., non-investment-grade securities, financial futures and options;
securities and index options).
Leverage Risk. Associated with securities or practices (such as borrowing) that
multiply small index or market movements into large changes in value (e.g.,
borrowing; reverse repurchase agreements, when-issued securities and forward
commitments).
Hedging Risk. When a derivative (a security whose value is based on another
security or index) is used as a hedge against an opposite position that the fund
also holds, any loss generated by the derivative should be substantially offset
by gains on the hedged investment, and vice versa. While hedging can reduce or
eliminate losses, it can also reduce or eliminate gains. (e.g., short sales,
financial futures and options securities and index options; currency contracts).
Speculative Risk. To the extent that a derivative is not used as a hedge, the
fund is directly exposed to the risks of that derivative. Gains or losses from
speculative positions in a derivative may be substantially greater than the
derivative's original cost. (e.g., short sales, financial futures and options
securities and index options; currency contracts).
11
Liquidity Risk. The risk that certain securities may be difficult or impossible
to sell at the time and the price that the seller would like. The seller may
have to lower the price, sell other securities instead or forego an investment
opportunity, any of which could have a negative effect on fund management or
performance (e.g., non-investment-grand securities, short sales, restricted and
illiquid securities, financial futures and options securities and index options;
currency contracts).
Management Risk. The risk that a strategy used by a fund's management may fail
to produce the intended result. Common to all investment companies.
Market Risk. The risk that the market value of a security may move up and down,
sometimes rapidly and unpredictably. These fluctuations may cause a security to
be worth less than the price originally paid for it, or less than it was worth
at an earlier time. Market risk may affect a single issuer, industry, sector of
the economy or the market as a whole. Common to all stocks and bonds and the
investment companies that invest in them (e.g., short sales, short-term trading,
when-issued securities and forward commitments, non-investment-grade securities,
foreign equities, financial futures and options; securities and index options
restricted and illiquid securities).
Natural Event Risk. The risk of losses attributable to natural disasters, crop
failures and similar events (e.g., foreign equities).
Opportunity Risk. The risk of missing out on an investment opportunity because
the assets necessary to take advantage of it are tied up in less advantageous
investments (e.g., short sales, when-issued securities and forward commitments;
financial futures and options; securities and index options, currency
contracts).
Political Risk. The risk of losses attributable to government or political
actions, from changes in tax or trade statutes to governmental collapse and war
(e.g., foreign equities).
Valuation Risk. The risk that a fund has valued certain of its securities at a
higher price than it can sell them for (e.g., non-investment-grade securities,
restricted and illiquid securities).
Fundamental Investment Restrictions
The following investment restrictions of each Fund may not be changed without
the approval of a majority of a Fund's outstanding voting securities which, as
used in this Statement of Additional Information, means the approval by the
lesser of (1) the holders of 67% or more of a Fund's shares represented at a
meeting if more than 50% of a Fund's outstanding shares are present in person or
by proxy at that meeting or (2) more than 50% of a Fund's outstanding shares.
For comparison purposes the fundamental investment restrictions of the Acquiring
Fund are compared against the restrictions of the other Acquired Funds and where
several Funds share identical restrictions these have been combined:
Premium Dividend
Fund I and Select Global Dividend Fund and
Acquiring Fund Dividend Trust Preferred Dividend Fund
-------------------------------------------------------------------------------------------------------
1. Borrow money, provided that the Same 1. Borrow money, provided that the
Fund may (i) borrow amounts not Fund may (i) borrow amounts not
exceeding 5% of the value of its exceeding 15% of the value of its
total assets (not including the total assets (including the amount
amount borrowed) for temporary borrowed) for temporary or emergency
purposes and (ii) issue senior purposes or for tender offers or
securities, as defined in the 1940 otherwise to repurchase its shares
Act, to the extent permitted under and (ii) issue senior securities, as
the 1940 Act. defined in the 1940 Act, to the
extent permitted under the 1940 Act.
2. Pledge, hypothecate, mortgage or Same 2. Pledge, hypothecate, mortgage or
otherwise encumber its assets, except otherwise encumber its assets, except
to
12
to secure borrowings permitted by the secure borrowings or
preceding paragraph. Collateral senior securities permitted by the
arrangements with respect to margin preceding paragraph. Collateral
or futures contracts and options are arrangements with respect to margin,
not deemed to be pledges or other swap transactions, risk management
encumbrances for purposes of this options and when-issued and forward
restriction. commitment transactions are not
deemed to be pledges or other
encumbrances for purposes of this
restriction.
3. Purchase securities on margin, Same 3. Purchase securities on margin,
except the Fund may obtain such except the Fund may obtain such
short-term credits as may be short-term credits as may be
necessary for the clearance of necessary for the clearance of
security transactions and may make security transactions and may make
margin deposits in connection with margin deposits in connection with
transactions in options, futures transactions in options, [swap
contracts and options on such transactions and risk management
contracts. transactions.][bracketed text
appears in Preferred Dividend Fund
only]
4. Make short sales of securities or Same Same
maintain a short position for the
account of the Fund, unless at all
times when a short position is open
the Fund owns an equal amount of such
securities or owns securities which,
without payment of any further
consideration, are convertible into
or exchangeable for securities of the
same issue as, and in equal amounts
to, the securities sold short.
5. Underwrite securities issued by Same Same
other persons; except to the extent
that in connection with the
disposition of its portfolio
investments it may be deemed to be an
underwriter under the federal
securities laws.
6. Purchase or sell real estate, Same Same
although the Fund may purchase
securities of issuers which deal in
real estate, securities which are
secured by interests in real estate
and securities representing interests
in real estate.
7. Purchase or sell commodities or Same 7. Purchase or sell commodities or
commodity contracts, except that the commodity contracts, except that the
Fund may purchase or sell financial Fund may purchase or sell financial
futures contracts and related options. futures contracts and related
options [and enter into swap
transactions]. [bracketed text
appears in Preferred Dividend Fund
only]
13
8. Make loans, except by purchase of Same Same
debt obligations in which the Fund
may invest consistent with its
investment policies, by entering into
repurchase agreements, or through the
lending of its portfolio securities.
9. Purchase or retain the securities Same None
of any issuer if, to the knowledge of
the Fund, those officers and Trustees
of the Fund and officers and
Directors of the Adviser who each own
beneficially more than .50 of 1% of
the securities of that issuer
together own more than 5% of such
issuer.
10. Invest in securities of any Same Same
issuer if, immediately after such
investment, more than 5% of the total
assets of the Fund (taken at current
value) would be invested in the
securities of such issuer or acquire
more than 10% of the outstanding
voting securities of any issuer,
provided that this limitation does
not apply to obligations issued or
guaranteed as to interest and
principal by the U.S. Government or
its agencies or instrumentalities or
to repurchase agreements secured by
such obligations and that up to 25%
of the Fund's total assets (at
current value) may be invested
without regard to this limitation.
11. Invest more than 25% of the value Preferred Dividend Fund Invest more than 25% of the value of
of its total assets in the securities I: its total assets in the securities
of issuers primarily engaged in any Invest more than 20% of of issuers primarily engaged in any
one industry except the utilities the value of its total one industry [except the utilities
industry, provided that this assets in the industry][bracketed text appears in
limitation does not apply to securities of issuers Global Dividend Fund only], provided
obligations issued or guaranteed as primarily engaged in that this limitation does not apply
to interest and principal by the U.S. any one industry except to obligations issued or guaranteed
Government or its agencies or the utilities industry, as to interest and principal by the
instrumentalities or to repurchase provided that this U.S. Government or its agencies or
agreements secured by such limitation does not instrumentalities or to repurchase
obligations or to bank money market apply to obligations agreements secured by such
instruments. issued or guaranteed as obligations.
to interest and
principal by the U.S.
Government or its
agencies or
instrumentalities or to
repurchase agreements
secured by such
obligations or to bank
money market instruments.
14
Select Dividend Trust:
Same
12. Buy or sell oil, gas or other Same None
mineral leases, rights or royalty
contracts although it may purchase
securities of issuers which deal in,
represent interests in or are secured
by interests in such leases, rights
or contracts.
13. Purchase securities of any issuer Same None
for the purpose of exercising control
or management, except in connection
with a merger, consolidation,
acquisition or reorganization.
Non-Fundamental Investment Restrictions of Preferred Dividend Fund
Preferred Dividend Fund will abide by the following non-fundamental investment
restrictions pursuant to certain restrictions set forth in the 1940 Act. In the
event of a change in the law liberalizing the following restrictions, such
restrictions would be automatically revised in conformity with such change.
Preferred Dividend Fund may not:
1. Acquire more than 10% of the outstanding voting securities of any insurance
company;
2. Acquire any security of an issuer that, in its most recent fiscal year,
derived more than 15% of its gross revenues from activities as a broker, dealer
or underwriter, unless (i) immediately after the acquisition of any equity
security (limited, at the time of acquisition, to a "margin security" as defined
in Regulation T promulgated by the Federal Reserve System) of the issuer,
Preferred Dividend Fund owns not more than 5% of the outstanding securities of
that class of the issuer's equity securities; (ii) immediately after the
acquisition of any debt security (rated, at the time of acquisition, investment
grade by the Board of Trustees), Preferred Dividend Fund owns not more than 10%
of the outstanding principal amount of the issuer's debt securities; and (iii)
immediately after any such acquisition, Preferred Dividend Fund has invested not
more than 5% of the value of its total assets in securities of the issuer.
TRUSTEES AND OFFICERS OF THE FUNDS
General
The business of the Funds is managed by each Fund's Board of Trustees, who elect
officers who are responsible for the day-to-day operations of each Fund and who
execute policies formulated by the Trustees. The Acquiring Fund and the Acquired
Funds share the same Board of Trustees and executive officers. The tables below
list the trustees and executive officers of the Funds and their term in office,
their principal occupations during the last five years, other directorships held
by trustees and their affiliations, if any, either within the John Hancock Fund
Complex or elsewhere. The term "Fund Complex" includes each of the investment
companies advised by the Adviser as of the date of this Statement of Additional
Information. Trustees of the Funds generally serve until resignation, retirement
age or until their successors are duly elected and qualified.
15
Other
Name, (Age), Address(1) Principal Occupations and other Number of John Directorships
and Position with the Directorships During the Past Five Hancock Funds held by
Funds Years Trustee Since Overseen Director
-----------------------------------------------------------------------------------------------------------------
Charles L. Ladner Chairman and Trustee, Dunwoody 1992 (A-D) 160 Trustee of
Born: 1938 Village, Inc. (retirement services) 1993 (E) other funds
Independent Trustee (until 2003); Senior Vice President in the Fund
and Chief Financial Officer, UGI Complex
Corporation (public utility holding
company) (retired 1998); Vice
President and Director for AmeriGas,
Inc. (retired 1998); Director of
AmeriGas Partners, L.P. (gas
distribution) (until 1997); Director,
EnergyNorth, Inc. (until 1995);
Director, Parks and History
Association (since 2001).
James F. Carlin Director and Treasurer, Alpha 1988(A) 53 Trustee of
Born: 1940 Analytical Laboratories (chemical 1989(B) other funds
Independent Trustee analysis); Part Owner and Treasurer, 1990(C) in the Fund
Lawrence Carlin Insurance Agency, 1992(D) Complex
Inc. (since 1995); Part Owner and 1993(E)
Vice President, Mone Lawrence Carlin
Insurance Agency, Inc. (until 2005);
Director/Treasurer, Rizzo Associates
(engineering) (until 2000); Chairman
and CEO, Carlin Consolidated, Inc.
(management/investments);
Director/Partner, Proctor Carlin &
Co., Inc. (until 1999); Trustee,
Massachusetts Health and Education
Tax Exempt Trust; Director of the
following: Uno Restaurant Corp.
(until 2001), Arbella Mutual
(insurance) (until 2000), HealthPlan
Services, Inc. (until 1999), Flagship
Healthcare, Inc. (until 1999), Carlin
Insurance Agency, Inc. (until 1999);
Chairman, Massachusetts Board of
Higher Education (until 1999).
James R. Boyle* Chairman and Director, John Hancock 2005(A-E) 260 Trustee of
Born: 1959 Advisers, LLC, (the "Adviser"), The other funds
Non-Independent Trustee Berkeley Financial Group, LLC in the Fund
Non-Independent Trustee ("The Complex
Berkeley Group") (holding company)
and John Hancock Funds, LLC. ("John
Hancock Funds") (since 2005);
President, John Hancock Annuities;
Executive Vice President, John
Hancock Life Insurance Company (since
2004); President U.S. Annuities;
Senior Vice President, The
Manufacturers Life Insurance Company
(U.S.A.) (prior to 2004).
John A. Moore President and Chief Executive 2002 (A-E) 53 Trustee of
Born: 1939 Officer, Institute for Evaluating other funds
Independent Trustee Health Risks, (nonprofit institution) in the Fund
(until 2001); Chief Scientist, Complex
Sciences International (health
research) (until 2003); Principal,
Hollyhouse (consulting) (since 2000);
Director, CIIT (nonprofit
research) (since 2002).
16
Patti McGill Peterson+ Executive Director, Council for 2002(A-E) 53 Trustee of
Born: 1943 International Exchange of Scholars other funds
Independent Trustee and Vice President, Institute of in the Fund
International Education (since 1998); Complex
Senior Fellow, Cornell Institute of
Public Affairs, Cornell University
(until December 1998); Former
President of Wells College and St.
Lawrence University; Director,
Niagara Mohawk Power Corporation
(electric utility) (until 2003);
Director, Ford Foundation,
International Fellowships Program
(since 2002); Director, Lois Roth
Endowment (since 2002); Director,
Council for International Educational
Exchange (since 2003).
Richard P. Chapman Jr. President and Chief Executive 2005(A-E) 53 Trustee of
Born: 1935 Officer, Brookline Bancorp., Inc. other funds
Independent Trustee (lending) (since 1972); Chairman and in the Fund
Director, Lumber Insurance Co. Complex
(insurance) (until 2000); Chairman
and Director, Northeast Retirement
Services, Inc. (retirement
administration) (since 1998).
Ronald R. Dion+ Chairman and Chief Executive Officer, 1998(A-E) 53 Trustee of
Born 1946 R. M. Bradley& Co., Inc.; Director, other funds
Chairman and Independent The New England Council and in the Fund
Trustee Massachusetts Roundtable; Director, Complex
Boston Stock Exchange; Trustee, North
Shore Medical Center; Director, BJ's
Wholesale Club, Inc. and a
Corporator of the Eastern Bank;
Trustee, Emmanuel College; Director,
Boston Municipal Research Bureau;
Member of the Advisory Board, Carroll
Graduate School of Management at
Boston College.
Steven R. Pruchansky Chairman and Chief Executive Officer, 1992(A-D) 53 Trustee of
Born: 1944 Greenscapes of Southwest Florida, 1993(E) other funds
Independent Trustee Inc. (since 2000); Director and in the Fund
President, Greenscapes of Southwest Complex
Florida, Inc. (until 2000); Managing
Director, JonJames, LLC (real
estate) (since 2001); Director,
First Signature Bank & Trust Company
(until 1991); Director, Mast Realty
Trust (until 1994); President,
Maxwell Building Corp. (until 1991).
William H. Cunningham Former Chancellor, University of 1994(A-E) 160 Trustee of
Born: 1944 Texas System and former President of other funds
Independent Trustee the University of Texas, Austin, in the Fund
Texas; Chairman and CEO, IBT Complex;
Technologies (until 2001); Director Director,
of the following: Hire.com (until Southwest
2004), STC Broadcasting, Inc. and Airlines;
Sunrise Television Corp. (until
2001), Symtx, Inc. (electronic
manufacturing) (since 2001),
Adorno/Rogers Technology, Inc. (until
2004), Pinnacle Foods Corporation
(until 2003), rateGenius (until
2003), Jefferson-Pilot Corporation
(diversified life insurance
company)(until 2006), New Century
Equity Holdings (formerly Billing
Concepts) (until 2001), eCertain
(until 2001), ClassMap.com (until
2001), Agile Ventures (until 2001),
AskRed.com (until 2001), Southwest
Airlines, Introgen and Viasystems,
Group, Inc. (electronic manufacturer)
(until 2003); Advisory Director,
Interactive Bridge, Inc. (college
fundraising) (until 2001); Advisory
Director, Q Investments (until 2003);
Advisory Director, JP Morgan Chase
Bank (formerly Texas Commerce Bank -
Austin)(since 1988), LIN Television
(since 2002), WilTel Communications
(until 2003) and Hayes Lemmerz
International, Inc. (diversified
automotive parts supply company)
(since 2003)
17
(1) Business address for Independent and Non-Independent Trustees is: 601
Congress Street, Boston, Massachusetts 02210.
* "Interested person" (as defined in the 1940 Act) of the Funds and the
Adviser. The Non-Independent Trustee holds positions with the Funds'
Adviser, underwriter and/or certain other affiliates.
+ Trustee representing the holders of the preferred shares.
(A) Premium Dividend Fund I
(B) Premium Dividend Fund II
(C) Select Dividend Trust
(D) Global Dividend Fund
(E) Preferred Dividend Fund
Principal Officers who are not Trustees
Name, (Age), Address(1) and
Position with the Funds Principal Occupation(s) during the Past 5 Years Officer Since
-------------------------------------------------------------------------------------------------------------------
Keith F. Hartstein Senior Vice President, Manulife Financial Corporation (since 2004); 2005
Born: 1956 Director, President and Chief Executive Officer, the Adviser and
President and Chief The Berkeley Group (holding company); Director, President and Chief
Executive Officer Executive Officer, John Hancock Funds; Director, President and
Chief Executive Officer, Sovereign Asset Management LLC
("Sovereign"); Director, John Hancock Signature Services, Inc.;
President, John Hancock Trust, John Hancock Funds II and John
Hancock Funds III; Director, Chairman and President, NM Capital
Management, Inc. (NM Capital); Chairman, Investment Company
Institute Sales Force Marketing Committee (since 2003); Executive
Vice President, John Hancock Funds, LLC (until 2005).
Gordon Shone Treasurer, John Hancock Funds (since 2006); John Hancock Funds II, 2006
Born: 1956 John Hancock Funds III and John Hancock Trust (since 2005); Vice
Treasurer President and Chief Financial Officer, John Hancock Trust
(2003-2005); Senior Vice President, John Hancock Life Insurance
Company (U.S.A.) (since 2001); Vice President, John Hancock
Investment Management Services, Inc. and John Hancock Advisers, LLC
(since 2006), The Manufacturers Life Insurance Company (U.S.A.)
(1998 to 2000).
Francis V. Knox, Jr. Vice President and Chief Compliance Officer for John Hancock 2005
Born: 1947 Investment Company, John Hancock Life Insurance Company (U.S.A.),
Chief Compliance Officer John Hancock Life Insurance Company, John Hancock Trust, John
Hancock Funds, John Hancock Funds II and John Hancock Funds III
(since 2005); Fidelity Investments - Vice President and Assistant
Treasurer, Fidelity Group of Funds (until 2004); Fidelity
Investments - Vice President and Ethics & Compliance Officer (until
2001).
John G. Vrysen Director, Executive Vice President and Chief Financial Officer, the 2005
Born: 1955 Adviser, Sovereign, the Berkeley Group, John Hancock Trust, John
Chief Financial Officer Hancock Funds, John Hancock Funds II and John Hancock Funds III
(since 2005);Vice President and General Manager, Fixed Annuities,
U.S. Wealth Management (until 2005).Vice President, Operations
Manulife Wood Logan 7/00-9/04.
Thomas Kinzler Vice President and Counsel for John Hancock Life Insurance Company 2006
Born: 1955 (U.S.A.) (since 2006); Secretary and Chief Legal Officer, John
Secretary and Chief Legal Hancock Funds, John Hancock Funds II, John Hancock Funds III and
Officer John Hancock Trust (since 2006); Vice President and Associate
General Counsel for Massachusetts Mutual Life Insurance Company
(1999-2006); Secretary and Chief Legal Counsel for MML Series
Investment Fund (2000-2006); Secretary and Chief Legal Counsel for
MassMutual Institutional Funds (2000-2004); Secretary and Chief
Legal Counsel for MassMutual Select Funds and MassMutual Premier
Funds (2004-2006).
(1) Business address for officers is 601 Congress Street, Boston,
Massachusetts 02210-2805.
18
Board Committees
Each Fund's Board of Trustees currently has four standing committees (each a
"Committee"): the Audit Committee, the Governance Committee, the
Contracts/Operations Committee and the Investment Performance Committee. Each
Committee is comprised of Independent Trustees who are not "interested persons"
as defined in the 1940 Act.
The current membership of each Committee is set forth below.
Audit Governance Contracts/Operations Investment Performance
--------------------------------------------------------------------------------------------------------------
Messrs. Chapman, Ladner Moore All Independent Trustees Messrs. Carlin, All Independent Trustees
and Ms. Peterson Cunningham, Dion and
Pruchansky
Each Committee held five meetings during each Fund's fiscal year. With respect
to each Fund, no Trustee attended fewer than 75% of the aggregate of: (1) the
total number of meetings of the Trustees of the Fund; and (2) the total number
of meetings held by all Committees of the Trustees on which they served. The
Funds hold joint meetings of the Trustees and all Committees.
Audit Committee. All members of each Fund's Audit Committee are independent
under the New York Stock Exchange's Revised Listing Rules and each member is
financially literate with at least one having accounting or financial management
expertise. The Board has adopted a written charter for the Audit Committee,
which is attached as Attachment 1. The Audit Committee recommends to the full
Board the appointment of outside auditors for the Funds, monitors and oversees
the audits of the Funds, communicates with both independent auditors and
internal auditors on a regular basis and provides a forum for the auditors to
report and discuss any matters they deem appropriate at any time. Each Audit
Committee reports that it has (i) reviewed and discussed each Fund's audited
financial statements with management; (ii) discussed with the independent
auditors the matters relating to the quality of each Fund's financial reporting
as required by SAS 61; (iii) received written disclosures and an independence
letter from the independent auditors required by Independent Standards Board
Standard No. 1, and discussed with the auditors their independence; and (iv)
based on these discussions, recommended to the Board that each Fund's financial
statements be included in each Fund's annual report for the last fiscal year
(see Attachment 2).
Governance Committee. All of the Independent Trustees are members of the
Governance Committee. The Governance Committee makes recommendations to the
Board on issues related to corporate governance applicable to the Independent
Trustees and to the composition and operation of the Board and recommends
nominees to serve as members of the Board. Among other duties, the Governance
Committee determines the compensation paid to the Independent Trustees. All
members of the Governance Committee are independent under the New York Stock
Exchange's Revised Listing Rules and are Independent Trustees. The Board has
adopted a written charter for the Governance Committee, which is attached as
Attachment 3 to this proxy. The Governance Committee selects and nominates for
elections candidates for Independent Trustees. The Trustees who are not
Independent Trustees and the Officers of the Fund are nominated and selected by
the Board.
In reviewing a potential nominee and in evaluating the renomination of current
Independent Trustees, the Governance Committee expects to apply the following
criteria: (i) the nominee's reputation for integrity, honesty and adherence to
high ethical standards; (ii) the nominee's business acumen, experience and
ability to exercise sound judgments; (iii) a commitment to understand the Fund
and the responsibilities of a trustee of an investment company; (iv) a
commitment to regularly attend and participate in meetings of the Board and its
Committees, (v) the ability to understand potential conflicts of interest
involving management of the Fund and to act in the interests of all
shareholders; and (vi) the absence of a real or apparent conflict of interest
that would impair the nominee's ability to represent the interests of all the
shareholders and to fulfill the responsibilities of an Independent Trustee. The
Governance Committee does not necessarily place the same emphasis on each
criteria and each nominee may not have each of these qualities.
As long as an existing Independent Trustee continues, in the opinion of the
Governance Committee, to satisfy the criteria listed above, the Committee
generally would favor the renomination of an existing Trustee rather than a new
candidate. Consequently, while the Governance Committee will consider nominees
recommended by shareholders to serve as Trustees, the Governance Committee may
only act upon such recommendations if there is a vacancy on
19
the Board or the Governance Committee determines that the selection of a new or
additional Trustee is in the best interests of the Funds. In the event that a
vacancy arises or a change in Board membership is determined to be advisable,
the Governance Committee will, in addition to any shareholder recommendations,
consider candidates identified by other means, including candidates proposed by
members of the Governance Committee. The Governance Committee may retain a
consultant to assist the Committee in a search for a qualified candidate.
Any shareholder recommendation must be submitted in compliance with all of the
pertinent provisions of Rule 14a-8 under the 1934 Act and a Fund's by-laws to be
considered by the Governance Committee. In evaluating a nominee recommended by a
shareholder, the Governance Committee, in addition to the criteria discussed
above, may consider the objectives of the shareholder in submitting that
nomination and whether such objectives are consistent with the interests of all
shareholders. If the Board determines to include a shareholder's candidate among
the slate of its designated nominees, the candidate's name will be placed on the
Fund's proxy card. If the Board determines not to include such candidate among
its designated nominees and the shareholder has satisfied the requirements of
Rule 14a-8, the shareholder's candidate will be treated as a nominee of the
shareholder who originally nominated the candidate. In that case, the candidate
will not be named on the proxy card distributed with the Fund's proxy statement.
Each of the nominees for election as Trustee was recommended by the Governance
Committee.
Contract/Operations Committee. The Contracts/Operations Committee oversees the
initiation, operation and renewal of the various contracts between the Fund and
other entities. These contracts include advisory, custodial and transfer agency
agreements and arrangements with other service providers.
Investment Performance Committee. The Investment Performance Committee monitors
and analyzes the investment performance of the Funds generally, consults with
the Adviser as necessary if a Fund is considered to require special attention,
and reviews fund peer groups and other comparative standards as necessary.
Trustee Beneficial Ownership of Securities
Securities of the Funds
The following table provides a dollar range indicating each Trustee's ownership
of equity securities of the Funds as well as aggregate holdings of shares of
equity securities of all John Hancock funds overseen by the Trustee, as of
January 25, 2007.
Trustee Holdings(1)
Premium Dividend Fund I Premium Dividend Fund II Select Dividend Trust
Trustee Shares Dollar Range Shares Dollar Range Shares Dollar Range
-------------------------------------------------------------------------------------------------------------------
Independent Trustees
-------------------------------------------------------------------------------------------------------------------
James F. Carlin 4,150 $10,001 - $50,000 1,200 $10,001 - $50,000 1,000 $10,001 - $50,000
Richard P. Chapman, Jr. -- -- -- -- -- --
William H. Cunningham -- -- -- -- -- --
Ronald R. Dion 100 $1 - $10,000 -- -- 65 $1 - $10,000
Charles L. Ladner 390 $1 - $10,000 200 $1 - $10,000 200 $1 - $10,000
Dr. John A. Moore 100 $1 - $10,000 100 $1 - $10,000 100 $1 - $10,000
Patti McGill Peterson 153 $1 - $10,000 130 $1 - $10,000 102 $1 - $10,000
Steven R. Pruchansky 116 $1 - $10,000 200 $1 - $10,000 100 $1 - $10,000
-------------------------------------------------------------------------------------------------------------------
Non-Independent Trustee
-------------------------------------------------------------------------------------------------------------------
James R. Boyle -- -- -- -- -- --
20
Global Dividend Fund Preferred Dividend Fund All John Hancock Funds
Overseen
Trustee Shares Dollar Range Shares Dollar Range Dollar Range
-------------------------------------------------------------------------------------------------------------------
Independent Trustees
-------------------------------------------------------------------------------------------------------------------
James F. Carlin 100 $1 - $10,000 100 $1 - $10,000 Over $100,000
Richard P. Chapman, Jr. -- -- -- -- Over $100,000
William H. Cunningham -- -- -- -- Over $100,000
Ronald R. Dion 100 $1 - $10,000 65 $1 - $10,000 Over $100,000
Charles L. Ladner 235 $1 - $10,000 200 $1 - $10,000 Over $100,000
Dr. John A. Moore 100 $1 - $10,000 100 $1 - $10,000 Over $100,000
Patti McGill Peterson 108 $1 - $10,000 -- -- Over $100,000
Steven R. Pruchansky 300 $1 - $10,000 275 $1 - $10,000 Over $100,000
-------------------------------------------------------------------------------------------------------------------
Non-Independent Trustee
-------------------------------------------------------------------------------------------------------------------
James R. Boyle -- -- -- -- --
(1) The amounts reflect the aggregate dollar range of equity securities
beneficially owned by the Trustees in the Funds and in all John Hancock funds
overseen by each Trustee. For each Trustee, the amounts reflected include share
equivalents of certain John Hancock funds in which the Trustee is deemed to be
invested pursuant to the Deferred Compensation Plan for Independent Trustees, as
more fully described under "Remuneration of Trustees and Officers." The
information as to beneficial ownership is based on statements furnished to the
Funds by the Trustees. Each of the Trustees has all voting and investment powers
with respect to the shares indicated. None of the Trustees beneficially owned
individually, and the Trustees and executive officers of the Funds as a group
did not beneficially own, in excess of one percent of the outstanding shares of
any Fund.
The trustees and officers of the Funds do not own one percent or more of any
class of any Fund's securities.
Independent Trustees Securities Transactions
None of the Independent Trustees of the Funds, or their immediate family
members, has engaged in any transactions with the Funds, any officer of the
Funds or any registered investment company or private fund advised by the
Adviser or Subadviser or any officer of the Adviser or Subadviser the value of
which exceeds $60,000.
Compensation
The following table provides information regarding the compensation paid by the
Funds and the other investment companies in the John Hancock fund complex to the
Independent Trustees for their services for each Fund's most recently completed
fiscal year. Any non-Independent Trustees and each of the officers of the Funds
are interested persons of the Adviser, are compensated by the Adviser and/or its
affiliates, and receive no compensation from the Funds for their services.
Total
Premium Premium Select Global Compensation
Dividend Dividend Dividend Dividend Preferred from Fund and
Trustee Fund I(1) Fund II(2) Trust(3) Fund(4) Dividend(5) Fund Complex(6)
------------------------------------------------------------------------------------------------------------------
James F. Carlin $ 1,097 $ 1,418 $ 1,288 $ 873 $ 969 $ 5,645
Richard P. Chapman, Jr.* $ 1,105 $ 1,429 $ 1,292 $ 877 $ 971 $ 5,674
William H. Cunningham* $ 970 $ 1,264 $ 1,194 $ 790 $ 911 $ 5,129
Ronald R. Dion* $ 686 $ 891 $ 720 $ 496 $ 494 $ 3,287
Charles L. Ladner $ 579 $ 731 $ 768 $ 448 $ 644 $ 3,170
Dr. John A. Moore* $ 1,297 $ 1,677 $ 1,447 $ 1,003 $ 1,058 $ 6,482
Pattie McGill Peterson $ 570 $ 736 $ 781 $ 458 $ 596 $ 3,141
Steven R. Pruchansky* $ 871 $ 1,139 $ 1,092 $ 709 $ 781 $ 4,592
--------------------------------------------------------------------------------------
TOTALS $ 7,175 $ 9,285 $ 8,582 $ 5,654 $ 6,424 $37,120
(1) Compensation is for fiscal year ended September 30, 2006
(2) Compensation is for fiscal year ended October 31, 2006
(3) Compensation is for fiscal year ended June 30, 2006
(4) Compensation is for fiscal year ended July 31, 2006
(5) Compensation is for fiscal year ended May 31, 2006
(6) The total compensation paid by the John Hancock fund complex to the
Independent Trustees for the calendar year ended December 31, 2006. All the
Independent Trustees were Trustees of 53 funds in the John Hancock fund complex
were Trustees of funds except Mr. Cunningham and Mr. Ladner who were Trustees of
160 funds.
*As of September 30, 2006, the value of the aggregate accrued deferred
compensation amount from all funds in the John Hancock fund complex for Mr.
Chapman was $78,064, Mr. Cunningham was $155,553, Mr. Dion was $511,282, Dr.
Moore was $301,295, Mr. Pruchansky was $301,658 and for Mr. Smith was $318,001
under the John Hancock Deferred Compensation Plan for Independent Trustees (the
"Plan"). Under the Plan, an Independent Trustee may elect to have deferred fees
invested by a Fund in shares of one or more funds in the John Hancock fund
complex, and the amount paid to the Trustees under the Plan will be determined
based upon the performance of such investments. Deferral of Trustees' fees does
not obligate any Fund to retain the services of any Trustee or obligate any Fund
to pay any particular level of compensation to the Trustee.
As of December 21, 2006, officers and Trustees of the Fund as a group owned less
than 1% of the outstanding shares of the Fund. To the knowledge of each Fund, no
persons owned of record or beneficially 5% or more of any class of the Fund's
outstanding shares of the Fund.
21
PROXY VOTING POLICIES
The Adviser and the Subadviser have jointly adopted Proxy Voting Policies to
determine how to vote proxies relating to each Fund's portfolio securities.
These Proxy Voting Policies are incorporated by reference to exhibit 7 of the
Acquiring Fund's annual report filed on Form N-CSR on January 3, 2007.
Information regarding how each Fund voted proxies relating to portfolio
securities during the most recent 12-month period ended June 30 is available on
the Adviser's website at http://www.jhfunds.com/proxy and on the Securities and
Exchange Commission's website at http://www.sec.gov.
OWNERSHIP OF SHARES OF THE FUNDS
To the knowledge of each Fund, as of January 25, 2007, the following persons
owned of record or beneficially 5% or more of the outstanding shares of the
Acquiring Fund:
Name Address Percentage
Ownership
--------------------------------------------------------------------------------
The Commerce Group, Inc. 211 Main Street, Webster, MA 01570 45.0%
INVESTMENT ADVISORY AND OTHER SERVICES
Advisory Agreement
Each Fund has an investment management contract with John Hancock Advisers, LLC
(the "Adviser"), a wholly owned subsidiary of John Hancock Financial Services,
Inc., a subsidiary of Manulife Financial Corporation ("MFC"). Founded in 1968,
John Hancock Advisers is a wholly owned subsidiary of John Hancock Financial
Services, Inc. (a subsidiary of MFC) and managed approximately $28 billion in
assets as of March 31, 2006.
Under the investment management contracts, each Fund pays a monthly management
fee to the Adviser at an annual rate based on a percentage of the Fund's average
weekly net asset value and the value attributable to the Fund's preferred
shares. The Proxy Statement/Prospectus has more detailed information regarding
each Fund's advisory fees. The table below indicates the amount each Fund paid
to the Adviser during the last three fiscal years for each fund:
Fund Fiscal Year / Advisory Fee Fiscal Year / Advisory Fee Fiscal Year / Advisory Fee
----------------------------------------------------------------------------------------------------------------------------
Premium Dividend Fund II 10/31/2004: $2,139,989 10/31/2005: $2,210,655 10/31/2006: $2,215,621
Premium Dividend Fund I 09/30/2004: $1,643,299 09/30/2005: $1,701,707 09/30/2006: $1,697,138
Select Dividend Trust 06/30/2004: $1,650,629 06/30/2005: $1,709,859 06/30/2006: $1,717,815
Global Dividend Fund 07/31/2004: $1,345,374 07/31/2005: $1,403,201 07/31/2006: $1,393,632
Preferred Dividend Fund 05/31/2004: $1,199,365 05/31/2005: $1,224,314 05/31/2006: $1,231,786
Each Fund has an administrative agreement with the Adviser under which the
Adviser oversees the custodial, auditing, valuation, accounting, legal, stock
transfer and dividend disbursing services and maintains Fund communications with
shareholders. The Funds pay the Adviser a monthly administration fee based on a
percentage of the Funds average weekly managed assets. The Proxy
Statement/Prospectus has more detailed information regarding the administration
fee each Fund' paid to the Adviser. The Funds also reimbursed JHLICo for certain
compliance costs, included in the Funds' Statements of Operations.
Each Fund bears all costs of its organization and operation, including but not
limited to expenses of preparing, printing and mailing all shareholders'
reports, notices, prospectuses, proxy statements and reports to regulatory
agencies; expenses relating to the issuance, registration and qualification of
shares; government fees; interest charges; expenses of furnishing to
shareholders their account statements; taxes; expenses of redeeming shares;
brokerage and other expenses connected with the execution of portfolio
securities transactions; expenses pursuant to the Funds plans of distribution;
fees and expenses of custodians including those for keeping books and accounts,
maintaining a committed line of credit, and calculating the net asset value of
shares; fees and expenses of transfer agents and dividend disbursing agents;
legal, accounting, financial, management, tax and auditing fees and expenses of
the Funds (including an allocable portion of the cost of the Adviser's employees
rendering such services to the Funds); the compensation and expenses of Trustees
who are not otherwise affiliated with the Fund, the Adviser or
22
any of their affiliates; expenses of Trustees' and shareholders' meetings;
trade association memberships; insurance premiums; and any extraordinary
expenses.
From time to time, the Adviser may reduce its fee or make other arrangements to
limit a Fund's expenses to a specified percentage of its average daily net
assets. The Adviser retains the right to reimpose a fee and recover any other
payments to the extent that, at the end of any fiscal year, the Fund's annual
expenses fall below this limit.
Securities held by a Fund may also be held by other funds or investment advisory
clients for which the Adviser or its affiliates provide investment advice.
Because of different investment objectives or other factors, a particular
security may be bought for one or more funds or clients when one or more other
funds or clients are selling the same security. If opportunities for purchase or
sale of securities by the Adviser for the Fund or for other funds or clients for
which the Adviser renders investment advice arise for consideration at or about
the same time, transactions in such securities will be made, insofar as
feasible, for the respective funds or clients in a manner deemed equitable to
all of them. To the extent that transactions on behalf of more than one client
of the Adviser or its affiliates may increase the demand for securities being
purchased or the supply of securities being sold, there may be an adverse effect
on price.
Pursuant to the investment management contracts with each Fund, the Adviser is
not liable for any error of judgment or mistake of law or for any loss suffered
by a Fund in connection with the matters to which the investment management
contract relates, except a loss resulting from willful misfeasance, bad faith or
gross negligence on the part of the Adviser in the performance of its duties or
from reckless disregard by the Adviser of its obligations and duties under the
Advisory Agreement.
Under the investment management contracts, each Fund may use the name "John
Hancock" or any name derived from or similar to it only for so long as the
investment management contracts or any extension, renewal or amendment thereof
remains in effect. If the investment management contracts between the Adviser
and a Fund is no longer in effect, the Fund (to the extent that it lawfully can)
will cease to use such a name or any other name indicating that it is advised by
or otherwise connected with the Adviser. In addition, the Adviser or JHLICo may
grant the nonexclusive right to use the name "John Hancock" or any similar name
to any other corporation or entity, including but not limited to any investment
company of which the JHLICo or any subsidiary or affiliate thereof or any
successor to the business of any subsidiary or affiliate thereof shall be the
investment adviser.
The Advisory Agreement was approved by all Trustees. The Advisory Agreement will
continue in effect from year to year, provided that its continuance is approved
annually after its initial two year term both (i) by the holders of a majority
of the outstanding voting securities of the Fund or by the Trustees, and (ii) by
a majority of the Trustees who are not parties to the Agreement or "interested
persons" of any such parties. The Advisory Agreement may be terminated on 60
days written notice by any party or by vote of a majority of the outstanding
voting securities of the Fund and will terminate automatically if assigned.
Code of Ethics. Personnel of the Adviser and its affiliates may trade securities
for their personal accounts. The Funds also may hold, or may be buying or
selling, the same securities. To prevent the Funds from being disadvantaged, the
Adviser, Sub-Adviser, principal underwriter and each Fund have adopted a code of
ethics which restricts the trading activity of those personnel. The Funds' codes
of ethics may 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. Copies of the Funds' codes of ethics may also be
obtained, after paying a duplicating fee, by electronic request to
publicinfo@sec.gov, or by writing to the Commission's Public Reference Section,
Washington, D.C. 20549-0102. The Funds' codes of ethics are also available
online at the Securities and Exchange Commission website: http://www.sec.gov.
Subadvisory Agreement
Effective December 31, 2005, the investment management teams of the Adviser were
reorganized into MFC Global Investment Management (U.S.), LLC ("MFC Global
(U.S.)" or "Subadviser"), a wholly owned indirect subsidiary of John Hancock
Life Insurance Company ("JHLICo"), a subsidiary of MFC. MFC Global (U.S.) serves
as the subadviser to each Fund and managed approximately $26.6 billion in assets
as of November 30, 2006. The Funds
23
are not responsible for payment of subadvisory fees. Prior to January 1, 2006,
the Adviser did not pay subadvisory fees for management of the Funds. The chart
below indicates the subadvisory fees paid to the Subadviser by the Adviser for
the management of each Fund during the last fiscal year:
Fiscal Year Ended/
Fund Subadvisory Fee
------------------------------------------------------
Premium Dividend Fund II 10/31/2006: $468,118.42
Premium Dividend Fund I 09/30/2006: $319,765.25
Select Dividend Trust 06/30/2006: $211,073.78
Global Dividend Fund 07/31/2006: $200,538.07
Preferred Dividend Fund 05/31/2006: $126,293.06
Pursuant to the subadvisory agreement between the Adviser and the Subadviser,
the Subadviser will provide services to the Funds, including, without
limitation, (i) formulating and implementing continuous investment programs for
each Fund consistent with the investment objectives and investment policies set
forth in the Funds' registration statements, (ii) selecting broker-dealers to
effect all of the Funds' transactions, (iii) maintaining all books and records
with respect to each Fund, and (iv) voting proxies relating to securities held
by the Funds. The subadvisory agreement sets forth that the Subadviser is not
liable for any error of judgment or mistake of law or for any loss suffered by
the Adviser or a Fund in connection with the matters to which the investment
management contract relates, except a loss resulting from willful misfeasance,
bad faith or gross negligence on the part of the Adviser in the performance of
its duties or from reckless disregard by the Subadviser of its obligations and
duties under the subadvisory agreement
The subadvisory agreement continues in effect for a period of more than two
years only so long as the continuance is specifically approved by the Trustees
of the Funds.
A discussion regarding the basis for the approval of the advisory and
sub-advisory agreements by each Fund's Board is available in each Fund's
respective shareholder reports for the most recently completed fiscal year.
Custodian
Portfolio securities of the Fund are held pursuant to a custodian agreement
between the Fund and The Bank of New York, One Wall Street, New York, New York
10286. Under the custodian agreement, The Bank of New York is performing
custody, portfolio, foreign custody manager and fund accounting services.
Independent Auditors
The independent auditors of the Fund, PricewaterhouseCoopers LLP, audit and
render an opinion on the Fund's annual financial statements, and review the
Fund's annual federal income tax return. PricewaterhouseCoopers LLP has offices
at 125 High Street, Boston, MA 02110.
PORTFOLIO MANAGERS
Portfolio Managers and Other Accounts Managed.
The portfolio managers of each Fund are Gregory Phelps and Mark Maloney. As of
November 30, 2006, each portfolio manager managed the following other accounts:
Other Accounts Managed by the Portfolio Manager(1)
----------------------------------------------------------------------
Registered Investment Pooled Investment
Portfolio Manager Name Companies (assets) Vehicles (assets) Other Accounts
----------------------------------------------------------------------------------------------------------------
Gregory Phelps 4 ($4.15 billion) 2 ($65 million) None
----------------------------------------------------------------------------------------------------------------
Mark Maloney 4 ($4.15 billion) 2 ($65 million) None
----------------------------------------------------------------------------------------------------------------
(1) The Funds are not included in the number of other accounts managed.
MFC Global (U.S.) does not generally receive a fee based upon the investment
performance of the accounts reflected in the table above.
24
Potential Conflicts of Interest. When a portfolio manager is responsible for the
management of more than one account, the potential arises for the portfolio
manager to favor one account over another. The principal types of potential
conflicts of interest that may arise are discussed below. For the reasons
outlined below, MFC Global (U.S.) does not believe that any material conflicts
are likely to arise out of a portfolio manager's responsibility for the
management of the fund as well as one or more other accounts. MFC Global (U.S.)
has adopted procedures that are intended to monitor compliance with the policies
referred to in the following paragraphs. Generally, the risks of such conflicts
of interests are increased to the extent that a portfolio manager has a
financial incentive to favor one account over another. MFC Global (U.S.) has
structured its compensation arrangements in a manner that is intended to limit
such potential for conflicts of interests. See "Structure of Compensation"
below.
A portfolio manager could favor one account over another in allocating new
investment opportunities that have limited supply, such as initial public
offerings and private placements. If, for example, an initial public offering
that was expected to appreciate in value significantly shortly after the
offering was allocated to a single account, that account may be expected to have
better investment performance than other accounts that did not receive an
allocation on the initial public offering. MFC Global (U.S.) has policies that
require a portfolio manager to allocate such investment opportunities in an
equitable manner and generally to allocate such investments proportionately
among all accounts with similar investment objectives.
A portfolio manager could favor one account over another in the order in which
trades for the accounts are placed. If a portfolio manager determines to
purchase a security for more than one account in an aggregate amount that may
influence the market price of the security, accounts that purchased or sold the
security first may receive a more favorable price than accounts that made
subsequent transactions. The less liquid the market for the security or the
greater the percentage that the proposed aggregate purchases or sales represent
of average daily trading volume, the greater the potential for accounts that
make subsequent purchases or sales to receive a less favorable price. When a
portfolio manager intends to trade the same security for more than one account,
MFC Global (U.S.)'s policies generally require that such trades be "bunched,"
which means that the trades for the individual accounts are aggregated and each
account receives the same price. There are some types of accounts as to which
bunching may not be possible for contractual reasons (such as directed brokerage
arrangements). Circumstances may also arise where the trader believes that
bunching the orders may not result in the best possible price. Where those
accounts or circumstances are involved, MFC Global (U.S.) will place the order
in a manner intended to result in as favorable a price as possible for such
client.
A portfolio manager could favor an account if the portfolio manager's
compensation is tied to the performance of that account rather than all accounts
managed by the portfolio manager. If, for example, the portfolio manager
receives a bonus based upon the performance of certain accounts relative to a
benchmark while other accounts are disregarded for this purpose, the portfolio
manager will have a financial incentive to seek to have the accounts that
determine the portfolio manager's bonus achieve the best possible performance to
the possible detriment of other accounts. Similarly, if MFC Global (U.S.)
receives a performance-based advisory fee, the portfolio manager may favor that
account, whether or not the performance of that account directly determines the
portfolio manager's compensation. The investment performance on specific
accounts is not a factor in determining the portfolio manager's compensation.
See "Structure of Compensation" below. MFC Global (U.S.) receives a
performance-based fee with respect to one of the accounts managed by the
portfolio managers of Active Bond Fund.
A portfolio manager could favor an account if the portfolio manager has a
beneficial interest in the account. For example, if the portfolio manager held
an interest in an investment partnership that was one of the accounts managed by
the portfolio manager, the portfolio manager would have an economic incentive to
favor the account in which the portfolio manager held an interest. MFC Global
(U.S.) imposes certain trading restrictions and reporting requirements for
accounts in which a portfolio manager or certain family members have a personal
interest in order to confirm that such accounts are not favored over other
accounts.
If the different accounts have materially and potentially conflicting investment
objectives or strategies, a conflict of interest may arise. For example, if a
portfolio manager purchases a security for one account and sells the same
security short for another account, such trading pattern may disadvantage either
the account that is long or short. In making portfolio manager assignments, MFC
Global (U.S.) seeks to avoid such potentially conflicting situations. However,
where a portfolio manager is responsible for accounts with differing investment
objectives and policies, it
25
is possible that the portfolio manager will conclude that it is in the best
interest of one account to sell a portfolio security while another account
continues to hold or increase the holding in such security.
Structure of Compensation
MFC Global (U.S.) has adopted a system of compensation for portfolio managers
and others involved in the investment process that is applied systematically
among investment professionals. At MFC Global (U.S.), the structure of
compensation of investment professionals is currently comprised of the following
basic components: base salary and an annual investment bonus plan, as well as
customary benefits that are offered generally to all full-time employees of MFC
Global (U.S.). A limited number of senior portfolio managers, who serve as
officers of both MFC Global (U.S.) and its parent company, may also receive
options or restricted stock grants of common shares of Manulife Financial. The
following describes each component of the compensation package for the
individuals identified as a portfolio manager for the fund.
Base salary. Base compensation is fixed and normally reevaluated on an annual
basis. MFC Global (U.S.) seeks to set compensation at market rates, taking into
account the experience and responsibilities of the investment professional.
Investment Bonus Plan. Only investment professionals are eligible to participate
in the Investment Bonus Plan. Under the plan, investment professionals are
eligible for an annual bonus. The plan is intended to provide a competitive
level of annual bonus compensation that is tied to the investment professional
achieving superior investment performance and aligns the financial incentives of
MFC Global (U.S.) and the investment professional. Any bonus under the plan is
completely discretionary, with a maximum annual bonus that may be well in excess
of base salary. While the amount of any bonus is discretionary, the following
factors are generally used in determining bonuses under the plan.
Investment Performance: The investment performance of all accounts managed by
the investment professional over one and three- year periods is considered. The
pre-tax performance of each account is measured relative to an appropriate peer
group benchmark (for example a Morningstar large cap growth peer group if the
fund invests primarily in large cap stocks with a growth strategy). With respect
to fixed income accounts, relative yields are also used to measure performance.
The Profitability of MFC Global (U.S.): The profitability of MFC Global (U.S.)
and its parent company are also considered in determining bonus awards, with
greater emphasis placed upon the profitability of MFC Global (U.S.).
Non-Investment Performance: The more intangible contributions of an investment
professional to MFC Global (U.S.) business, including the investment
professional's support of sales activities, new fund/strategy idea generation,
professional growth and development, and management, where applicable, are
evaluated in determining the amount of any bonus award.
Options and Stock Grants. A limited number of senior investment professionals
may receive options to purchase shares of Manulife stock. Generally, such option
would permit the investment professional to purchase a set amount of stock at
the market price on the date of grant. The option can be exercised for a set
period (normally a number of years or until termination of employment) and the
investment professional would exercise the option if the market value of
Manulife stock increases. Some investment professionals may receive restricted
stock grants, where the investment professional is entitled to receive the stock
at no or nominal cost, provided that the stock is forgone if the investment
professional's employment is terminated prior to a vesting date.
MFC Global (U.S.) also permits investment professionals to participate on a
voluntary basis in a deferred compensation plan, under which the investment
professional may elect on an annual basis to defer receipt of a portion of their
compensation until retirement. Participation in the plan is voluntary. No
component of the compensation arrangements for the investment professionals
involves mandatory deferral arrangements.
While the profitability of MFC Global (U.S.) and the investment performance of
the accounts that the investment professionals maintain are factors in
determining an investment professional's overall compensation, the investment
professional's compensation is not linked directly to the net asset value of any
fund.
26
Ownership of Securities
As of January 5, 2007, the portfolio managers did not own shares any Fund.
NET ASSET VALUE
All Funds
The net asset value of the Funds' common stock will be determined at least once
each week by dividing the value of all assets of the Fund (including accrued
interest and dividends), less all liabilities (including accrued expenses and
accumulated and unpaid dividends, including any Additional Dividends) and the
aggregate liquidation preference of the outstanding shares of the preferred
shares, by the total number of shares of the common stock outstanding.
In valuing the Funds' portfolios, securities listed on an exchange or traded
over-the-counter and quoted on the NASDAQ System will be valued at the last sale
price on the day of valuation or, if there has been no sale that day, at the
last reported bid price, using prices as of the close of trading.
Over-the-counter securities not quoted on the NASDAQ System are be valued by the
Acquiring Fund, Premium Dividend Fund I and Dividend Select Trust at the current
bid price as obtained from two dealers which make markets in such securities or
from a pricing service. Such securities are be valued by Preferred Dividend Fund
and Global Dividend Fund at the lowest bid price as obtained from two dealers
which make markets in such securities or from a pricing service. Securities for
which reliable quotations are not readily available and other assets will be
valued at their fair value as determined by or under the direction of the Funds'
Board of Trustees. Auction preferred stocks have had a consistent history of
trading in the secondary market at par value plus accrued dividends.
Accordingly, when reliable quotations are not available for auction preferred
stocks, they will generally be valued at par plus accrued dividends, although a
different value may be assigned due to changes in an issuer's creditworthiness
or market conditions. Money market instruments with remaining maturities of 60
days or less will be valued at amortized cost.
The Acquiring Fund, Premium Dividend Fund I and Dividend Select Trust
The market value of the Funds' Eligible Assets will be determined as set forth
in the preceding paragraph, except that, for purposes of calculating the
Eligible Asset Coverage and the Dividend Coverage / AMPS Basic Maintenance
Amount requirement and the Minimum Liquidity Level, (i) Eligible Assets for
which reliable quotations are not available will be valued at zero and (ii)
Eligible Assets subject to call options written by the Fund will be valued at
the lower of market value or the strike price of the option.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities and the
allocation of brokerage commissions are made by the Adviser pursuant to
recommendations made by an investment committee of the Adviser, which consists
of officers and directors of the Adviser and affiliates and officers and
Trustees who are interested persons of the Fund. Orders for purchases and sales
of securities are placed in a manner which, in the opinion of the Adviser, will
offer the best price and market for the execution of each such transaction.
Purchases from underwriters of portfolio securities may include a commission or
commissions paid by the issuer, and transactions with dealers serving as market
makers reflect a "spread". Debt securities are generally traded on a net basis
through dealers acting for their own account as principals and not as brokers;
no brokerage commissions are payable on these transactions.
In the U.S. Government securities market, securities are generally traded on a
"net" basis with dealers acting as principal for their own account without a
stated commission, although the price of the security usually includes a profit
to the dealer. On occasion, certain money market instruments and agency
securities may be purchased directly from the issuer, in which case no
commissions or premiums are paid. In other countries, both debt and equity
securities are traded on exchanges at fixed commission rates. Commissions on
foreign transactions are generally higher than the negotiated commission rates
available in the U.S. There is generally less government supervision and
regulation of foreign stock exchanges and broker-dealers than in the U.S.
The Fund's primary policy is to execute all purchases and sales of portfolio
instruments at the most favorable prices consistent with best execution,
considering all of the costs of the transaction including brokerage commissions.
This policy governs the selection of brokers and dealers and the market in which
a transaction is executed.
27
To the extent consistent with the foregoing, the Fund will be governed in the
selection of brokers and dealers, and the negotiation of brokerage commission
rates and dealer spreads, by the reliability and quality of the services,
including primarily the availability and value of research information and, to a
lesser extent, statistical assistance furnished to the Adviser and their value
and expected contribution to the performance of the Fund.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, the Fund
may pay a broker which provides brokerage and research services to the Fund an
amount of disclosed commission in excess of the commission which another broker
would have charged for effecting that transaction. This practice is subject to a
good faith determination by the Board of Trustees that such commission is
reasonable in light of the services provided and to such policies as the Board
of Trustees may adopt from time to time.
Research services received from broker-dealers supplement the Adviser's own
research (and the research of its affiliates), and may include the following
types of information: statistical and background information on the U.S. and
foreign economies, industry groups and individual companies; forecasts and
interpretations with respect to the U.S. and foreign economies, securities,
markets, specific industry groups and individual companies; information on
federal, state, local and foreign political developments; portfolio management
strategies; performance information on securities, indexes and investment
accounts; and information concerning prices of securities. Broker-dealers may
communicate such information electronically, orally, in written form or on
computer software. Research services may also include the providing of
electronic communication of trade information and the providing of custody
services, as well as the providing of equipment used to communicate research
information, the providing of specialized consultations with the Adviser's
personnel with respect to computerized systems and data furnished to the Adviser
as a component of other research services, the arranging of meetings with
management of companies, and the providing of access to consultants who supply
research information.
The outside research assistance is useful to the Adviser since the
broker-dealers used by the Adviser tend to follow a broader universe of
securities and other matters than the Adviser's staff can follow. In addition,
the research provides the Adviser with a diverse perspective on financial
markets. Research services provided to the Adviser by broker-dealers are
available for the benefit of all accounts managed or advised by the Adviser or
by its affiliates. Some broker-dealers may indicate that the provision of
research services is dependent upon the generation of certain specified levels
of commissions and underwriting concessions by the Adviser's clients, including
the Fund. However, the Fund is not under any obligation to deal with any
broker-dealer in the execution of transactions in portfolio securities. In some
cases, the research services are available only from the broker-dealer providing
them. In other cases, the research services may be obtainable from alternative
sources in return for cash payments.
The Adviser believes that the research services are beneficial in supplementing
the Adviser's research and analysis and that they improve the quality of the
Adviser's investment advice. It is not possible to place a dollar value on
information and services to be received from brokers and dealers, since it is
only supplementary to the research efforts of the Adviser. The advisory fee paid
by the Fund is not reduced because the Adviser receives such services. However,
to the extent that the Adviser would have purchased research services had they
not been provided by broker-dealers, the expenses to the Adviser could be
considered to have been reduced accordingly. The research information and
statistical assistance furnished by brokers and dealers may benefit the Life
Company or other advisory clients of the Adviser, and conversely, brokerage
commissions and spreads paid by other advisory clients of the Adviser may result
in research information and statistical assistance beneficial to the Fund. The
Fund will make no commitment to allocate portfolio transactions upon any
prescribed basis.
While the Adviser's officers, will be primarily responsible for the allocation
of the Fund's brokerage business, the policies and practices of the Adviser in
this regard must be consistent with the foregoing and at all times be subject to
review by the Trustees.
The Adviser may determine target levels of commission business with various
brokers on behalf of its clients (including the Fund) over a certain time
period. The target levels will be based upon the following factors, among
others: (1) the execution services provided by the broker; and (2) the research
services provided by the broker. The Fund's trades may be executed directly by
dealers that sell shares of the John Hancock funds or by other broker-dealers
with which such dealers have clearing arrangements, consistent with obtaining
best execution and the Conduct Rules of the National Association of Securities
Dealers, Inc. and other applicable regulatory requirements. The Adviser will not
use a specific formula in connection with any of these considerations to
determine the target
28
levels. The Adviser's indirect parent, the Life Company, is the indirect sole
shareholder of Signator Investors, Inc., a broker-dealer (until January 1, 1999,
John Hancock Distributors, Inc.) ("Signator" or "Affiliated Broker"). Pursuant
to procedures determined by the Trustees and consistent with the above policy of
obtaining best net results, the Fund may execute portfolio transactions with or
through the Affiliated Broker.
Signator may act as broker for the Fund on exchange transactions, subject,
however, to the general policy of the Fund set forth above and the procedures
adopted by the Trustees pursuant to the 1940 Act. Commissions paid to an
Affiliated Broker must be at least as favorable as those which the Trustees
believe to be contemporaneously charged by other brokers in connection with
comparable transactions involving similar securities being purchased or sold. A
transaction would not be placed with an Affiliated Broker if the Fund would have
to pay a commission rate less favorable than the Affiliated Broker's
contemporaneous charges for comparable transactions for its other most favored,
but unaffiliated, customers, except for accounts for which the Affiliated Broker
acts as clearing broker for another brokerage firm, and any customers of the
Affiliated Broker not comparable to the Fund as determined by a majority of the
Trustees who are not "interested persons" (as defined in the 1940 Act) of the
Fund, the Adviser or the Affiliated Broker. Because the Adviser, which is
affiliated with the Affiliated Broker, has, as an investment adviser to the
Fund, the obligation to provide investment management services, which include
elements of research and related investment skills, such research and related
skills will not be used by the Affiliated Broker as a basis for negotiating
commissions at a rate higher than that determined in accordance with the above
criteria.
Other investment advisory clients advised by the Adviser may also invest in the
same securities as the Fund. When these clients buy or sell the same securities
at substantially the same time, the Adviser may average the transactions as to
price and allocate the amount of available investments in a manner which the
Adviser believes to be equitable to each client, including the Fund. Because of
this, client accounts in a particular style may sometimes not sell or acquire
securities as quickly or at the same prices as they might if each were managed
and traded individually.
For purchases of equity securities, when a complete order is not filled, a
partial allocation will be made to each account pro rata based on the order
size. For high demand issues (for example, initial public offerings), shares
will be allocated pro rata by account size as well as on the basis of account
objective, account size (a small account's allocation may be increased to
provide it with a meaningful position), and the account's other holdings. In
addition, an account's allocation may be increased if that account's portfolio
manager was responsible for generating the investment idea or the portfolio
manager intends to buy more shares in the secondary market. For fixed income
accounts, generally securities will be allocated when appropriate among accounts
based on account size, except if the accounts have different objectives or if an
account is too small to get a meaningful allocation. For new issues, when a
complete order is not filled, a partial allocation will be made to each account
pro rata based on the order size. However, if a partial allocation is too small
to be meaningful, it may be reallocated based on such factors as account
objectives, strategies, duration benchmarks and credit and sector exposure. For
example, value funds will likely not participate in initial public offerings as
frequently as growth funds. In some instances, this investment procedure may
adversely affect the price paid or received by the Fund or the size of the
position obtainable for it. On the other hand, to the extent permitted by law,
the Adviser may aggregate securities to be sold or purchased for the Fund with
those to be sold or purchased for other clients managed by it in order to obtain
best execution.
U.S. FEDERAL INCOME TAX MATTERS
The following is a summary discussion of certain U.S. federal income tax
consequences that may be relevant to a shareholder of acquiring, holding and
disposing of common shares or preferred shares of a Fund. This discussion only
addresses U.S. federal income tax consequences to U.S. shareholders who hold
their shares as capital assets and does not address all of the U.S. federal
income tax consequences that may be relevant to particular shareholders in light
of their individual circumstances. This discussion also does not address the tax
consequences to shareholders who are subject to special rules, including,
without limitation, financial institutions, insurance companies, dealers in
securities or foreign currencies, foreign shareholders, shareholders who hold
their shares as or in a hedge against currency risk, a constructive sale, or a
conversion transaction, shareholders who are subject to the alternative minimum
tax, or tax-exempt or tax-deferred plans, accounts, or entities. In addition,
the discussion does not address any state, local, or foreign tax consequences,
and it does not address any U.S. federal tax consequences other than U.S.
federal income tax consequences. The discussion reflects applicable tax laws of
the United States as of the date of this Prospectus, which tax laws may be
changed or subject to new interpretations by the courts or the Internal Revenue
Service ("IRS") retroactively or prospectively. No attempt is made to present a
detailed explanation of all
29
U.S. federal income tax concerns affecting each Fund and its shareholders, and
the discussion set forth herein does not constitute tax advice. Investors are
urged to consult their own tax advisers to determine the specific tax
consequences to them of investing in a Fund, including the applicable federal,
state, local and foreign tax consequences to them and the effect of possible
changes in tax laws.
Each Fund intends to elect to be treated and to qualify each year as a
"regulated investment company" under Subchapter M of the Code so that it
generally will not pay U.S. federal income tax on income and capital gains
distributed to shareholders. In order to qualify as a regulated investment
company under Subchapter M of the Code, which qualification this discussion
assumes, a Fund must, among other things, (i) derive at least 90% of its gross
income for each taxable year from (a) dividends, interest, payments with respect
to securities loans, gains from the sale or other disposition of stock,
securities or foreign currencies, or other income (including gains from options,
futures and forward contracts) derived with respect to its business of investing
in such stock, securities or currencies 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 for the items described in (a) above (each a "Qualified
Publicly Traded Partnership") (the "90% income test"); 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 (I) cash and cash
items, U.S. government securities, the securities of other regulated investment
companies and (II) other securities, with such other securities limited, in
respect to 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 (other than U.S. government securities and the
securities of other regulated investment companies) of (I) any one issuer, (II)
any two or more issuers that the Fund controls and that are determined to be
engaged in the same or similar trades or businesses or related trades or
businesses or (III) any one or more Qualified Publicly Traded Partnerships. For
purposes of the 90% income test, the character of income earned by certain
entities in which a Fund invests that are not treated as corporations for U.S.
federal income tax purposes (e.g., partnerships or trusts) will generally pass
through to the Fund. Consequently, a Fund may be required to limit its equity
investments in such entities that earn fee income, rental income or other
nonqualifying income.
If a Fund qualifies as a regulated investment company and, for each taxable
year, it distributes to its shareholders an amount equal to or exceeding the sum
of (i) 90% of its "investment company taxable income" as that term is defined in
the Code (which includes, among other things, dividends, taxable interest, and
the excess of any net short-term capital gains over net long-term capital
losses, as reduced by certain deductible expenses) without regard to the
deduction for dividends paid and (ii) 90% of the excess of its gross tax-exempt
interest, if any, over certain disallowed deductions, the Fund generally will be
relieved of U.S. federal income tax on any income of a Fund, including "net
capital gains" (the excess of net long-term capital gain over net short-term
capital loss), distributed to shareholders. However, if a Fund retains any
investment company taxable income or net capital gain, it generally will be
subject to U.S. federal income tax at regular corporate rates on the amount
retained. Each Fund intends to distribute at least annually all or substantially
all of its investment company taxable income, net tax exempt interest, if any,
and net capital gain. If for any taxable year a Fund did not qualify as a
regulated investment company, it would be treated as a corporation subject to
U.S. federal income tax thereby subjecting any income earned by the Fund to tax
at the corporate level at a 35% federal tax rate and, when such income is
distributed, to a further tax at the shareholder level. In addition, a Fund
could be required to recognize unrealized gains, pay taxes and make
distributions (which could be subject to interest charges) before requalifying
as a regulated investment company.
In order to avoid incurring a nondeductible 4% federal excise tax obligation,
the Code requires that a Fund distribute (or be deemed to have distributed) by
December 31 of each calendar year an amount at least equal to the sum of (i) 98%
of its ordinary income for such year, (ii) 98% of its capital gain net income
(which is the excess of its realized net long-term capital gain over its
realized net short-term capital loss), generally computed on the basis of the
one-year period ending on October 31 of such year, after reduction by any
available capital loss carryforwards and (iii) 100% of any ordinary income and
capital gain net income from the prior year (as previously computed) that were
not paid out during such year and on which the Fund paid no federal income tax.
Under current law, provided that a Fund qualifies as a RIC for federal income
tax purposes, the Fund should not be liable for any income, corporate excise or
franchise tax in The Commonwealth of Massachusetts.
Although dividends generally will be treated as distributed when paid, any
dividend declared by a Fund as of a record date in October, November or December
and paid during the following January will be treated for U.S.
30
federal income tax purposes as received by shareholders on December 31 of the
calendar year in which it is declared. In addition, certain other distributions
made after the close of a taxable year of a Fund may be "spilled back" and
treated as paid by the Fund (except for purposes of the 4% excise tax) during
such taxable year. In such case, shareholders will be treated as having received
such dividends in the taxable year in which the distributions were actually
made.
Each holder of common shares of the Funds, other than holders of Preferred
Dividend Fund and Premium Dividend Fund II, will automatically have all
distributions of dividends and capital gains reinvested by the Plan Agent,
unless an election is made to receive cash. Holders of common shares of
Preferred Dividend Fund and Premium Dividend Fund II must elect to have all
distributions of dividends and capital gains reinvested by the Plan Agent. For
U.S. federal income tax purposes, assuming the Fund has sufficient current or
accumulated earnings and profits, such distributions generally will be taxable
whether a shareholder takes them in cash or they are reinvested pursuant to the
Plan in additional shares of the Fund. In general, dividends from investment
company taxable income are taxable either as ordinary income or, if so
designated by the Fund, as "qualified dividend income" taxable to individual
shareholders at a maximum 15% tax rate (if any), and dividends from net capital
gain (if any) that are designated as capital gain dividends are taxable as
long-term capital gains for U.S. federal income tax purposes without regard to
the length of time the shareholder has held shares of the Fund. A portion of the
dividend distributions to individual shareholders may qualify as "qualified
dividend income" as that term is defined in Section 1(h)(11) of the Code,
qualifying for the maximum 15% tax rate on dividends under the Jobs and Growth
Tax Relief Reconciliation Act of 2003 to the extent that such dividends are
attributable to qualified dividend income from the Fund's investments in common
and preferred stock of U.S. companies and stock of certain foreign corporations,
provided that certain holding period and other requirements are met. Capital
gain dividends distributed by a Fund (if any) to individual shareholders
generally will qualify for the maximum 15% tax rate under such Act. Absent
further legislation, the maximum 15% tax rate on qualified dividend income and
long-term capital gains will cease to apply to taxable years beginning after
December 31, 2010. Shareholders receiving distributions in the form of
additional shares issued by a Fund will be treated for federal income tax
purposes as receiving a distribution in an amount equal to the amount of cash
they would have received had they elected to receive cash, except when a Fund
distributes newly issued shares, in which case the amount of the distribution
will be equal to the fair market value of the shares received, determined as of
the distribution date. The basis of such shares will equal the amount of the
distribution. The source and U.S. federal income tax status of all distributions
will be reported to shareholders annually and shareholders receiving
distributions in the form of additional shares of a Fund will receive a report
as to the net asset value of those shares.
If a Fund retains any net capital gains for a taxable year, the Fund may
designate the retained amount as undistributed capital gains in a notice to
shareholders who, if subject to U.S. federal income tax on long-term capital
gains, (i) will be required to include in income for U.S. federal income tax
purposes, as long-term capital gain, their proportionate shares of such
undistributed amount, and (ii) will be entitled to credit their proportionate
shares of the tax paid by the Fund on the undistributed amount against their
U.S. federal income tax liabilities, if any, and to claim refunds to the extent
the credit exceeds such liabilities.
If a Fund acquires any equity interest (under Treasury regulations that may be
promulgated in the future, generally including not only stock but also an option
to acquire stock such as is inherent in a convertible bond) in certain foreign
corporations that receive at least 75% of their annual gross income from passive
sources (such as interest, dividends, certain rents and royalties, or capital
gains) or that hold at least 50% of their assets in investments producing such
passive income ("passive foreign investment companies"), the Fund could be
subject to U.S. federal income tax and additional interest charges on "excess
distributions" received from such companies or on gain from the disposition of
stock in such companies, even if all income or gain actually received by the
Fund is timely distributed to its shareholders. The Fund would not be able to
pass through to its shareholders any credit or deduction for such a tax. An
election may generally be available that would ameliorate these adverse tax
consequences, but any such election could require the Fund to recognize taxable
income or gain (subject to tax distribution requirements) without the concurrent
receipt of cash. These investments could also result in the treatment of capital
gains from the sale of stock of passive foreign investment companies as ordinary
income. Each Fund will monitor and may limit and/or manage its holdings in
passive foreign investment companies to limit its tax liability or maximize its
return from these investments.
31
When a Fund utilizes leverage through borrowing or issuing preferred shares, a
failure by the Fund to meet the asset coverage requirements imposed by the 1940
Act or by any rating organization that has rated such leverage or additional
restrictions that may be imposed by certain lenders on the payment of dividends
or distributions potentially could limit or suspend the Fund's ability to make
distributions on its common shares. Such a suspension or limitation could
prevent the Fund from distributing at least 90% of its investment company
taxable income as is required under the Code and therefore might jeopardize the
Fund's qualification for taxation as a regulated investment company and/or might
subject the Fund to the 4% excise tax discussed above. Upon any failure to meet
such asset coverage requirements, a Fund may, in its sole discretion, purchase
or redeem shares of preferred stock in order to maintain or restore the
requisite asset coverage and avoid the adverse consequences to the Fund and its
shareholders of failing to satisfy the distribution requirement. There can be no
assurance, however, that any such action would achieve these objectives. Each
Fund will endeavor to avoid restrictions on its ability to distribute dividends.
If for any taxable year a Fund fails to qualify for treatment as a regulated
investment company under the Code, the Fund will incur a regular Federal
corporate income tax on its taxable income (including capital gain),
irrespective of whether such income has been distributed to shareholders.
Distributions to its shareholders for such year would be taxable as ordinary
dividends to the extent of the Fund's current and accumulated earnings and
profits, if any. Before requalifying as a regulated investment company for a
subsequent taxable year, the Fund would be required to distribute to
shareholders any earnings and profits accumulated in the taxable year(s) for
which it did not qualify as a regulated investment company.
If a Fund invests in certain pay-in-kind securities, zero coupon securities,
deferred interest securities or, in general, any other securities with original
issue discount (or with market discount if the Fund elects to include market
discount in income currently), the Fund generally must accrue income on such
investments for each taxable year, which generally will be prior to the receipt
of the corresponding cash payments. However, a Fund must distribute, at least
annually, all or substantially all of its investment company taxable income,
including such accrued income, to shareholders to qualify as a regulated
investment company under the Code and avoid U.S. federal income and excise
taxes. Therefore, a Fund may have to dispose of its portfolio securities under
disadvantageous circumstances to generate cash, or may have to borrow the cash,
to satisfy distribution requirements.
At the time of an investor's purchase of a Fund's shares, a portion of the
purchase price may be attributable to realized or unrealized appreciation in the
Fund's portfolio or undistributed taxable income of the Fund. Consequently,
subsequent distributions by the Fund with respect to these shares from such
appreciation or income may be taxable as ordinary income to such investor even
if the net asset value of the investor's shares is, as a result of the
distributions, reduced below the investor's cost for such shares and the
distributions economically represent a return of a portion of the investment.
Sales and other dispositions of a Fund's shares generally are taxable events for
shareholders that are subject to tax. Shareholders should consult their own tax
advisers with reference to their individual circumstances to determine whether
any particular transaction in a Fund's shares is properly treated as a sale for
tax purposes, as the following discussion assumes, and the tax treatment of any
gains or losses recognized in such transactions. In general, if shares of a Fund
are sold, the shareholder will recognize gain or loss equal to the difference
between the amount realized on the sale and the shareholder's adjusted basis in
the shares sold. Such gain or loss generally will be treated as long-term gain
or loss if the shares were held for more than one year and otherwise generally
will be treated as short-term gain or loss. Any loss recognized by a shareholder
upon the sale or other disposition of shares with a tax holding period of six
months or less generally will be treated as a long-term capital loss to the
extent of any amounts treated as distributions of long-term capital gains with
respect to such shares. Losses on sales or other dispositions of shares may be
disallowed under "wash sale" rules in the event of other investments in a Fund
(including those made pursuant to reinvestment of dividends and/or capital gains
distributions) within a period of 61 days beginning 30 days before and ending 30
days after a sale or other disposition of shares. In that event, the basis of
the replacement shares of the Fund will be increased to reflect the disallowed
loss.
Under Treasury regulations, if a shareholder recognizes a loss with respect to
shares of $2 million or more for an individual shareholder, or $10 million or
more for a corporate shareholder, in any single taxable year (or a greater
amount over a combination of years), the shareholder must file with the IRS a
disclosure statement on Form 8886. Direct shareholders of portfolio securities
are in many cases excepted from this reporting requirement but, under
32
current guidance, shareholders of regulated investment companies are not
excepted. The fact that a loss is reportable under these regulations does not
affect the legal determination of whether or nor the taxpayer's treatment of the
loss is proper. Shareholders should consult with their tax advisers to determine
the applicability of these regulations in light of their individual
circumstances.
Options written or purchased and futures contracts entered into by a Fund on
certain securities and indices may cause the Fund to recognize gains or losses
from marking-to-market even though such options may not have lapsed, been closed
out, or exercised, or such futures or forward contracts may not have been
performed or closed out. The tax rules applicable to these contracts may affect
the characterization of some capital gains and losses recognized by a Fund as
long-term or short-term. Additionally, a Fund may be required to recognize gain
if an option, futures contract, forward contract, short sale or other
transaction that is not subject to the mark-to-market rules is treated as a
"constructive sale" of an "appreciated financial position" held by the Fund
under Section 1259 of the Code. Any net mark-to-market gains and/or gains from
constructive sales may also have to be distributed to satisfy the distribution
requirements referred to above even though a Fund may receive no corresponding
cash amounts, possibly requiring the Fund to dispose of portfolio securities or
borrow to obtain the necessary cash. Losses on certain options, futures or
forward contracts and/or offsetting positions (portfolio securities or other
positions with respect to which a Fund's risk of loss is substantially
diminished by one or more options, futures or forward contracts) may also be
deferred under the tax straddle rules of the Code, which may also affect the
characterization of capital gains or losses from straddle positions and certain
successor positions as long-term or short-term. Certain tax elections may be
available that would enable a Fund to ameliorate some adverse effects of the tax
rules described in this paragraph. The tax rules applicable to options, futures,
forward contracts and straddles may affect the amount, timing and character of a
Fund's income and gains or losses and hence of its distributions to
shareholders.
Dividends of investment company taxable income designated by a Fund and received
by corporate shareholders of the Fund will qualify for the Dividends Received
Deduction to the extent of the amount of qualifying dividends received by the
Fund from domestic corporations for the taxable year. A dividend received by a
Fund will not be treated as a qualifying dividend (i) if the stock on which the
dividend is paid is considered to be "debt-financed" (generally, acquired with
borrowed funds), (ii) if the Fund fails to meet certain holding period
requirements for the stock on which the dividend is paid or (iii) to the extent
that the Fund is under an obligation (pursuant to a short sale or otherwise) to
make related payments with respect to positions in substantially similar or
related property. Moreover, the Dividends Received Deduction may be disallowed
or reduced if the corporate shareholder fails to satisfy the foregoing
requirements with respect to its shares of a Fund or by application of the Code.
The federal income tax treatment of a Fund's investment in preferred securities
or other securities and its transactions involving, among other things, swaps,
caps, floors and collars is uncertain and may be subject to recharacterization
by the IRS. To the extent the tax treatment of such securities or transactions
differs from the tax treatment expected by a Fund, the timing or character of
income recognized by the Fund could be affected, and the Fund may be required to
purchase or sell securities, or otherwise change its portfolio, in order to
comply with the tax rules applicable to regulated investment companies under the
Code.
The IRS has taken the position that if a regulated investment company has two or
more classes of shares, it must designate distributions made to each class in
any year as consisting of no more than such class's proportionate share of
particular types of income, including dividends qualifying for the Dividends
Received Deduction (if any) and capital gains. A class's proportionate share of
a particular type of income is determined according to the percentage of total
dividends paid by the regulated investment company during the year to such
class. Consequently, each Fund other than Premium Dividend Fund I intends to
designate distributions made to the common shareholders and the preferred
shareholders of particular types of income (including ordinary income, qualified
dividend income (if any) and capital gains) in accordance with each such class's
proportionate share of such income.
Dividends (including Additional Dividends, if any) paid on the preferred shares
and dividends paid on the common shares (other than capital gains dividends
described below) will be eligible for the Dividends Received Deduction to the
extent they are designated by a Fund as qualifying for such deduction, except
the aggregate amount of dividends which may be designated by a Fund for any year
cannot exceed the aggregate amount of dividends received by the Fund in that
year for which it would be allowed the Dividends Received Deduction if it were
not a regulated investment company ("qualified dividends").
33
Under current law, for any taxable year of a Fund, ordinary income dividends
paid by the Fund will qualify fully for the Dividends Received Deduction if the
DRD qualified dividends received by the Fund are not less than the net income of
the Fund exclusive of net capital gains (stated differently, if the income of
the Fund other than such dividends or net capital gains does not exceed the
expenses of the Fund). Each Fund intends to operate so as to achieve this
result, but there can be no assurance that it will be achieved. A Fund's "net
income" includes all dividends, interest and other income and short-term capital
gains earned by the Fund on its portfolio holdings, net of the Fund's expenses.
The term "net capital gains" means the excess of net long-term capital gains
over net short-term capital losses.
Under Rev. Rul. 89-91, 1989-1 C.B. 226, distributions on the preferred shares
and the common shares are required to consist proportionately of each type of
income with particular tax characteristics earned by a Fund. Thus, if for a
given taxable year, a particular percentage of the total net income of a Fund
qualifies for the Dividends Received Deduction, then a uniform percentage of the
distributions on the preferred shares and on the common shares of each Fund
other than Premium Dividends Fund I will qualify for such deductions. As a Fund
established prior to the issuance of Rev. Rul 89-91, Premium Dividends Fund I is
not subject to the proportionality requirement of the ruling. Instead, in the
case of Premium Dividend Fund I, if the qualified dividends received by the Fund
are less than its net income, exclusive of net capital gains, then the Fund will
allocate the qualified dividends first to the preferred shares and then to the
common shares, provided that Premium Dividend Fund I receives an opinion of
counsel that such a preferential allocation is permitted under applicable law.
If such an opinion is not received by Premium Dividend Fund I, then the Fund
will allocate the qualifying dividends ratably among the common shares and the
preferred shares, most likely ratably in proportion to the dividends paid on
shares of each. In the event that qualified dividends are allocated ratably
between the preferred shares and the common shares of a Fund, some portion of
the dividends payable on the preferred shares might not qualify for the
Dividends Received Deduction. In such event, the Fund would pay Additional
Dividends to maintain the Net After-Tax Return of holders of preferred shares.
Payment of any such Additional Dividends on the preferred shares will reduce the
amount available for payment of dividends on the common shares.
Based in part on the lack of any present intention on the part of any Fund to
redeem or purchase the preferred shares at any time in the future, each Fund
believes that under present law its preferred shares will constitute stock of
the Fund and distributions with respect to the preferred shares (other than
distributions in redemption of the preferred shares that are treated as
exchanges under Section 302(b) of the Code) will constitute dividends to the
extent of the Fund's current or accumulated earnings and profits as calculated
for U.S. federal income tax purposes. Such dividends generally will be taxable
as ordinary income to shareholders (other than qualified dividend income and
capital gain dividends). This view relies in part on a published ruling of the
IRS stating that certain preferred stock similar in many material respects to
the Preferred Shares represents equity. It is possible, however, that the IRS
might take a contrary position asserting, for example that the preferred shares
constitute debt of a Fund. If this position were upheld, the discussion of the
treatment of distributions above would not apply. Instead distributions by such
Fund to shareholders of preferred shares would constitute interest, whether or
not such distributions exceeded the earnings and profits of the Fund, would be
included in full in the income of the recipient and would be taxed as ordinary
income.
If a Fund retains any net capital gain for a taxable year, the Fund may
designate the retained amount as undistributed capital gains in a notice to
shareholders who, if subject to U.S. federal income tax on long-term capital
gains, (i) will be required to include in income for U.S. federal income tax
purposes, as long-term capital gain, their proportionate shares of such
undistributed amount, and (ii) will be entitled to credit their proportionate
shares of the tax paid by the Fund on the undistributed amount against their
U.S. federal income tax liabilities, if any, and to claim refunds to the extent
the credit exceeds such liabilities.
Sales, redemptions, and other dispositions of preferred shares generally are
taxable events for shareholders that are subject to tax. Shareholders should
consult their own tax advisers with reference to their individual circumstances
to determine whether any particular transaction in a Fund's shares (including a
redemption of preferred shares) is properly treated as a sale or exchange for
tax purposes, as the following discussion assumes, and the tax treatment of any
gains or losses recognized in such transactions. In general, if preferred shares
are sold, the shareholder will recognize gain or loss equal to the difference
between the amount realized on the sale and the shareholder's adjusted basis in
the shares sold. Such gain or loss generally will be treated as long-term gain
or loss if the shares were held for more than one year and otherwise generally
will be treated as short-term gain or loss. Even if a redemption of
34
preferred shares were treated as a sale or exchange, any declared but unpaid
dividends distributed to shareholders in connection with the redeemed shares
will be taxable to shareholders as dividends as described above.
Any loss recognized by a shareholder upon the sale or other disposition of
shares with a tax holding period of six months or less generally will be treated
as a long-term capital loss to the extent of any amounts treated as
distributions of long-term capital gain with respect to such shares. Losses on
sales or other dispositions of shares may be disallowed under "wash sale" rules
in the event a shareholder acquires other shares in a Fund (including those
acquired pursuant to reinvestment of dividends and/or capital gains
distributions) within a period of 61 days beginning 30 days before and ending 30
days after a sale or other disposition of shares.
Each Fund is required in certain circumstances to backup withhold on reportable
payments, including dividends, capital gains distributions, and proceeds of
sales or other dispositions of a Fund's shares paid to certain holders of the
Fund's shares who do not furnish the Fund with their correct social security
number or other taxpayer identification number and certain other certifications,
or who are otherwise subject to backup withholding. Backup withholding is not an
additional tax. Any amounts withheld from payments made to a shareholder may be
refunded or credited against such shareholder's U.S. federal income tax
liability, if any, provided that the required information is furnished to the
IRS.
The foregoing is a general and abbreviated summary of the provisions of the Code
and the Treasury regulations currently in effect as they generally affect the
taxation of a Fund and its preferred shareholders. As noted above, these
provisions are subject to change by legislative, judicial 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,
foreign, state, and local income or other taxes.
ADDITIONAL INFORMATION
A Registration Statement on Form N-14, relating to the shares offered hereby,
has been filed by the Acquiring Fund with the Securities and Exchange
Commission, Washington, D.C. The Joint Proxy Statement/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 Acquiring Fund and the
shares offered hereby, reference is made to the Registration Statement.
Statements contained in the Joint Proxy Statement/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.
FINANCIAL STATEMENTS
Incorporated herein by reference are:
(i) the audited financial statements of the Acquiring Fund for the
fiscal year ended 10/31/2006 are incorporated by reference herein to
the Acquiring Fund's annual report filed on Form N-CSR on
01/03/2007;
(ii) the audited financial statements of Premium Dividend Fund I for the
fiscal year ended 09/30/2006 are incorporated by reference herein to
Premium Dividend Fund I's annual report filed on Form N-CSR on
11/29/2006;
(iii) the audited financial statements of Select Dividend Trust for the
fiscal year ended 06/30/2006 are incorporated by reference herein to
the Select Dividend Trust's annual report filed on Form N-CSR on
08/29/06 and the unaudited financial statements of Select Dividend
Trust are incorporated by reference herein to the Select Dividend
Trust's semi-annual report dated 12/31/06 filed on Form N-CSRS on
02/28/07;
(iv) the audited financial statements of Global Dividend Fund for the
fiscal year ended 07/31/2006 are to be incorporated by reference
herein to the Global Dividend Fund's annual report filed on Form
N-CSR on 09/28/2006; and
35
(v) the audited financial statements of Preferred Dividend Fund for the
fiscal year ended 05/31/2006 are incorporated by reference herein to
the Preferred Dividend Fund's annual report filed on Form N-CSR on
08/01/2006 and the unaudited financial statements of Preferred
Dividend Fund are incorporated by reference herein to the Preferred
Dividend Fund's semi-annual report dated 11/30/06 filed on Form
N-CSRS on 01/26/07.
PRO FORMA FINANCIAL STATEMENTS
Set forth in Appendix B hereto are unaudited pro forma financial statements of
the Acquiring Fund giving effect to the Reorganization which include: (i) Pro
Forma Condensed Statements of Assets and Liabilities at October 31, 2006, (ii)
Pro Forma Condensed Statement of Operations for the one year period ended
October 31, 2006 and (iii) Pro Forma Portfolio of Investments at October 31,
2006.
36
APPENDIX A - DESCRIPTION OF RATINGS
The ratings of Moody's Investors Service, Inc. and Standard & Poor's Ratings
Group represent their opinions as to the quality of various debt instruments
they undertake to rate. It should be emphasized that ratings are not absolute
standards of quality. Consequently, debt instruments with the same maturity,
coupon and rating may have different yields while debt instruments of the same
maturity and coupon with different ratings may have the same yield.
MOODY'S INVESTORS SERVICE, INC. - PREFERRED SECURITIES RATINGS
Aaa: Preferred stocks which are rated "Aaa" are considered to be top quality.
This rating indicates good asset protection and the least risk of dividend
impairment within the universe of preferred stocks.
Aa: Preferred stocks which are rated "Aa" are considered to be high grade. This
rating indicates that there is reasonable assurance that earnings and asset
protection will remain relatively well maintained in the foreseeable future.
A: Preferred stocks which are rated "A" are considered to be upper-medium grade.
While risks are judged to be somewhat greater than in the "Aaa" and "Aa"
classifications, earnings and asset protection are, nevertheless, expected to be
maintained at adequate levels.
Baa: Preferred stocks which are rated "Baa" are judged lower-medium grade,
neither highly protected nor poorly secured. Earnings and asset protection
appear adequate at present but may be questionable over any great length of
time.
Ba: Preferred stocks which are rated "Ba" are considered to have speculative
elements and their future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
MOODY'S INVESTORS SERVICE, INC. - BOND RATINGS
Aaa: Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated "A" possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment at some time in the future.
Baa: Bonds which are rated "Baa" are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated "Ba" are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated "B" generally lack the characteristics of desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated "Caa" are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated "Ca" represented obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
STANDARD & POOR'S RATINGS GROUP - PREFERRED SECURITIES RATINGS
AAA: This is the highest rating that may be assigned to a preferred stock issue
and indicates an extremely strong capacity to pay the preferred stock
obligations.
AA: A preferred stock issue rated "AA" also qualifies as a high quality fixed
income security. The capacity to pay preferred stock obligations is very strong,
although not as overwhelming as for issues rated "AAA."
A: An issue rated "A" is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
BBB: An issue rated "BBB" is regarded as backed by an adequate capacity to pay
the preferred stock obligations. Although it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for preferred stock
in this category for issues in the "A" category.
BB: An issue rated "BB" is regarded, on balance, as predominantly speculative
with respect to the issuer's capacity to pay the preferred stock obligation.
While such issues will likely have some quality and protective characteristics,
there are outweighed by large uncertainties or major risk exposures to adverse
conditions.
STANDARD & POOR'S RATINGS GROUP - BOND RATINGS
AAA: Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated "BBB" is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B: Debt rated "BB," and "B" is regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
CCC: Debt rated "CCC" has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
2
CC: The rating "CC" is typically applied to debt subordinated to senior debt
that is assigned an actual or implied "CCC" rating.
3
APPENDIX B - PRO FORMA FINANCIAL STATEMENTS
John Hancock Patriot Premium Dividend Fund II
Pro-forma Statement of Operations
For the twelve month period ended October 31, 2006
(Unaudited)
The following unaudited pro forma combined Statement of Operations has been
derived from the Statement of Operations of John Hancock Patriot Premium
Dividend Fund II, John Hancock Patriot Premium Dividend Fund, John Hancock
Patriot Global Fund, John Hancock Patriot Preferred Dividend Fund, and John
Hancock Select Dividend Trust as of October 31, 2006 and such information has
been adjusted to give effect to the Reorganization as if the Reorganization had
occurred on October 31, 2006. The pro forma Combined Statement of Operations is
presented for informational purposes only and does not purport to be indicative
of the financial conditions that actually would have resulted if the
Reorganization had occurred on October 31, 2006. The pro forma Combined
Statement of Operations should be read in conjunction with the funds' financial
statements and related notes thereto which are included in the Proxy Statement
and Prospectus.
Patriot Patriot
Premium Premium Patriot Select Patriot Global
Dividend Fund Dividend Fund Dividend Trust Dividend Fund
I (PDF) II (PDT) (DIV) (PGD)
---------------------------------------------------------------
Investment Income:
Dividends $ 12,469,617 $ 15,960,496 $ 12,315,084 $ 10,073,021
Interest 271,660 335,606 267,949 222,372
---------------------------------------------------------------
12,741,277 16,296,102 12,583,033 10,295,393
---------------------------------------------------------------
Expenses:
Investment Management Fees 1,708,266 2,215,621 1,698,418 1,393,458
Administration Fees 214,241 280,899 318,454 261,273
Compliance Fees 3,522 3,451 3,478 2,767
Auction Fees 171,250 268,472 190,568 152,084
Custodian Fees 44,908 52,777 44,388 39,192
Printing 57,098 47,379 46,550 38,991
Transfer Agent Fees 49,328 43,033 41,392 33,892
Professional Fees 39,920 39,501 34,912 33,898
Blue Sky Fees 23,825 23,825 23,825 23,750
Trustees' Fees 10,133 14,487 10,591 9,050
Interest 978 0
Miscellaneous 18,256 24,087 21,995 16,550
Federal Excise 5,667 38,505
---------------------------------------------------------------
-
-----------------------------------------------------------------------------------------------
Total Expenses 2,346,414 3,014,510 2,434,571 2,043,410
-----------------------------------------------------------------------------------------------
Less Expense Reductions - - - -
-----------------------------------------------------------------------------------------------
Net Expenses 2,346,414 3,014,510 2,434,571 2,043,410
-----------------------------------------------------------------------------------------------
Net Investment Loss 10,394,863 13,281,592 10,148,462 8,251,983
-----------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on:
Investments (2,758,663) (319,381) (4,074,075) 662,515
Change in net unrealized
appreciation (depreciation) of:
Investments 14,998,763 16,940,149 16,420,848 8,136,966
Net realized and unrealized
gain / loss 12,240,100 16,620,768 12,346,773 8,799,481
PATRIOT
Patriot PREMIUM
Preferred DIVIDEND FUND
Dividend Fund PRO-FORMA ADJUSTMENTS II PRO-FORMA
(PPF) COMBINED (1) COMBINED
----------------------------------------------------------------
Investment Income:
Dividends $ 9,463,739 $ 60,281,957 $ - $ 60,281,957
Interest 166,608 1,264,195 - 1,264,195
----------------------------------------------------------------
9,630,347 61,546,152 - 61,546,152
----------------------------------------------------------------
Expenses:
Investment Management Fees 1,218,994 8,234,757 20,549(D) 8,255,306
Administration Fees 228,561 1,303,428 (267,828)(E) 1,035,600
Compliance Fees 2,438 15,656 15,656
Auction Fees 133,071 915,445 915,445
Custodian Fees 35,051 216,316 (54,079)(F) 162,237
Printing 39,500 229,518 (57,380)(F) 172,139
Transfer Agent Fees 38,517 206,162 (141,613)(F) 64,550
Professional Fees 34,790 183,021 (109,813)(F) 73,208
Blue Sky Fees 23,825 119,050 (59,525)(F) 59,525
Trustees' Fees 8,547 52,718 52,718
Interest 978 978
Miscellaneous 11,454 92,342 (55,405)(F) 36,937
Federal Excise 125,774 169,946 (169,946)(G) -
----------------------------------------------------------------
- -
------------------------------------------------------------------------------------------------
Total Expenses 1,900,432 11,739,337 (895,039) 10,844,298
------------------------------------------------------------------------------------------------
Less Expense Reductions - - - -
------------------------------------------------------------------------------------------------
Net Expenses 1,900,432 11,739,337 (895,039) 10,844,298
------------------------------------------------------------------------------------------------
Net Investment Loss 7,729,915 49,806,815 895,039 50,701,854
------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on:
Investments 258,775 (6,230,829) - (6,230,829)
Change in net unrealized
appreciation (depreciation) of:
Investments 3,910,249 60,406,975 - 60,406,975
Net realized and unrealized
gain / loss 4,169,024 54,176,146 - 54,176,146
Patriot Patriot
Premium Premium Patriot Select Patriot Global
Dividend Fund Dividend Fund Dividend Trust Dividend Fund
I (PDF) II (PDT) (DIV) (PGD)
----------------------------------------------------------------
Change in Distributions to
DARTS Series A (2,573,907) (1,881,075) -
Change in Distributions to
DARTS Series B - (1,887,807) -
Distributions to DARTS - (2,273,487)
Distributions to ARPS - - -
Distributions to AMPS - - (2,622,847) -
-------------------------------------------------------------------------------------------------------
Increase (Decrease) in net assets
resulting from operations $ 20,061,056 $ 26,133,478 $ 19,872,388 $ 14,777,977
=======================================================================================================
Average Net Assets 1,035,599,634 145,740,892 180,423,689 144,378,541 114,182,244
PATRIOT
Patriot PREMIUM
Preferred DIVIDEND FUND
Dividend Fund PRO-FORMA ADJUSTMENTS II PRO-FORMA
(PPF) COMBINED (1) COMBINED
------------------------------------------------------------
Change in Distributions to
DARTS Series A (4,454,982) (4,454,982)
Change in Distributions to
DARTS Series B (1,887,807) - (1,887,807)
Distributions to DARTS (2,273,487) (2,273,487)
Distributions to ARPS (1,978,776) (1,978,776) (1,978,776)
Distributions to AMPS (2,622,847) (2,622,847)
---------------------------------------------------------------------------------------------------
Increase (Decrease) in net assets
resulting from operations $ 9,920,163 $ 144,941,208 $ 895,039 $ 145,836,247
===================================================================================================
Average Net Assets 1,035,599,634 99,874,267 684,599,633 684,599,663
2
John Hancock Patriot Premium Dividend Fund II
Pro-forma Statement of Assets and Liabilities 10-31-06
(Unaudited)
The following unaudited pro forma combined Statement of Assets, Liabilities and
Capital has been derived from the Statement of Assets, Liabilities and Capital
of John Hancock Patriot Dividend Fund II, John Hancock Patriot Premium Dividend
Fund, John Hancock Patriot Global Fund, John Hancock Patriot Preferred Dividend
Fund, and John Hancock Select Dividend Trust as of October 31, 2006 and such
information has been adjusted to give effect to the Reorganization as if the
Reorganization had occurred on October 31, 2006. The pro forma Combined
Statement of Assets, Liabilities and Capital is presented for informational
purposes only and does not purport to be indicative of the financial conditions
that actually would have resulted if the Reorganization had occurred on October
31, 2006. The pro forma Combined Statement of Assets, Liabilities and Capital
should be read in conjunction with the funds' financial statements and related
notes thereto which are included in the Proxy Statement and Prospectus.
Patriot Premium Patriot Premium Patriot Select Patriot Global
Dividend Fund I Dividend Fund II Dividend Trust Dividend Fund
(PDF) (PDT) (DIV) (PGD)
--------------------------------------------------------------------
Assets:
Investments at value
(Cost - $203,174,590, $261,221,869,
$208,528,480, $168,729,018, and
$150,672,574, respectively) $ 223,246,005 $ 291,580,205 $ 223,912,194 $ 180,835,631
Cash 512 549 833 552
Receivable for investment sold 578,411 1,682,651 315,497
Dividends and interest receivable 975,196 1,128,257 849,947 646,120
Other assets 29,294 38,225 29,963 24,035
--------------- ---------------- -------------- --------------
Total Assets 224,829,418 294,429,887 224,792,937 181,821,835
------------------------------------------------------ ---------------- -------------- --------------
Liabilities:
Payable for investments purchased
Dividend Payable
Payable to Affiliates
Management Fees 162,515 211,687 155,512 125,698
Other 19,465 28,731 29,159 23,568
Other payables and accrued expenses 225,248 236,610 199,294 327,112
--------------- ---------------- -------------- --------------
Total Liabilities 407,228 477,028 383,965 476,378
-----------------------------------------------------------------------------------------------------------
Dutch Auction Rate Transferable Securities
Series A 68,580,036 50,199,235 60,210,448
DARTS Series B 50,155,208
Auction Market Preferred Shares (AMPS) 70,053,092
Auction Rate Preferred Shares (ARPS)
Net Assets:
Common shares capital paid-in 143,176,686 168,307,245 143,161,777 113,165,49
Accumulated net realized gain/(loss) on
investments (7,503,177) (5,599,691) (4,247,937) (4,395,767)
Net unrealized appreciation of investments 20,071,415 30,358,336 15,383,715 12,106,614
Accumulated net investment income 97,170 532,526 58,325 258,693
Patriot Premium
Patriot Preferred Dividend Fund
Dividend Fund II pro forma
(PPF) ADJUSTMENTS combined
--------------------------------------------------------
Assets:
Investments at value
(Cost - $203,174,590, $261,221,869,
$208,528,480, $168,729,018, and
$150,672,574, respectively) $ 156,000,132 $ -- $ 1,075,574,167
Cash 826 -- 3,272
Receivable for investment sold -- -- 2,576,559
Dividends and interest receivable 431,701 -- 4,031,221
Other assets 20,752 -- 142,269
----------------- -------------- ---------------
Total Assets 156,453,411 -- 1,082,327,488
-------------------------------------------------------- -------------- ---------------
Liabilities:
Payable for investments purchased
Dividend Payable
Payable to Affiliates
Management Fees 108,587 763,999
Other 20,351 121,274
Other payables and accrued expenses 203,668 1,191,932
----------------- -------------- ---------------
Total Liabilities 332,606 2,077,205
-----------------------------------------------------------------------------------------------
Dutch Auction Rate Transferable Securities
Series A 178,989,719
DARTS Series B 50,155,208
Auction Market Preferred Shares (AMPS) 70,053,092
Auction Rate Preferred Shares (ARPS) 52,721,025 52,721,025
Net Assets:
Common shares capital paid-in 99,436,059 667,247,236
Accumulated net realized gain/(loss) on
investments (457,776) (906,061)(A) (23,110,349)
Net unrealized appreciation of investments 5,327,558 83,247,638
Accumulated net investment income -- (414,188)(B) 532,526
3
Patriot Premium Patriot Premium Patriot Select Patriot Global
Dividend Fund I Dividend Fund II Dividend Trust Dividend Fund
(PDF) (PDT) (DIV) (PGD)
--------------------------------------------------------------------
Distributions in excess of net investment
income
-- -- -- --
$ 155,842,154 $ 193,598,416 $ 154,355,880 $ 121,135,009
=============================================================== ================ ============== ==============
Net Assets applicable to common shares
Patriot Premium Dividend Fund II -- $ 193,598,416
Patriot Premium Dividend Fund I $ 155,842,154
Patriot Global Dividend Fund $ 121,135,009
Patriot Preferred Dividend Fund
Patriot Select Dividend Trust $ 154,355,880
=============================================================== ================ ============== ==============
Shares outstanding
Patriot Premium Dividend Fund II $ 15,046,539
Patriot Premium Dividend Fund I $ 15,292,571
Patriot Global Dividend Fund $ 8,344,700
Patriot Preferred Dividend Fund
Patriot Select Dividend Trust $ 10,010,393
=============================================================== ================ ============== ==============
Net Asset value per common share
Patriot Premium Dividend Fund II $ 12.87
Patriot Premium Dividend Fund I $ 10.19
Patriot Global Dividend Fund $ 14.52
Patriot Preferred Dividend Fund
Patriot Select Dividend Trust $ 15.42
Patriot Premium
Patriot Preferred Dividend Fund
Dividend Fund II pro forma
(PPF) ADJUSTMENTS combined
--------------------------------------------------------
Distributions in excess of net investment
income (906,061) 906,061 (A) --
$ 103,399,780 727,917,051
================================================================= ============== ===============
Net Assets applicable to common shares
Patriot Premium Dividend Fund II $ 534,732,823 (C) $ 727,917,051
Patriot Premium Dividend Fund I $ (155,842,154)(C) --
Patriot Global Dividend Fund $ (121,135,009)(C) --
Patriot Preferred Dividend Fund $ 103,399,780 $ (103,399,780)(C)
Patriot Select Dividend Trust $ (154,355,880)(C) --
================================================================= ============== ===============
Shares outstanding
Patriot Premium Dividend Fund II 40,904,864 (C) $ 56,606,168
Patriot Premium Dividend Fund I (15,292,571)(C)
Patriot Global Dividend Fund (8,344,700)(C) --
Patriot Preferred Dividend Fund $ 7,257,200 (7,257,200)(C)
Patriot Select Dividend Trust (10,010,393)(C)
================================================================= ============== ===============
Net Asset value per common share
Patriot Premium Dividend Fund II -- $ 12.86
Patriot Premium Dividend Fund I --
Patriot Global Dividend Fund --
Patriot Preferred Dividend Fund $ 14.25 --
Patriot Select Dividend Trust --
See notes to Pro-Forma Statements
4
John Hancock Patriot Premium Fund II
Schedule of Investments
October 31, 2006 (unaudited)
----------------------------------------------------------------------------------------------------------------
Patriot Premium Patriot Premium Dividend Patriot Select Dividend
Dividend Fund I Fund II Fund
--------------------------------------------------------------------------
% of Net
Issuer Assets Shares Value Shares Value Shares Value
----------------------------------------------------------------------------------------------------------------
COMMON STOCKS
Electric Utilities 3.16%
FPL Group, Inc. 20,000 1,020,000 20,000 1,020,000 20,000 1,020,000
Pinacle West Capital Corp. 37,000 1,768,970 40,000 1,912,400 30,000 1,434,300
Progress Energy, Inc. 72,500 3,335,000 99,000 4,554,000 84,000 3,864,000
Progress Energy, Inc.
(Contingent Value
Obligation) 69,000 21,390 176,250 54,638 20,000 6,200
Southern Co.
--------- --------- ---------
6,145,360 7,541,038 6,324,500
--------- --------- ---------
Gas Utilities 2.66%
National Fuel Gas Co. 59,850 2,238,390 86,000 3,216,400 56,150 2,100,010
People's Energy Corp. 58,400 2,551,496 70,200 3,067,038 57,750 2,523,098
--------- --------- ---------
4,789,886 6,283,438 4,623,108
--------- --------- ---------
Integrated 2.64%
Telecommunication
Services
AT&T, Inc. 97,850 3,351,363 102,350 3,505,488 97,700 3,346,225
Verizon Communications
Inc. 33,100 1,224,700 40,000 1,480,000 33,150 1,226,550
--------- --------- ---------
4,576,063 4,985,488 4,572,775
--------- --------- ---------
Multi-Utilities & 41.49%
Unregulated Power
Alliant Energy Corp. 144,380 5,536,973 182,900 7,014,215 148,000 5,675,800
Ameren Corp. 45,900 2,483,190 80,000 4,328,000 85,400 4,620,140
CH Energy Group, Inc. 151,050 7,857,621 198,800 10,341,576 151,250 7,868,025
Consolidated Edison, Inc. 32,000 1,547,200 78,000 3,771,300 45,000 2,175,750
Dominion Resources, Inc. 64,300 5,207,657 79,700 6,454,903 51,000 4,130,490
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Patriot Global Dividend Patriot Preferred Patriot Premium
Fund Dividend Fund Dividend Fund II pro
forma combined
-----------------------------------------------------------------------
Issuer Shares Value Shares Value Shares Value
----------------------------------------------------------------------------------------------------
COMMON STOCKS
Electric Utilities
FPL Group, Inc. 60,000 3,060,000
Pinacle West Capital Corp. 107,000 5,115,670
Progress Energy, Inc. 48,000 2,208,000 303,500 13,961,000
Progress Energy, Inc.
(Contingent Value
Obligation) 35,000 10,850 37,500 11,625 337,750 104,703
Southern Co. 20,000 728,000 20,000 728,000
--------- ---------- ----------
2,946,850 11,625 22,969,373
--------- ---------- ----------
Gas Utilities
National Fuel Gas Co. 202,000 7,554,800
People's Energy Corp. 56,450 2,466,301 28,000 1,223,320 270,800 11,831,252
--------- ---------- ----------
2,466,301 1,223,320 19,386,052
--------- ---------- ----------
Integrated
Telecommunication
Services
AT&T, Inc. 94,850 3,248,613 22,550 772,338 415,300 14,224,025
Verizon Communications
Inc. 29,650 1,097,050 135,900 5,028,300
--------- ---------- ----------
4,345,663 772,338 19,252,325
--------- ---------- ----------
Multi-Utilities &
Unregulated Power
Alliant Energy Corp. 118,420 4,541,407 52,000 1,994,200 645,700 24,762,595
Ameren Corp. 30,000 1,623,000 241,300 13,054,330
CH Energy Group, Inc. 120,900 6,289,218 622,000 32,356,440
Consolidated Edison, Inc. 155,000 7,494,250
Dominion Resources, Inc. 47,500 3,847,025 27,500 2,227,225 270,000 21,867,300
----------------------------------------------------------------------------------------------------
5
-----------------------------------------------------------------------------------------------------------------------------
Patriot Premium Patriot Premium Dividend Patriot Select Dividend
Dividend Fund I Fund II Fund
--------------------------------------------------------------------------
% of Net
Issuer Assets Shares Value Shares Value Shares Value
-----------------------------------------------------------------------------------------------------------------------------
DTE Energy Co. 126,000 5,724,180 193,500 8,790,705 155,900 7,082,537
Duke Energy Corp. 84,650 2,678,326 165,200 5,226,928 53,410 1,689,892
Energy East Corp. 257,000 6,247,670 320,000 7,779,200 242,000 5,883,020
KeySpan Corp. 158,250 6,421,785 236,250 9,587,025 183,650 7,452,517
NiSource, Inc. 87,450 2,034,962 158,050 3,677,824 117,700 2,738,879
NSTAR 350,000 12,176,500 276,000 9,602,040 188,000 6,540,520
OGE Energy Corp. 137,632 5,309,843 96,092 3,707,229
SCANA Corp. 21,700 867,132 28,400 1,134,864 21,700 867,132
TECO Energy, Inc. 173,000 2,852,770 196,750 3,244,408 176,750 2,914,608
Vectren Corp. 30,000 871,800 30,000 871,800
WPS Resources Corp. 30,400 1,617,584 55,400 2,947,834 51,000 2,713,710
Xcel Energy, Inc. 164,000 3,619,480 228,000 5,031,860 169,000 3,729,830
----------- ------------ --------------
66,873,030 95,114,325 70,661,879
----------- ------------ --------------
Oil Gas Storage & Transportation 1.16%
Kinder Morgan, Inc. 20,000 2,102,000 20,000 2,102,000 20,000 2,102,000
----------- ------------ --------------
TOTAL COMMON STOCKS
($311,001,723) 51.11% $84,486,338 $116,026,387 $ 88,284,262
----------- ------------ --------------
Agricultural Products 2.53%
Ocean Spray Cranberries, Inc., 6.25%,
Ser A 35,000 2,878,750 44,250 3,639,563 40,000 3,290,000
----------- ------------ --------------
Consumer Finance 3.49%
CIT Group, Inc., 6.35%, Ser A 20,000 520,400 20,000 520,400 20,000 520,400
HSBC Finance Corp., 6.36%
Depository Shares, Ser B
SLM Corp., 6,97%, Ser A 13,000 693,550 92,000 4,908,200 92,000 4,908,200
----------- ------------ --------------
1,213,950 5,428,600 5,428,600
----------- ------------ --------------
Diversified Banks 4.53%
Bank of America Corp., 6.75%,
Depository Shares, Ser VI 170,000 4,401,300 260,000 6,731,400 220,000 5,695,800
HSBC Holdings Plc, 6.20%,Ser A 25,000 628,500 0
Royal Bank of Scotland 65,200 1,566,756 140,000 3,364,200
-----------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
Patriot Global Dividend Patriot Preferred Patriot Premium
Fund Dividend Fund Dividend Fund II pro
forma combined
----------------------------------------------------------------------------
Issuer Shares Value Shares Value Shares Value
--------------------------------------------------------------------------------------------------------------------
DTE Energy Co. 116,900 5,310,767 30,000 1,362,900 622,300 28,271,089
Duke Energy Corp. 134,250 4,247,670 437,510 13,842,816
Energy East Corp. 194,000 4,716,140 1,013,000 24,626,030
KeySpan Corp. 131,600 5,340,328 91,550 3,715,099 801,300 32,516,754
NiSource, Inc. 82,400 1,917,448 46,400 1,079,728 492,000 11,448,840
NSTAR 158,000 5,496,820 100,000 3,479,000 1,072,000 37,294,880
OGE Energy Corp. 233,724 9,017,072
SCANA Corp. 17,700 707,292 15,500 619,380 105,000 4,195,800
TECO Energy, Inc. 140,000 2,308,600 62,000 1,022,380 748,500 12,342,765
Vectren Corp. 60,000 1,743,600
WPS Resources Corp. 60,400 3,213,884 197,200 10,493,012
Xcel Energy, Inc. 136,000 3,001,520 59,000 1,302,130 756,000 16,684,920
------------ ----------- -------------
52,561,119 16,802,042 302,012,493
------------ ----------- -------------
Oil Gas Storage & Transportation
Kinder Morgan, Inc. 20,000 2,102,000 80,000 8,408,000
------------ -------------
TOTAL COMMON STOCKS
($311,001,723) $ 64,421,932 $18,809,325 $372,028,243
------------ ----------- -------------
Agricultural Products
Ocean Spray Cranberries, Inc.,
6.25%, Ser A 45,000 3,701,250 60,000 4,935,000 224,250 18,844,563
------------ ----------- -------------
Consumer Finance
CIT Group, Inc., 6.35%, Ser A 20,000 520,400 60,000 1,561,200 140,000 3,642,800
HSBC Finance Corp., 6.36%
Depository Shares, Ser B 35,600 923,464 35,600 923,464
SLM Corp., 6,97%, Ser A 92,000 4,908,200 101,000 5,388,350 390,000 20,806,500
------------ ----------- -------------
5,428,600 7,873,014 25,372,764
------------ ----------- -------------
Diversified Banks
Bank of America Corp., 6.75%,
Depository Shares, Ser VI 170,000 4,401,300 140,000 3,624,600 960,000 24,854,400
HSBC Holdings Plc, 6.20%,Ser A 25,000 628,500
Royal Bank of Scotland 28,200 677,646 80,000 1,922,400 313,400 7,531,002
--------------------------------------------------------------------------------------------------------------------
6
-----------------------------------------------------------------------------------------------------------------
Patriot Premium Patriot Premium Dividend Patriot Select Dividend
Dividend Fund I Fund II Fund
% of Net
------------------------------------------------------------------------
Issuer Assets Shares Value Shares Value Shares Value
-----------------------------------------------------------------------------------------------------------------
Group Plc, 5.75%, Ser L
(United Kingdom)
--------- ---------- ---------
6,596,556 10,095,600 5,695,800
--------- ---------- ---------
Diversified Chemicals 0.40%
DuPont (E.I.) de Nemours &
Co., $4.50, Ser B
Electric Utilities 30.29%
Alabama Power Co., 5.20% 240,000 5,829,600 262,475 6,375,518 240,000 5,829,600
Boston Edison Co., 4.25% 58,152 4,623,084 64,157 5,100,482
Boston Edison Co., 4.78% 25,558 2,281,052 67,342 6,010,274
Carolina Power & Light Co.,
$4.20 41,151 3,325,515
Carolina Power & Light Co.,
$5.44 11,382 1,098,363
Central Illinois Light Co.,
4.64%
Central Maine Power Co.,
4.75%
Connecticut Light & Power
Co., 3.90%,Ser 1949
Delmarva Power & Light
Co., 3.70% 13,109 900,835
Duquesne Light Co., 6.50% 105,900 5,310,885 107,000 5,366,050 107,000 5,366,050
Entergy Arkansas, Inc., 50,000
6.45% 1,273,440 50,000 1,273,440 100,000 2,546,880
Entergy Mississippi, Inc., 150,000
6.25% 3,731,250 153,000 3,805,875 104,000 2,587,000
FPC Capital I, 7.10%, Ser A 150,400 3,823,168
Georgia Power Co., 6.00%, 213,800
Ser R 5,327,896 54,900 1,368,108
Great Plains Energy, Inc., 12,510
4.50% 1,029,573
Great Plains Energy, Inc., 99,900
8.00% Conv 2,497,500
HECO Capital Trust III, 107,900
6.50% 2,699,658 37,500 938,250
Interstate Power & Light 25,000
Co., 7.10%, Ser C 675,000 76,500 2,065,500 25,000 675,000
Interstate Power & Light 25,000
Co., 8.375%, Ser B 806,250 25,000 806,250 46,000 1,483,500
Massachusetts Electric Co.,
4.76%
------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Patriot Premium
Patriot Global Dividend Patriot Preferred Dividend Fund II pro
Fund Dividend Fund forma combined
----------------------------------------------------------------------
Issuer Shares Value Shares Value Shares Value
----------------------------------------------------------------------------------------------------
Group Plc, 5.75%, Ser L
(United Kingdom)
--------- --------- ----------
5,078,946 5,547,000 33,013,902
--------- --------- ----------
Diversified Chemicals
DuPont (E.I.) de Nemours &
Co., $4.50, Ser B 33,900 2,881,500 33,900 2,881,500
--------- ----------
Electric Utilities
Alabama Power Co., 5.20% 222,000 5,392,380 251,400 6,106,506 1,215,875 29,533,604
Boston Edison Co., 4.25% 122,309 9,723,566
Boston Edison Co., 4.78% 19,380 1,729,665 112,280 10,020,990
Carolina Power & Light Co.,
$4.20 41,151 3,325,515
Carolina Power & Light Co.,
$5.44 11,382 1,098,363
Central Illinois Light Co.,
4.64% 7,460 560,899 7,460 560,899
Central Maine Power Co.,
4.75% 11,015 944,536 11,015 944,536
Connecticut Light & Power
Co., 3.90%,Ser 1949 27,255 940,298 27,255 940,298
Delmarva Power & Light
Co., 3.70% 13,109 900,835
Duquesne Light Co., 6.50% 100,000 5,015,000 100,000 5,015,000 519,900 26,072,985
Entergy Arkansas, Inc.,
6.45% 50,000 1,273,440 100,000 2,546,880 350,000 8,914,080
Entergy Mississippi, Inc.,
6.25% 120,000 2,985,000 140,000 3,482,500 667,000 16,591,625
FPC Capital I, 7.10%, Ser A 150,400 3,823,168
Georgia Power Co., 6.00%,
Ser R 268,700 6,696,004
Great Plains Energy, Inc.,
4.50% 12,510 1,029,573
Great Plains Energy, Inc.,
8.00% Conv 99,900 2,497,500
HECO Capital Trust III,
6.50% 145,400 3,637,908
Interstate Power & Light
Co., 7.10%, Ser C 25,000 675,000 32,000 864,000 183,500 4,954,500
Interstate Power & Light
Co., 8.375%, Ser B 36,800 1,186,800 132,800 4,282,800
Massachusetts Electric Co.,
4.76% 6,166 562,841 6,166 562,841
----------------------------------------------------------------------------------------------------
7
------------------------------------------------------------------------------------------------------------------------------
Patriot Premium Patriot Premium Dividend Patriot Select Dividend
Dividend Fund I Fund II Fund
% of Net ---------------------------------------------------------------------------
Issuer Assets Shares Value Shares Value Shares Value
------------------------------------------------------------------------------------------------------------------------------
Monongahela Power Co., $6.28 Ser D 24,931 2,406,622
PPL Electric Utilities Corp., 4.40% 29,790 2,465,123
PPL Electric Utilities Corp., 4.60% 3,917 349,347
PPL Electric Utilities Corp.,
6.25%, Depository Shares 200,000 5,118,760 200,000 5,118,760 200,000 5,118,760
PPL Energy Supply LLC, 7.00% 70,000 1,794,800 50,000 1,282,000 50,000 1,282,000
Public Service Electric & Gas Co.,
4.30%, Ser C 8,280 670,680
Southern California Edison Co.,
6.00%, Ser C 18,000 1,823,063 18,000 1,823,063 18,000 1,823,063
Southern California Edison Co.,
6.125% 35,000 3,553,596 35,000 3,553,596 35,000 3,553,596
Union Electric Co., $3.70
Virginia Electric & Power Co., $6.98 35,000 3,659,688 10,500 1,097,906
Virginia Electric & Power Co., $7.05 10,200 1,067,175 10,000 1,046,250 10,000 1,046,250
Wisconsin Public Service Corp.,
6.76% 35,883 3,709,405 7,500 775,313
Xcel Energy, Inc., $4.08, Ser B 8,610 716,783
Xcel Energy, Inc., $4.11, Ser D 24,921 1,887,766 8,770 664,328
Xcel Energy, Inc., $4.16, Ser E 9,410 785,735
---------- ---------- ----------
56,173,543 60,565,328 38,285,399
---------- ---------- ----------
Gas Utilities 3.84%
Southern Union Co., 7.55%, Ser A 201,100 5,252,732 239,700 6,260,964 226,300 5,910,956
Southwest Gas Capital II, 7.70%
---------- ---------- ----------
5,252,732 6,260,964 5,910,956
---------- ---------- ----------
Integrated Telecommunication
Services 0.55%
Telephone & Data Systems, Inc.,
6.625% 101,900 2,527,120 19,300 478,640
---------- ----------
------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
Patriot Premium
Patriot Global Dividend Patriot Preferred Dividend Fund II pro
Fund Dividend Fund forma combined
------------------------------------------------------------------------
Issuer Shares Value Shares Value Shares Value
---------------------------------------------------------------------------------------------------------------
Monongahela Power Co., $6.28 Ser D 24,931 2,406,622
PPL Electric Utilities Corp., 4.40% 29,790 2,465,123
PPL Electric Utilities Corp., 4.60% 3,917 349,347
PPL Electric Utilities Corp.,
6.25%, Depository Shares 200,000 5,118,760 200,000 5,118,760 1,000,000 25,593,800
PPL Energy Supply LLC, 7.00% 50,000 1,282,000 50,000 1,282,000 270,000 6,922,800
Public Service Electric & Gas Co.,
4.30%, Ser C 8,280 670,680
Southern California Edison Co.,
6.00%, Ser C 12,000 1,215,376 14,000 1,417,938 80,000 8,102,504
Southern California Edison Co.,
6.125% 40,000 4,061,252 50,000 5,076,565 195,000 19,798,604
Union Electric Co., $3.70 12,262 961,034 12,262 961,034
Virginia Electric & Power Co., $6.98 45,500 4,757,594
Virginia Electric & Power Co., $7.05 30,200 3,159,675
Wisconsin Public Service Corp.,
6.76% 6,095 630,071 49,478 5,114,788
Xcel Energy, Inc., $4.08, Ser B 8,610 716,783
Xcel Energy, Inc., $4.11, Ser D 33,691 2,552,093
Xcel Energy, Inc., $4.16, Ser E 9,410 785,735
---------- ---------- -----------
31,213,581 34,230,919 220,468,769
---------- ---------- -----------
Gas Utilities
Southern Union Co., 7.55%, Ser A 128,700 3,361,644 201,400 5,260,568 997,200 26,046,864
Southwest Gas Capital II, 7.70% 72,300 1,881,246 72,300 1,881,246
---------- ---------- -----------
3,361,644 7,141,814 27,928,110
---------- ---------- -----------
Integrated Telecommunication
Services
Telephone & Data Systems, Inc.,
6.625% 40,000 992,000 161,200 3,997,760
---------- -----------
---------------------------------------------------------------------------------------------------------------
8
-----------------------------------------------------------------------------------------------------------------
Patriot Premium Patriot Premium Dividend Patriot Select Dividend
Dividend Fund I Fund II Fund
% of Net ------------------------------------------------------------------------
Issuer Assets Shares Value Shares Value Shares Value
-----------------------------------------------------------------------------------------------------------------
Investment Banking & 12.64%
Brokerage
Bear Stearns Cos., Inc.
(The), 5.49%, Depository
Shares, Ser G 25,200 1,183,140 50,650 2,378,018 140,200 6,582,390
Bear Stearns Cos., Inc.
(The), 5.72%, Depository
Shares, Ser F 102,460 5,097,385 95,300 4,741,175
Bear Stearns Cos., Inc.
(The), 6.15%, Depository
Shares, Ser E 84,000 4,222,680 23,000 1,156,210
Goldman Sachs Group, Inc.,
6.20%, Ser B 20,000 513,000 20,000 513,000 20,000 513,000
Lehman Brothers Holdings,
Inc., 5.67%, Depository
Shares, Ser D 102,700 5,427,695 124,800 6,595,680 125,600 6,637,960
Lehman Brothers Holdings,
Inc., 5.94%, Depository
Shares, Ser C 90,400 4,610,400 53,000 2,703,000 13,000 663,000
Merrill Lynch & Co., Inc.,
6.375%, Depository Shares,
Ser 3 30,000 780,600 26,900 699,938 25,000 650,500
---------- ---------- ----------
17,612,220 21,853,491 16,203,060
---------- ---------- ----------
Multi-Line Insurance 3.64%
MetLife, Inc., 6.50%, Ser B 115,000 2,990,000 215,000 5,590,000 215,000 5,590,000
---------- ---------- ----------
Multi-Utilities & 12.84%
Unregulated Power
Baltimore Gas & Electric
Co., 6.70%, Ser 1993 20,250 2,107,899
Baltimore Gas & Electric
Co., 6.99%, Ser 1995 34,000 3,553,000 30,000 3,135,000 40,000 4,180,000
BGE Capital Trust II, 6.20% 205,000 5,028,650 205,300 5,036,009 200,000 4,906,000
PNM Resources Inc., 6.75%
Conv 98,049 4,869,113 67,896 3,371,715 66,055 3,280,291
PSEG Funding Trust II,
8.75% 71,400 1,874,964 36,300 953,238
Public Service Electric &
Gas Co., 4.08%, Ser A 5,000 392,500
Public Service Electric &
Gas Co., 4.18%, Ser B 13,677 1,100,999
Public Service Electric & 26,800 2,839,125 47,998 5,084,788 30,627 3,244,548
-----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Patriot Premium
Patriot Global Dividend Patriot Preferred Dividend Fund II pro
Fund Dividend Fund forma combined
----------------------------------------------------------------------
Issuer Shares Value Shares Value Shares Value
----------------------------------------------------------------------------------------------------
Investment Banking &
Brokerage
Bear Stearns Cos., Inc.
(The), 5.49%, Depository
Shares, Ser G 56,000 2,629,200 272,050 12,772,748
Bear Stearns Cos., Inc.
(The), 5.72%, Depository
Shares, Ser F 91,000 4,527,250 40,000 1,990,000 328,760 16,355,810
Bear Stearns Cos., Inc.
(The), 6.15%, Depository
Shares, Ser E 100,600 5,057,162 207,600 10,436,052
Goldman Sachs Group, Inc.,
6.20%, Ser B 20,000 513,000 47,800 1,226,070 127,800 3,278,070
Lehman Brothers Holdings,
Inc., 5.67%, Depository
Shares, Ser D 145,000 7,663,250 48,000 2,536,800 546,100 28,861,385
Lehman Brothers Holdings,
Inc., 5.94%, Depository
Shares, Ser C 28,100 1,433,100 102,500 5,227,500 287,000 14,637,000
Merrill Lynch & Co., Inc.,
6.375%, Depository Shares,
Ser 3 30,000 780,600 105,150 2,736,003 217,050 5,647,641
---------- ---------- ----------
17,546,400 18,773,535 91,988,706
---------- ---------- ----------
Multi-Line Insurance
MetLife, Inc., 6.50%, Ser B 215,000 5,590,000 260,000 6,760,000 1,020,000 26,520,000
--------- --------- ----------
Multi-Utilities &
Unregulated Power
Baltimore Gas & Electric
Co., 6.70%, Ser 1993 20,250 2,107,899
Baltimore Gas & Electric
Co., 6.99%, Ser 1995 10,000 1,045,000 20,000 2,090,000 134,000 14,003,000
BGE Capital Trust II, 6.20% 610,300 14,970,659
PNM Resources Inc., 6.75%
Conv 38,110 1,892,543 270,110 13,413,663
PSEG Funding Trust II,
8.75% 30,000 787,800 137,700 3,616,002
Public Service Electric &
Gas Co., 4.08%, Ser A 5,000 392,500
Public Service Electric &
Gas Co., 4.18%, Ser B 40,000 3,220,000 53,677 4,320,999
Public Service Electric & 7,000 741,563 19,000 2,012,813 131,425 13,922,836
----------------------------------------------------------------------------------------------------
9
---------------------------------------------------------------------------------------------------------
Patriot Premium Patriot Premium Patriot Select
Dividend Fund I Dividend Fund II Dividend Fund
% of Net ------------------------------------------------------------------
Issuer Assets Shares Value Shares Value Shares Value
---------------------------------------------------------------------------------------------------------
Gas Co., 6.92%
SEMPRA Energy, $4.36 19,250 1,559,250 19,250 1,559,250
SEMPRA Energy, $4.75, Ser
53 6,305 543,806 6,305 543,806
South Carolina Electric &
Gas Co., 6.52% 55,000 5,546,409 55,000 5,546,409 55,000 5,546,409
TECO Capital Trust I,
8.50% 12,501 323,776
---------- ---------- ----------
24,035,037 27,878,376 24,213,542
---------- ---------- ----------
Oil & Gas Exploration &
Production 10.68%
Anadarko Petroleum Corp.,
5.46%, Depository Shares,
Ser B 20,000 1,900,626 20,000 1,900,626
Apache Corp., 5.68%,
Depository Shares, Ser B 26,700 2,639,129 51,500 5,090,456 48,174 4,761,701
Devon Energy Corp.,
6.49%, Ser A 50,000 5,081,250 50,645 5,146,798 53,500 5,436,938
Nexen, Inc., 7.35%
(Canada) 205,500 5,229,975 112,300 2,858,035 95,000 2,417,750
---------- ---------- ----------
12,950,354 14,995,915 14,517,015
---------- ---------- ----------
Other Diversified
Financial Services 3.73%
Citigroup, Inc., 6.213%,
Depository Shares, Ser G 96,000 5,020,800 44,000 2,301,200
Citigroup, Inc., 6.231%,
Depository Shares, Ser H 56,400 2,877,528 86,100 4,392,822
Citigroup, Inc., 6.365%,
Depository Shares, Ser F 18,900 966,735
---------- ----------
8,865,063 6,694,022
---------- ----------
Regional Banks 5.46%
Abbey National Plc,
7.375%, Depository
Shares, Ser B (United
Kingdom) 29,700 770,418 29,700 770,418 29,700 770,418
HSBC USA, Inc., $2.8575 50,700 2,485,887 95,900 4,702,102 108,000 5,295,380
Sovereign Bancorp, Inc.,
7.30%, Depository Shares,
Ser C 90,000 2,438,100 90,000 2,438,100 90,000 2,438,100
---------- ---------- ----------
5,694,405 7,910,620 8,503,898
---------- ---------- ----------
Trucking 1.37%
---------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
Patriot Premium
Patriot Global Patriot Preferred Dividend Fund II pro
Dividend Fund Dividend Fund forma combined
------------------------------------------------------------------
Issuer Shares Value Shares Value Shares Value
----------------------------------------------------------------------------------------------
Gas Co., 6.92%
SEMPRA Energy, $4.36 38,500 3,118,500
SEMPRA Energy, $4.75, Ser
53 12,610 1,087,613
South Carolina Electric &
Gas Co., 6.52% 55,000 5,546,409 220,000 22,185,636
TECO Capital Trust I,
8.50% 12,501 323,776
---------- ---------- ----------
12,445,514 4,890,613 93,463,083
---------- ---------- ----------
Oil & Gas Exploration &
Production
Anadarko Petroleum Corp.,
5.46%, Depository Shares,
Ser B 20,000 1,900,626 34,567 3,284,947 94,567 8,986,825
Apache Corp., 5.68%,
Depository Shares, Ser B 48,075 4,751,916 62,200 6,148,084 236,649 23,391,286
Devon Energy Corp.,
6.49%, Ser A 50,000 5,081,250 63,500 6,453,188 267,645 27,199,423
Nexen, Inc., 7.35%
(Canada) 100,000 2,545,500 200,400 5,100,180 713,200 18,150,940
---------- ---------- ----------
14,279,292 20,986,399 77,728,474
---------- ---------- ----------
Other Diversified
Financial Services
Citigroup, Inc., 6.213%,
Depository Shares, Ser G 52,000 2,719,600 192,000 10,041,600
Citigroup, Inc., 6.231%,
Depository Shares, Ser H 85,200 4,346,904 88,700 4,525,474 316,400 16,142,728
Citigroup, Inc., 6.365%,
Depository Shares, Ser F 18,900 966,735
---------- ---------- ----------
4,346,904 7,245,074 27,151,063
---------- ---------- ----------
Regional Banks
Abbey National Plc,
7.375%, Depository
Shares, Ser B (United
Kingdom) 29,700 770,418 29,700 770,418 148,500 3,852,090
HSBC USA, Inc., $2.8575 108,650 5,327,251 131,700 6,457,422 494,950 24,268,042
Sovereign Bancorp, Inc.,
7.30%, Depository Shares,
Ser C 90,000 2,438,100 70,000 1,896,300 430,000 11,648,700
---------- ---------- ----------
8,535,769 9,124,140 39,768,832
---------- ---------- ----------
Trucking
----------------------------------------------------------------------------------------------
10
------------------------------------------------------------------------------------------------------------
Patriot Premium Patriot Premium Dividend Patriot Select Dividend
Dividend Fund I Fund II Fund
--------------------------------------------------------------------------
% of Net
Issuer Assets Shares Value Shares Value Shares Value
------------------------------------------------------------------------------------------------------------
AMERCO, 8.50%, Ser A 55,000 1,411,300
--------------
TOTAL PREFERRED 95.99%
STOCKS $137,924,667 $ 174,494,818 $ 134,810,933
============ ============== ==============
($676,513,809)
--------------------------------------------------------------------------------------------------
Patriot Global Dividend Patriot Preferred Patriot Premium
Fund Dividend Fund Dividend Fund II pro
forma combined
---------------------------------------------------------------------------
Issuer Shares Value Shares Value Shares Value
--------------------------------------------------------------------------------------------------
AMERCO, 8.50%, Ser A 155,000 3,977,300 180,000 4,618,800 390,000 10,007,400
------------- ------------- -------------
TOTAL PREFERRED
STOCKS $ 115,504,699 $ 135,999,808 $ 698,734,925
============= ============= =============
($676,513,809)
Patriot Premium Patriot Premium Dividend Patriot Select Dividend
Dividend Fund I Fund II Fund
------------------------------------------------------------------------------
% of Net
Issuer, maturity date Assets Par
Value Par Value Par Value
(000's (000's (000's
omitted) Value omitted) Value omitted) Value
---------------------------------------------------------------------------------------------------------------------
SHORT-TERM
INVESTMENTS
Commercial Paper 0.66%
Chevron Texaco Corp., 11-
01-06 835 835,000 1,059 1,059,000 817 817,000
------------ ------------- ------------
TOTAL SHORT-TERM 0.66%
INVESTMENTS $ 835,000 $ 1,059,000 $ 817,000
============ ============= ============
(Cost $4,811,000)
TOTAL INVESTMENTS 147.76% $223,246,005 $ 291,580,205 $223,912,194
------------ ------------- ------------
OTHER ASSETS AND
LIABILITIES, NET 0.58% $ 1,176,185 $ 2,372,654 $ 443,686
------------ ------------- ------------
FUND PREFERRED
SHARES, AT VALUE -48.34% $(68,580,036) $(100,354,443) $(70,000,000)
------------ ------------- ------------
TOTAL NET ASSETS 100.00% $155,842,154 $ 193,598,416 $154,355,880
============ ============= ============
Patriot Global Dividend Patriot Preferred Patriot Premium
Fund Dividend Fund Dividend Fund II
(Combined)
----------------------------------------------------------------------------
Issuer, maturity date Par Par Par
Value Value Value
(000's (000's (000's
omitted) Value omitted) Value omitted) Value
--------------------------------------------------------------------------------------------------------
SHORT-TERM
INVESTMENTS
Commercial Paper
Chevron Texaco Corp., 11-
01-06 909 909,000 1,191 1,191,000 4,811 4,811,000
------------ ------------ --------------
TOTAL SHORT-TERM
INVESTMENTS $ 909,000 $ 1,191,000 $ 4,811,000
============ ============ ==============
(Cost $4,811,000)
TOTAL INVESTMENTS $180,835,631 $156,000,132 $1,075,574,168
------------ ------------ --------------
OTHER ASSETS AND
LIABILITIES, NET $ 509,826 $ 120,673 $ 4,208,835
------------ ------------ --------------
FUND PREFERRED
SHARES, AT VALUE $(60,210,448) $(52,721,025) $ (351,865,952)
------------ ------------ --------------
TOTAL NET ASSETS $121,135,009 $103,399,780 $ 727,917,051
============ ============ ==============
11