UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-CSR
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CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
INVESTMENT COMPANY ACT FILE NUMBER 811-8747
CHARTWELL DIVIDEND AND INCOME FUND, INC.
(Exact name of registrant as specified in charter)
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1235 Westlakes Drive, Suite 400
Berwyn, PA 19312
(Address of principal executive offices) (Zip code)
PNC Bank, National Association
400 Bellevue Parkway
Wilmington, DE 19809
Attn: Closed-End Department
(Name and address of agent for service)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 1-610-296-1400
DATE OF FISCAL YEAR END: NOVEMBER 30, 2009
DATE OF REPORTING PERIOD: NOVEMBER 30, 2009
ITEM 1. REPORTS TO STOCKHOLDERS.
(GRAPHIC)
CHARTWELL DIVIDEND AND INCOME FUND, INC.
ANNUAL REPORT TO SHAREHOLDERS
DATED NOVEMBER 30, 2009
(CHARTWELL INVESTMENT PARTNERS LOGO)
www.chartwellip.com
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
INVESTMENT OBJECTIVES & STRATEGY (UNAUDITED)
The Chartwell Dividend and Income Fund's (the "Fund") primary investment
objective is to seek high current income. Capital appreciation is a secondary
objective. The Fund will seek to achieve its objectives by investing, under
normal circumstances, at least 50% of its total assets in income generating
equity securities, including dividend paying common stocks, convertible
securities, preferred stocks and other equity-related securities. In addition,
the Fund may invest the balance of its total assets in non-convertible debt
securities, consisting primarily of corporate bonds. The Fund attempts to
minimize individual security risk by diversifying across many industries and
asset classes. The Fund is a closed-end management investment company which
trades on the New York Stock Exchange under the symbol CWF.
COMMON STOCK
The Fund invests in the common stocks of utility companies, Real Estate
Investment Trusts (REITs) and other industrial and financial companies as well
as other equity securities. Both utilities and REITs tend to offer a premium
dividend yield with steady growth that can lead to capital appreciation.
Industrial and financial stocks are primarily purchased for capital appreciation
based on the fundamental value of the underlying company.
HIGH-YIELD CORPORATE BONDS
High-yield bonds are non-investment grade corporate debt obligations rated "Ba1"
or lower by Moody's Investors Service, Inc. or "BB+" or lower by Standard and
Poor's Ratings Group; they typically have a higher risk level than
investment-grade bonds. These securities have historically compensated investors
with higher levels of income for that risk. Prices usually are less sensitive to
interest rate fluctuations than higher rated bonds because of the high income
levels. However, the prices of these bonds are more sensitive to changes in the
economy.
CONVERTIBLE SECURITIES
The Fund can invest in both convertible preferred stock and convertible bonds.
Both pay fixed rates of income, but because they can be converted into common
stock, they are indirectly tied to the common stock's performance. As a result,
convertible securities generally offer higher income than common stocks and an
opportunity for price appreciation when the value of the underlying security
rises. The Fund buys convertibles when the underlying common stock offers strong
growth potential as well.
COVERED CALL OPTIONS
The Fund is permitted to write (i.e., sell) covered call options on equity
securities (including Exchange Traded Funds) or on stock indexes. The Fund may
cover call options by: (i) owning the same security or, in the case of options
on a stock index, a portfolio of stock substantially replicating the movement of
the index underlying
CHARTWELL
2
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
(UNAUDITED)
the call option until the option is exercised or expires; (ii) segregating cash
or other liquid assets with the Fund's Custodian in an amount equal to the
current market value of the call option; or (iii) other methods consistent with
applicable laws, rules and regulations.
The writing of call options involves some investment analysis and risks that are
different from those associated with securities transactions in common stocks.
Options can seek to enhance return through price appreciation of the option,
increase income, hedge to reduce overall portfolio risk, and/or hedge to reduce
individual security risk. Writing options to seek to increase income in the Fund
involves the risk of net loss (after receiving the option premium) if the
investment adviser is incorrect in its expectation of the direction or magnitude
of the change in securities prices. The successful use of options for hedging
purposes also depends in part on the degree of correlation between the option
and a security or index of securities. If the investment adviser is incorrect in
its expectation of changes in securities prices or its estimation of the
correlation between the option and a security index, the investment performance
of the Fund will be less favorable than it would have been in the absence of
such options transactions. The use of options may increase the Fund's portfolio
turnover rate and, therefore, associated brokerage commissions.
INVESTMENT IN SECURITIES ISSUED BY OTHER INVESTMENT COMPANIES
The Board of Directors recently approved a clarification of the Fund's
investment policies to permit the Fund to invest in shares of other investment
companies, including exchange traded funds ("ETFs"), to the extent permitted by
the Investment Company Act of 1940 (the "1940 Act"). ETFs are open-end
investment companies or unit investment trusts that are registered under the
1940 Act. ETF shares are listed and traded on stock exchanges at market prices.
An investment in other investment companies involves the risk in that the price
of the shares can fluctuate up or down. Consequently, the Fund could lose money
investing in another investment company if the prices of the securities owned by
the investment company decline in value. In addition, ETFs are subject to the
following risks that do not apply to conventional open-end funds: (i) market
price of an ETF's shares may trade above or below their net asset value; (ii) an
active trading market for an ETF's shares may not develop or be maintained; and
(iii) trading of an ETF's shares may be halted if the listing exchange's
officials deem such action appropriate, the shares are delisted from the
exchange, or the activation of market-wide "circuit breakers" (which are tied to
large decreases in stock prices) halts stock trading generally.
The Fund will bear its proportionate share of any management fees and other
expenses paid by such other investment companies, which will increase the Fund's
expenses and decrease returns.
CHARTWELL
3
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
(UNAUDITED)
TEMPORARY INVESTMENTS
The Board of Directors recently approved the addition of money market mutual
funds and cash to the list of the Fund's temporary investments. Temporary
investments can be made for defensive purposes in response to adverse market,
economic, political or other conditions, pending investment of the proceeds of
sales of portfolio securities, or at other times when suitable investments are
not available. In addition to money market mutual funds and cash, the Fund is
permitted to temporarily invest without limit in: debt securities issued by the
U.S. Government, its agencies or instrumentalities; commercial paper (rated
"A-2" or better by S&P or "P-2" or better by Moody's, similarly rated by another
comparable rating agency or, if not so rated, of comparable quality as
determined by the Fund's Manager); certificates of deposit or bankers'
acceptances; or repurchase agreements with respect to any of the foregoing
investments. The Fund is also permitted to borrow up to 5% of its total assets
for temporary purposes.
CHARTWELL
4
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
DEAR SHAREHOLDERS (UNAUDITED),
Stock market performance for the fiscal year ended November 30, 2009 was very
erratic but ended up solidly. The S&P 500 Index returned 25.39% and the Merrill
Lynch High Yield Cash Pay Index returned 63.24%, while for the same period the
Chartwell Dividend and Income Fund's ("Fund") market return, including
reinvested dividends, was 59.14% and the Net Asset Value (NAV) return was
29.42%, also including the reinvestment of dividends. These results are
discussed in greater detail later in this report. A solid contributor to the
Fund's positive performance was the robust options writing strategy used on the
common stock portfolio. Our ability to sell options on the portfolio's stocks
enabled the Fund to take advantage of continued high options premiums. Through
various portfolio transactions made during the period, we believe we continued
to strengthen the portfolio during these uncertain and tumultuous times, while
also positioning it for the possibility of a solid economic recovery. Some of
these changes are discussed in the fixed income and equity sections of this
report.
The first portion of this annual period saw a continuation of the economic and
financial crises that we wrote about in the November 30, 2008 Annual Report to
Shareholders. Home prices continued to decline and unemployment increased.
Financial institutions were absorbing significant losses on their loan and
investment portfolios as economic activity slowed and security values plunged.
The availability of credit to fund everyday business transactions was
dramatically reduced. All of this uncertainty drove the S&P 500 Index down to
its intra-day low of 667. On March 9, 2009 it appears as if the all clear bell
was rung and market participants found "green shoots" of nascent economic
improvement. Financial institutions began to lose less money and in some
instances hinted at substantial profits. The rates of decline of many economic
indicators began to ebb. Job losses slowed, credit became more available and
China appeared to begin to feel the benefits of its substantial economic
stimulus package. These and other "green shoots" incited the market to rally
over 60% from its lows through the end of November.
As the stock market is a forward-looking indicator, it appears to have begun to
discount an economic recovery which appears (based on economic data) to have
begun. In general, we are in agreement and we believe that the economy will be
on better footing in 2010. In our opinion, this improvement will come from,
among other things, inventory restocking, the impact of the domestic stimulus
package, continued low interest rates, global economic improvement and a steep
yield curve helping the banking industry. The main question for investors is:
will this economic recovery be sustainable or will the economy slip back into
another slowdown?
We will continue to closely monitor the economy and markets and will endeavor to
make appropriate adjustments in the Fund's portfolio.
CHARTWELL
5
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
(UNAUDITED)
Please read the equity and fixed income commentary for more information and
analysis.
THE ABOVE COMMENTARY REPRESENTS MANAGEMENT'S ASSESSMENT OF THE FUND AND MARKET
ENVIRONMENT AT A SPECIFIC POINT IN TIME AND SHOULD NOT BE RELIED UPON BY THE
READER AS RESEARCH OR INVESTMENT ADVICE.
Sincerely,
/s/ Winthrop S. Jessup
Winthrop S. Jessup
CHAIRMAN
CHARTWELL DIVIDEND AND INCOME FUND
/s/ Bernard P. Schaffer /s/ Andrew S. Toburen
Bernard P. Schaffer Andrew S. Toburen
PORTFOLIO MANAGER PORTFOLIO MANAGER
PORTFOLIO MANAGEMENT TEAM
Bernard P. Schaffer
PORTFOLIO MANAGER
EQUITY
Paul Matlack
PORTFOLIO MANAGER
FIXED INCOME
Andrew S. Toburen
PORTFOLIO MANAGER
FIXED INCOME
Christine F. Williams
PORTFOLIO MANAGER
FIXED INCOME
CHARTWELL
6
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
(UNAUDITED)
HOW DID THE FUND PERFORM DURING THE FISCAL YEAR ENDED NOVEMBER 30, 2009?
For the fiscal year ended November 30, 2009, the Fund's market return was 59.14%
including dividends reinvested. The Fund's net asset value (NAV) return
including dividends reinvested was 29.42%. The market, as measured by the S&P
500, was up 25.39% (including dividends) for the period.
The Merrill Lynch High Yield Cash Pay Index returned 63.24% for the year ended
November 30, 2009, the highest return for any twelve month period in the history
of this high yield bond index. In hindsight, November 2008 was near the peak of
financial market uncertainty in the latest credit cycle. From this top, the high
yield market's spread to Treasury (or risk premium) collapsed 1,229 basis points
to finish the period at 644 basis points, as seen in the graph below. The yield
on the Merrill Lynch High Yield Cash Pay Index declined from 21.69% at the start
of the period to 9.64% by the end of November. Tighter spreads and lower
absolute yields appear to be pricing in a declining high yield default rate in
the future. While in December 2009 Moody's Investors Service projected default
rates over the next twelve months to fall below 4%, the trailing twelve month
default rate as depicted in the graph below remains quite high at over 12%.
HIGH YIELD SPREAD VS. DEFAULT RATES
(Source: Merill Lynch, Bloomberg)
(PERFORMANCE GRAPH)
Jan-85 321 299
Feb-85 311 350
Mar-85 276 375
Apr-85 306 373
May-85 323 340
Jun-85 373 415
Jul-85 366 462
Aug-85 347 505
Sep-85 345 479
Oct-85 365 395
Nov-85 396 444
Dec-85 409 391
Jan-86 418 434
Feb-86 408 407
Mar-86 487 414
Apr-86 521 584
May-86 473 640
Jun-86 445 635
Jul-86 510 619
Aug-86 505 613
Sep-86 481 602
Oct-86 467 588
Nov-86 486 575
Dec-86 502 569
Jan-87 471 561
Feb-87 436 568
Mar-87 434 583
Apr-87 412 596
May-87 373 382
Jun-87 389 386
Jul-87 394 359
Aug-87 366 366
Sep-87 357 389
Oct-87 423 428
Nov-87 458 427
Dec-87 455 426
Jan-88 483 476
Feb-88 458 506
Mar-88 436 476
Apr-88 418 459
May-88 402 512
Jun-88 401 460
Jul-88 379 439
Aug-88 378 451
Sep-88 408 413
Oct-88 429 425
Nov-88 402 391
Dec-88 406 348
Jan-89 425 361
Feb-89 408 314
Mar-89 426 300
Apr-89 451 262
May-89 482 224
Jun-89 530 286
Jul-89 573 335
Aug-89 527 385
Sep-89 558 440
Oct-89 630 437
Nov-89 646 482
Dec-89 645 606
Jan-90 627 628
Feb-90 663 681
Mar-90 655 689
Apr-90 631 791
May-90 651 823
Jun-90 635 817
Jul-90 660 845
Aug-90 711 889
Sep-90 825 943
Oct-90 904 970
Nov-90 932 977
Dec-90 934 985
Jan-91 975 1124
Feb-91 811 1139
Mar-91 720 1220
Apr-91 648 1178
May-91 644 1231
Jun-91 600 1279
Jul-91 567 1271
Aug-91 578 1215
Sep-91 623 1191
Oct-91 557 1108
Nov-91 567 1094
Dec-91 641 1043
Jan-92 489 920
Feb-92 467 890
Mar-92 429 801
Apr-92 407 733
May-92 417 698
Jun-92 418 644
Jul-92 431 608
Aug-92 436 613
Sep-92 449 570
Oct-92 457 619
Nov-92 443 575
Dec-92 457 494
Jan-93 453 388
Feb-93 452 405
Mar-93 446 466
Apr-93 433 491
May-93 410 459
Jun-93 409 428
Jul-93 404 442
Aug-93 434 395
Sep-93 443 393
Oct-93 432 329
Nov-93 395 322
Dec-93 383 359
Jan-94 322 362
Feb-94 296 361
Mar-94 310 299
Apr-94 316 247
May-94 326 212
Jun-94 331 194
Jul-94 356 203
Aug-94 348 196
Sep-94 322 219
Oct-94 315 224
Nov-94 337 208
Dec-94 344 191
Jan-95 342 186
Feb-95 336 134
Mar-95 332 119
Apr-95 318 163
May-95 344 185
Jun-95 368 213
Jul-95 338 221
Aug-95 355 217
Sep-95 373 227
Oct-95 374 266
Nov-95 387 317
Dec-95 396 326
Jan-96 366 326
Feb-96 321 337
Mar-96 325 343
Apr-96 300 321
May-96 282 285
Jun-96 306 284
Jul-96 298 263
Aug-96 275 221
Sep-96 270 217
Oct-96 297 195
Nov-96 305 164
Dec-96 266 164
Jan-97 260 171
Feb-97 243 159
Mar-97 258 158
Apr-97 271 137
May-97 243 160
Jun-97 241 159
Jul-97 242 184
Aug-97 230 200
Sep-97 234 206
Oct-97 272 212
Nov-97 266 227
Dec-97 269 201
Jan-98 271 207
Feb-98 261 237
Mar-98 260 235
Apr-98 271 263
May-98 293 269
Jun-98 350 296
Jul-98 351 280
Aug-98 502 269
Sep-98 573 262
Oct-98 613 266
Nov-98 530 280
Dec-98 555 341
Jan-99 550 349
Feb-99 507 359
Mar-99 510 382
Apr-99 464 420
May-99 467 480
Jun-99 465 485
Jul-99 444 532
Aug-99 465 552
Sep-99 489 584
Oct-99 499 597
Nov-99 470 585
Dec-99 453 556
Jan-00 461 553
Feb-00 496 553
Mar-00 584 567
Apr-00 596 567
May-00 618 540
Jun-00 615 555
Jul-00 617 496
Aug-00 641 521
Sep-00 664 531
Oct-00 757 496
Nov-00 874 544
Dec-00 881 615
1-Jan 739 669
1-Feb 729 709
1-Mar 760 784
1-Apr 739 803
1-May 703 809
1-Jun 739 829
1-Jul 745 890
1-Aug 731 937
1-Sep 914 971
1-Oct 865 1019
1-Nov 752 1022
1-Dec 734 1060
2-Jan 697 1089
2-Feb 722 1073
2-Mar 621 1060
2-Apr 601 1057
2-May 643 1070
2-Jun 781 1054
2-Jul 874 1033
2-Aug 882 1002
2-Sep 966 978
2-Oct 974 929
2-Nov 800 894
2-Dec 802 843
3-Jan 747 768
3-Feb 757 771
3-Mar 696 698
3-Apr 576 679
3-May 614 663
3-Jun 554 614
3-Jul 488 587
3-Aug 477 619
3-Sep 483 603
3-Oct 415 607
3-Nov 401 550
3-Dec 368 531
4-Jan 360 517
4-Feb 381 442
4-Mar 392 427
4-Apr 351 403
4-May 383 365
4-Jun 371 349
4-Jul 369 293
4-Aug 381 234
4-Sep 372 234
4-Oct 355 242
4-Nov 310 247
4-Dec 314 241
5-Jan 341 219
5-Feb 305 249
5-Mar 360 229
5-Apr 423 220
5-May 423 218
5-Jun 404 192
5-Jul 354 191
5-Aug 390 203
5-Sep 378 197
5-Oct 381 195
5-Nov 394 178
5-Dec 399 167
6-Jan 368 171
6-Feb 369 159
6-Mar 339 158
6-Apr 318 151
6-May 330 173
6-Jun 351 179
6-Jul 359 172
6-Aug 369 166
6-Sep 365 171
6-Oct 353 181
6-Nov 347 190
6-Dec 318 174
7-Jan 300 177
7-Feb 311 175
7-Mar 312 158
7-Apr 303 162
7-May 276 151
7-Jun 312 144
7-Jul 422 153
7-Aug 451 144
7-Sep 410 129
7-Oct 429 107
7-Nov 548 91
7-Dec 561 91
8-Jan 640 110
8-Feb 697 124
8-Mar 745 148
8-Apr 635 171
8-May 607 188
8-Jun 686 200
8-Jul 741 235
8-Aug 772 251
8-Sep 1007 275
8-Oct 1496 302
8-Nov 1873 319
8-Dec 1724 419
9-Jan 1513 508
9-Feb 1623 563
9-Mar 1577 757
9-Apr 1232 847
9-May 1037 945
9-Jun 940 1068
9-Jul 810 1122
9-Aug 795 1167
9-Sep 685 1247
9-Oct 649 1269
9-Nov 644 1274
(SEE DESCRIPTION OF BENCHMARK INDICES ON PAGE 13.)
WHAT FACTORS CONTRIBUTED TO THE FUND'S PERFORMANCE?
For the fiscal year ended November 30, 2009 the equity portion of the Fund
returned 17.74%, underperforming the S&P 500 Index due to several factors.
During the strong rally that occurred subsequent to March 9, 2009, S&P 500
performance significantly benefited from the performance of lower quality and
smaller capitalization stocks. The Fund has been positioned with a leaning
towards higher quality, larger capitalization stocks which underperformed in the
rally. As can be seen below, while all sectors within the S&P 500 had positive
returns, four sectors of the S&P 500 preformed significantly better than the
Index itself. Three of these four are highly cyclical sectors (Basic Materials,
Technology and Consumer Discretionary) and the Fund was underweighted each of
these sectors on average during the year. In addition, investments in General
Maritime Corporation, PPG Industries, Exxon Mobil Corp., and Bank of America
Corp. detracted from
CHARTWELL
7
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
(UNAUDITED)
performance. Positive contributions to performance came from stock selection in
the Energy sector with investments in Energy Transfer Partners LP, Occidental
Petroleum Corporation and Copano Energy LLC leading the way; proper timing of
the weightings in Financials; positions in Limited Brands, Inc., JPMorgan Chase
& Co. and Annaly Capital Management, Inc. all significantly outperforming the
S&P 500 Index, and the options overwriting strategy previously discussed.
TOTAL RETURN
(Year Ended November 30, 2009)
(BAR CHART)
CWF (NAV) 29.4%
CWF Equities 17.7%
CWF High Yield 48.4%
S&P 500 Index 25.4%
Morgan Stanley REIT Index 40.7%
Merrill Lynch High Yield Cash Pay Index 63.2%
S&P 500 TOTAL RETURN BY SECTOR
(Year Ended November 30, 2009)
(BAR CHART)
Energy 10.38%
Utilities 3.8%
Tel. Services 5.24%
REITS 36.13%
Industrials 21.04%
Basic Materials 46.04%
Consumer Discretionary 42.48%
Fin. (ex-REIT) 17.96%
Consumer Staples 14.86%
Technology 56%
Health Care 24.9%
S&P 500 25.4%
(SEE DESCRIPTION OF BENCHMARK INDICES ON PAGE 13.)
CHARTWELL
8
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
(UNAUDITED)
The fixed income portion of the Fund returned 48.38% for the year ended November
30, 2009. Our fixed income investment performance trailed the broad high yield
index due primarily to the Fund's quality bias versus the overall market. For
example, the Fund owns very few speculative CCC-rated securities, which posted
average returns exceeding 100% during the period. In a year where every sector
posted solidly positive returns, previously beaten down Financials and Auto
issuers stood out as the best performing parts of the market, as depicted in the
following graph.
HIGH YIELD PERFORMANCE BY INDUSTRY
(Year Ended November 30, 2009)
(Source: Bloomberg)
(BAR CHART)
Financials 162.6%
Auto 140.6%
CCC Index 106.4%
Homebuilding 86.4%
Steel 83.6%
Technology 81.2%
Banking 71.2%
HY INDEX 63.2%
Gaming 63.2%
Telecommunications 57%
B Index 54.2%
BB Index 50.9%
Chemicals 50.8%
Energy 50.7%
Consumer 46.8%
Healthcare 46.7%
Paper 44%
Cable TV 35.7%
Utilities 31.7%
WHAT CHANGES WERE MADE TO THE PORTFOLIO DURING THE FISCAL YEAR?
The equity portion of the portfolio made some sizeable changes during the
period. Reductions were made in the Basic Materials sector and the significant
overweighting in the Telecommunications sector was reduced. Increases were made
in the Financials, Consumer Discretionary, and Healthcare sectors.
We sold a number of the Fund's fixed income holdings over the last year because
they had reached our price targets. Bond sales during the period included ALLIED
WASTE, AUTONATION, FREEPORT MCMORAN COPPER & GOLD, and TENNESSEE GAS PIPELINE,
among others. Proceeds from the sales were redeployed in new bond positions that
we believe offer better return prospects, such as ANIXTER INC., a distributor of
wire and wiring systems for voice and data networks, CEQUEL COMMUNICATIONS
HOLDINGS I, LLC, a cable television company, and FERRELLGAS PARTNERS, LP, a
propane distributor.
CHARTWELL
9
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
(UNAUDITED)
HOW DID THE FUND TRADE RELATIVE TO ITS NET ASSET VALUE (NAV) DURING THE FISCAL
YEAR?
As of November 30, 2009 the Fund was trading at a closing price of $3.65, which
is a 12.9% discount to its NAV of $4.19. In comparison, at November 30, 2008,
the Fund was trading at a closing price of $2.60, which was a large 30.1%
discount to its NAV of $3.67. As shown below, throughout the year ended November
30, 2009 the Fund traded between a 33.70% to 2.88% discount to its NAV.
HISTORY OF FUND PRICE, NAV AND PREMIUM
(Fiscal Year Ended November 30, 2009)
(Source: Bloomberg)
(PERFORMANCE GRAPH)
Date Price NAV
---- ------ ------
12/1/2008 2.4777 3.4827
12/2/2008 2.4379 3.5623
12/3/2008 2.5175 3.622
12/4/2008 2.428 3.5126
12/5/2008 2.3981 3.5225
12/8/2008 2.5175 3.622
12/9/2008 2.4379 3.5822
12/10/2008 2.4479 3.622
12/11/2008 2.3682 3.5723
12/12/2008 2.4021 3.5922
12/15/2008 2.3981 3.5723
12/16/2008 2.4924 3.64
12/17/2008 2.62 3.66
12/18/2008 2.6 3.64
12/19/2008 2.79 3.66
12/22/2008 2.86 3.64
12/23/2008 2.9 3.63
12/24/2008 2.95 3.65
12/26/2008 2.94 3.67
12/29/2008 2.85 3.65
12/30/2008 2.9525 3.72
12/31/2008 3.02 3.78
1/2/2009 3.16 3.82
1/5/2009 3.12 3.82
1/6/2009 3.15 3.88
1/7/2009 3.16 3.83
1/8/2009 3.13 3.85
1/9/2009 3.15 3.83
1/12/2009 3.1 3.77
1/13/2009 3.09 3.78
1/14/2009 2.996 3.71
1/15/2009 3 3.69
1/16/2009 3.1 3.71
1/20/2009 2.95 3.57
1/21/2009 3.001 3.65
1/22/2009 3.024 3.6
1/23/2009 3.05 3.61
1/26/2009 3.02 3.61
1/27/2009 3.07 3.63
1/28/2009 3.17 3.67
1/29/2009 3.05 3.62
1/30/2009 2.98 3.59
2/2/2009 3.09 3.6
2/3/2009 3.12 3.62
2/4/2009 3.05 3.6
2/5/2009 3.1 3.62
2/6/2009 3.13 3.67
2/9/2009 3.17 3.7
2/10/2009 3.02 3.62
2/11/2009 3.02 3.63
2/12/2009 3.01 3.64
2/13/2009 3.04 3.62
2/17/2009 2.8 3.51
2/18/2009 2.78 3.48
2/19/2009 2.7 3.46
2/20/2009 2.61 3.44
2/23/2009 2.47 3.4
2/24/2009 2.75 3.43
2/25/2009 2.65 3.43
2/26/2009 2.63 3.42
2/27/2009 2.61 3.4
3/2/2009 2.38 3.32
3/3/2009 2.42 3.29
3/4/2009 2.5 3.31
3/5/2009 2.35 3.24
3/6/2009 2.29 3.24
3/9/2009 2.26 3.08
3/10/2009 2.43 3.14
3/11/2009 2.4 3.15
3/12/2009 2.5 3.22
3/13/2009 2.51 3.25
3/16/2009 2.55 3.26
3/17/2009 2.55 3.27
3/18/2009 2.5996 3.3
3/19/2009 2.54 3.28
3/20/2009 2.5673 3.25
3/23/2009 2.72 3.36
3/24/2009 2.62 3.33
3/25/2009 2.67 3.37
3/26/2009 2.76 3.39
3/27/2009 2.7 3.37
3/30/2009 2.6 3.32
3/31/2009 2.67 3.36
4/1/2009 2.77 3.39
4/2/2009 2.8 3.42
4/3/2009 2.78 3.45
4/6/2009 2.72 3.44
4/7/2009 2.72 3.41
4/8/2009 2.73 3.43
4/9/2009 2.84 3.49
4/13/2009 2.85 3.51
4/14/2009 2.8 3.47
4/15/2009 2.86 3.51
4/16/2009 2.94 3.53
4/17/2009 2.99 3.54
4/20/2009 2.9 3.46
4/21/2009 2.88 3.46
4/22/2009 2.89 3.44
4/23/2009 2.8999 3.47
4/24/2009 2.86 3.49
4/27/2009 2.82 3.48
4/28/2009 2.84 3.5
4/29/2009 2.9 3.56
4/30/2009 2.94 3.57
5/1/2009 2.95 3.59
5/4/2009 3.03 3.66
5/5/2009 3.02 3.65
5/6/2009 3.07 3.7
5/7/2009 3.06 3.67
5/8/2009 3.16 3.73
5/11/2009 3.098 3.69
5/12/2009 3.1082 3.7
5/13/2009 3.0301 3.64
5/14/2009 3.275 3.66
5/15/2009 3.01 3.64
5/18/2009 3.07 3.71
5/19/2009 3.06 3.66
5/20/2009 3.04 3.66
5/21/2009 2.9201 3.64
5/22/2009 2.95 3.63
5/26/2009 3.01 3.68
5/27/2009 3.0199 3.65
5/28/2009 3.04 3.69
5/29/2009 3.07 3.72
6/1/2009 3.17 3.77
6/2/2009 3.16 3.79
6/3/2009 3.09 3.77
6/4/2009 3.19 3.8
6/5/2009 3.18 3.8
6/8/2009 3.14 3.8
6/9/2009 3.15 3.8
6/10/2009 3.15 3.81
6/11/2009 3.18 3.82
6/12/2009 3.21 3.84
6/15/2009 3.17 3.8
6/16/2009 3.11 3.73
6/17/2009 3.13 3.71
6/18/2009 3.1 3.73
6/19/2009 3.17 3.74
6/22/2009 3.12 3.68
6/23/2009 3.0712 3.69
6/24/2009 3.11 3.71
6/25/2009 3.16 3.75
6/26/2009 3.15 3.76
6/29/2009 3.1604 3.78
6/30/2009 3.17 3.77
7/1/2009 3.16 3.79
7/2/2009 3.13 3.73
7/6/2009 3.14 3.74
7/7/2009 3.11 3.69
7/8/2009 3.07 3.68
7/9/2009 3.0899 3.69
7/10/2009 3.14 3.69
7/13/2009 3.14 3.74
7/14/2009 3.11 3.76
7/15/2009 3.17 3.81
7/16/2009 3.22 3.83
7/17/2009 3.23 3.85
7/20/2009 3.33 3.89
7/21/2009 3.27 3.86
7/22/2009 3.18 3.87
7/23/2009 3.19 3.92
7/24/2009 3.25 3.93
7/27/2009 3.46 3.96
7/28/2009 3.37 3.95
7/29/2009 3.36 3.94
7/30/2009 3.4 3.96
7/31/2009 3.43 3.99
8/3/2009 3.52 4.02
8/4/2009 3.54 4.03
8/5/2009 3.64 4.02
8/6/2009 3.59 4
8/7/2009 3.6 4.03
8/10/2009 3.63 4.04
8/11/2009 3.6 4.01
8/12/2009 3.67 4.02
8/13/2009 3.72 4.03
8/14/2009 3.68 4.02
8/17/2009 3.58 3.97
8/18/2009 3.63 3.96
8/19/2009 3.57 3.98
8/20/2009 3.56 3.99
8/21/2009 3.57 4.02
8/24/2009 3.59 4.03
8/25/2009 3.66 4.04
8/26/2009 3.66 4.04
8/27/2009 3.66 4.05
8/31/2009 3.67 4.04
9/1/2009 3.51 3.98
9/2/2009 3.52 3.97
9/3/2009 3.62 4
9/4/2009 3.63 4.03
9/8/2009 3.65 4.05
9/9/2009 3.69 4.08
9/10/2009 3.74 4.11
9/11/2009 3.77 4.12
9/14/2009 3.88 4.15
9/15/2009 3.8 4.13
9/16/2009 3.87 4.17
9/17/2009 3.87 4.16
9/18/2009 4.04 4.16
9/21/2009 3.95 4.15
9/22/2009 3.9505 4.18
9/23/2009 3.92 4.15
9/24/2009 3.85 4.13
9/25/2009 3.84 4.13
9/28/2009 3.87 4.17
9/29/2009 3.91 4.17
9/30/2009 3.9 4.15
10/1/2009 3.87 4.09
10/2/2009 3.82 4.08
10/5/2009 3.88 4.12
10/6/2009 3.95 4.16
10/7/2009 3.92 4.15
10/8/2009 3.92 4.18
10/9/2009 3.92 4.19
10/12/2009 3.91 4.2
10/13/2009 3.95 4.18
10/14/2009 3.87 4.23
10/15/2009 3.93 4.25
10/16/2009 3.93 4.23
10/19/2009 3.97 4.26
10/20/2009 3.89 4.21
10/21/2009 3.9 4.19
10/22/2009 3.87 4.22
10/23/2009 3.84 4.2
10/26/2009 3.81 4.16
10/27/2009 3.8 4.15
10/28/2009 3.67 4.1
10/29/2009 3.68 4.16
10/30/2009 3.53 4.08
11/2/2009 3.57 4.1
11/3/2009 3.57 4.1
11/4/2009 3.61 4.1
11/5/2009 3.66 4.15
11/6/2009 3.66 4.15
11/9/2009 3.74 4.2
11/10/2009 3.7 4.2
11/11/2009 3.69 4.21
11/12/2009 3.67 4.18
11/13/2009 3.69 4.19
11/16/2009 3.67 4.23
11/17/2009 3.66 4.2
11/18/2009 3.64 4.21
11/19/2009 3.62 4.18
11/20/2009 3.63 4.17
11/23/2009 3.62 4.2
11/24/2009 3.64 4.2
11/25/2009 3.68 4.22
11/27/2009 3.6301 4.17
11/30/2009 3.65 4.19
Premium/
Discount
--------
12/1/2008 -28.857
12/2/2008 -31.564
12/3/2008 -30.495
12/4/2008 -30.878
12/5/2008 -31.921
12/8/2008 -30.495
12/9/2008 -31.944
12/10/2008 -32.418
12/11/2008 -33.705
12/12/2008 -33.13
12/15/2008 -32.8969
12/16/2008 -31.528
12/17/2008 -28.415
12/18/2008 -28.571
12/19/2008 -23.77
12/22/2008 -21.429
12/23/2008 -20.11
12/24/2008 -19.178
12/26/2008 -19.891
12/29/2008 -21.918
12/30/2008 -20.632
12/31/2008 -20.106
1/2/2009 -17.277
1/5/2009 -18.325
1/6/2009 -18.814
1/7/2009 -17.493
1/8/2009 -18.701
1/9/2009 -17.755
1/12/2009 -17.772
1/13/2009 -18.519
1/14/2009 -19.245
1/15/2009 -18.699
1/16/2009 -16.442
1/20/2009 -17.367
1/21/2009 -17.781
1/22/2009 -16
1/23/2009 -15.512
1/26/2009 -16.343
1/27/2009 -15.427
1/28/2009 -13.624
1/29/2009 -15.746
1/30/2009 -16.992
2/2/2009 -14.167
2/3/2009 -13.812
2/4/2009 -15.278
2/5/2009 -14.365
2/6/2009 -14.714
2/9/2009 -14.324
2/10/2009 -16.575
2/11/2009 -16.804
2/12/2009 -17.308
2/13/2009 -16.022
2/17/2009 -20.228
2/18/2009 -20.115
2/19/2009 -21.965
2/20/2009 -24.128
2/23/2009 -27.353
2/24/2009 -19.825
2/25/2009 -22.741
2/26/2009 -23.099
2/27/2009 -23.235
3/2/2009 -28.313
3/3/2009 -26.444
3/4/2009 -24.471
3/5/2009 -27.469
3/6/2009 -29.321
3/9/2009 -26.623
3/10/2009 -22.611
3/11/2009 -23.81
3/12/2009 -22.36
3/13/2009 -22.769
3/16/2009 -21.779
3/17/2009 -22.018
3/18/2009 -21.223
3/19/2009 -22.561
3/20/2009 -21.006
3/23/2009 -19.048
3/24/2009 -21.321
3/25/2009 -20.772
3/26/2009 -18.584
3/27/2009 -19.881
3/30/2009 -21.687
3/31/2009 -20.536
4/1/2009 -18.289
4/2/2009 -18.129
4/3/2009 -19.42
4/6/2009 -20.93
4/7/2009 -20.235
4/8/2009 -20.408
4/9/2009 -18.625
4/13/2009 -18.803
4/14/2009 -19.308
4/15/2009 -18.519
4/16/2009 -16.714
4/17/2009 -15.537
4/20/2009 -16.185
4/21/2009 -16.763
4/22/2009 -15.988
4/23/2009 -16.43
4/24/2009 -18.052
4/27/2009 -18.966
4/28/2009 -18.857
4/29/2009 -18.539
4/30/2009 -17.647
5/1/2009 -17.827
5/4/2009 -17.213
5/5/2009 -17.26
5/6/2009 -17.027
5/7/2009 -16.621
5/8/2009 -15.282
5/11/2009 -16.043
5/12/2009 -15.995
5/13/2009 -16.755
5/14/2009 -17.281
5/15/2009 -17.308
5/18/2009 -17.251
5/19/2009 -16.393
5/20/2009 -16.94
5/21/2009 -19.777
5/22/2009 -18.733
5/26/2009 -18.207
5/27/2009 -17.264
5/28/2009 -17.615
5/29/2009 -17.473
6/1/2009 -15.915
6/2/2009 -16.623
6/3/2009 -18.037
6/4/2009 -16.053
6/5/2009 -16.316
6/8/2009 -17.368
6/9/2009 -17.105
6/10/2009 -17.323
6/11/2009 -16.754
6/12/2009 -16.406
6/15/2009 -16.579
6/16/2009 -16.622
6/17/2009 -15.633
6/18/2009 -16.89
6/19/2009 -15.241
6/22/2009 -15.217
6/23/2009 -16.77
6/24/2009 -16.173
6/25/2009 -15.733
6/26/2009 -16.223
6/29/2009 -16.392
6/30/2009 -15.915
7/1/2009 -16.623
7/2/2009 -16.086
7/6/2009 -16.043
7/7/2009 -15.718
7/8/2009 -16.576
7/9/2009 -16.264
7/10/2009 -14.905
7/13/2009 -16.043
7/14/2009 -17.287
7/15/2009 -16.798
7/16/2009 -15.927
7/17/2009 -16.104
7/20/2009 -16.452
7/21/2009 -17.358
7/22/2009 -17.829
7/23/2009 -16.582
7/24/2009 -15.267
7/27/2009 -12.626
7/28/2009 -14.684
7/29/2009 -14.721
7/30/2009 -14.141
7/31/2009 -14.035
8/3/2009 -12.438
8/4/2009 -12.159
8/5/2009 -9.453
8/6/2009 -10.25
8/7/2009 -10.67
8/10/2009 -10.149
8/11/2009 -10.224
8/12/2009 -8.706
8/13/2009 -7.692
8/14/2009 -8.458
8/17/2009 -9.824
8/18/2009 -8.333
8/19/2009 -10.302
8/20/2009 -10.777
8/21/2009 -11.194
8/24/2009 -10.918
8/25/2009 -9.406
8/26/2009 -9.406
8/27/2009 -9.63
8/31/2009 -9.158
9/1/2009 -11.809
9/2/2009 -11.335
9/3/2009 -9.5
9/4/2009 -9.926
9/8/2009 -9.877
9/9/2009 -9.559
9/10/2009 -9.002
9/11/2009 -8.495
9/14/2009 -6.506
9/15/2009 -7.99
9/16/2009 -7.194
9/17/2009 -6.971
9/18/2009 -2.885
9/21/2009 -4.819
9/22/2009 -5.49
9/23/2009 -5.542
9/24/2009 -6.78
9/25/2009 -7.022
9/28/2009 -7.194
9/29/2009 -6.235
9/30/2009 -6.024
10/1/2009 -5.379
10/2/2009 -6.373
10/5/2009 -5.825
10/6/2009 -5.048
10/7/2009 -5.542
10/8/2009 -6.22
10/9/2009 -6.444
10/12/2009 -6.905
10/13/2009 -5.502
10/14/2009 -8.511
10/15/2009 -7.529
10/16/2009 -7.092
10/19/2009 -6.808
10/20/2009 -7.601
10/21/2009 -6.921
10/22/2009 -8.294
10/23/2009 -8.571
10/26/2009 -8.413
10/27/2009 -8.434
10/28/2009 -10.488
10/29/2009 -11.538
10/30/2009 -13.48
11/2/2009 -12.927
11/3/2009 -12.927
11/4/2009 -11.951
11/5/2009 -11.807
11/6/2009 -11.807
11/9/2009 -10.952
11/10/2009 -11.905
11/11/2009 -12.352
11/12/2009 -12.201
11/13/2009 -11.933
11/16/2009 -13.239
11/17/2009 -12.857
11/18/2009 -13.539
11/19/2009 -13.397
11/20/2009 -12.95
11/23/2009 -13.81
11/24/2009 -13.333
11/25/2009 -12.796
11/27/2009 -12.947
11/30/2009 -12.888
CHARTWELL
10
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
(UNAUDITED)
CWF AS A % OF TOTAL INVESTMENTS
(As of November 30, 2009)
(PIE CHART)
Equities 55.8%
Fixed Income 43.7%
Cash 0.5%
HOW IS THE FUND POSITIONED AT THE CLOSE OF THE FISCAL YEAR?
As shown in the chart above, as of November 30, 2009, the percentage of the
Fund's total investments held in equities and fixed income was 55.8% and 43.7%,
respectively. The Fund continues to be overweight high quality, higher dividend
paying securities. In the Equity portion of the portfolio, securities related to
the Financial Services Group (Banks, Financials and Real Estate) represent the
largest allocation from both an absolute and relative perspective, as depicted
in the graph below. The Financials weighting has been increased as the financial
markets have recovered. Technology and Consumer Staples are the largest
underweights within the portfolio at November 30, 2009.
FUND EQUITY ALLOCATION AS A % OF TOTAL INVESTMENTS
(As of November 30, 2009)
(PIE CHART)
Fixed Income 43.7%
Equities 55.8%
Cash 0.5%
Banks 5.4%
Basic Materials 0.8%
Energy 9.6%
Consumer Staples 3.6%
Consumer Discretionary 4.3%
Financials 6.6%
Healthcare 6.9%
Industrials 4.6%
Real Estate 4.7%
Technology 2.8%
Telecommunication Services 3.1%
Transportation 1.3%
Utilities 2.1%
CHARTWELL
11
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
(UNAUDITED)
FUND FIXED INCOME ALLOCATION AS A % OF TOTAL INVESTMENTS
(As of November 30, 2009)
(PIE CHART)
Cash 0.5%
Fixed Income 43.7%
Equities 55.8%
Basic Industry 4.4%
Cable Television 3.6%
Consumer Products 0.2%
Energy 9.3%
Gaming 2.4%
Healthcare 1.5%
Metals & Mining 4.1%
Paper & Forest Products 1.8%
Real Estate 0.5%
Retail 2.4%
Services 3.8%
Telecommunications 3.3%
Transportation 2.0%
Utilities 4.4%
We intend to remain conservatively positioned and well diversified in he fixed
income portion of the Fund relative to the overall high yield market. Our
primary goal with the Fund's fixed income investments is to contribute a stable
income stream to help support the Fund's monthly distribution. Towards that end,
we own bonds from primarily BB-rated and B-rated issuers. Our bond portfolio is
currently overweighted versus the high yield market in Utilities and Cable
Television, industries that have historically been relatively stable. As shown
above, at the end of November, the bond portfolio had no direct exposure to
Financial issuers, including Banks and Insurance companies.
CHARTWELL
12
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
(UNAUDITED)
WHAT ARE THE TOP 10 EQUITY HOLDINGS BY PERCENTAGE OF TOTAL INVESTMENTS?
TOP 10 EQUITIES BY PERCENTAGE OF TOTAL INVESTMENTS
(AS OF NOVEMBER 30, 2009)
% OF TOTAL
TICKER SECURITY INVESTMENTS
------ -------------------------------- -----------
JPM JPMorgan Chase & Company 3.1%
OXY Occidental Petroleum Corporation 2.8%
NLY Annaly Capital Management, Inc. 2.7%
MET MetLife, Inc. 2.5%
ETP Energy Transfer Partners LP 2.3%
PFE Pfizer Inc. 2.2%
XOM Exxon Mobil Corporation 2.1%
MMM 3M Company 1.9%
ACE Ace Limited 1.8%
MRK Merck & Company, Inc. 1.8%
DEFINITION OF THE COMPARATIVE INDICES
S&P 500 INDEX is an unmanaged capitalization-weighted index of 500 stocks
designed to measure performance of the broad domestic economy through changes in
the aggregate market value of 500 stocks representing all major industries.
MERRILL LYNCH HIGH YIELD CASH PAY INDEX is an unmanaged index of corporate bonds
that pay cash coupons, meet a minimum size threshold, and have a Merrill Lynch
composite rating lower than BBB3.
MORGAN STANLEY REIT INDEX is an unmanaged total-return index comprised of the
most actively traded real estate investment trusts and is designed to be a
measure of real estate equity performance.
CHARTWELL
13
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
UTILIZATION OF LEVERAGE (UNAUDITED)
The Chartwell Dividend and Income Fund, Inc. has utilized leverage through the
issuance of commercial paper. As of November 30, 2009, the Fund had
approximately $10 million in leverage outstanding (out of $60 million available)
in the form of commercial paper rated A1/P1 by Moody's Investors Service,
Inc./Standard & Poor's Ratings Group. These ratings should enhance the
marketability and reduce the interest costs associated with the issuance of the
commercial paper. However, it must be noted that the utilization of leverage
involves the risk of lower portfolio returns if the cost of leverage is higher
than the resulting yields on assets or if the Fund experiences capital losses in
excess of the yield spread, if any. Therefore, the addition of leverage also
increases the potential volatility of the Fund. The Fund has the ability to
leverage to a maximum of 33% of the Fund's gross assets.
The Fund utilizes leveraging to seek to enhance the yield and NAV of its common
stock. However, these objectives cannot be achieved in all interest rate
environments. To leverage, the Fund issues commercial paper, which is issued at
a discount equivalent to short-term interest rates, and invests the proceeds in
long-term securities. The interest earned on these investments is paid to common
stock shareholders in the form of dividends, and the value of these portfolio
holdings is reflected in the per share NAV of the Fund's common stock. However,
in order to benefit common stock shareholders, the yield curve must be
positively sloped; that is, short-term interest rates must be lower than
long-term interest rates. At the same time, a period of generally declining
interest rates will benefit common stock shareholders. IF EITHER OF THESE
CONDITIONS CHANGE, THEN THE RISKS OF LEVERAGING WILL BEGIN TO OUTWEIGH THE
BENEFITS.
To illustrate these concepts, assume a fund's common stock capitalization of
$100 million and the issuance of commercial paper for an additional $50 million,
creating a total value of $150 million available for investment in long-term
securities. If prevailing short-term interest rates are approximately 3% and
long-term interest rates are approximately 6%, the yield curve has a strongly
positive slope. In this example, the Fund pays a discount on the $50 million of
commercial paper based on the lower short-term interest rates. At the same time,
the Fund's total portfolio of $150 million earns the income based on long-term
interest rates.
In this case, the discount paid to commercial paper holders is significantly
lower than the income earned on the Fund's long-term investments, and therefore
the common stock shareholders are the beneficiaries of the incremental yield.
However, if short-term interest rates rise, narrowing the differential between
short-term and long-term interest rates, the incremental yield pick-up on the
common stock will be reduced or eliminated completely. At the same time, the
market value on the Fund's common stock (that is, its price as listed on the New
York Stock Exchange), may, as a result, decline. Furthermore, if long-term
interest rates rise, the common stock's NAV will reflect the full decline in the
price of the portfolio's investments, since the value of the Fund's commercial
paper does not fluctuate. In addition to the decline in net asset value, the
market value of the Fund's common stock may also decline.
CHARTWELL
14
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
SCHEDULE OF INVESTMENTS
ASSET CLASS WEIGHTINGS (UNAUDITED)+:
(BAR CHART)
Common Stock 60.3%
Exchange Traded Fund 2.0%
Preferred Stock 1.7%
Corporate Notes/Bonds 50.1%
Cash Equivalent 0.6%
+ Percentages are based on total net assets of $70,852,629.
Total Investments including leverage are $81,237,267.
NUMBER OF MARKET
SHARES VALUE
---------- ------------
COMMON STOCK--60.3%
AEROSPACE & DEFENSE--1.4%
Honeywell International, Inc. ..................... 25,000 $ 961,750
------------
BANKS--4.1%
JPMorgan Chase & Company .......................... 60,000 2,549,400
National Penn Bancshares, Inc. .................... 64,415 355,571
------------
2,904,971
------------
BEVERAGES--1.3%
Coca-Cola Company ................................. 5,000 286,000
PepsiCo, Inc. ..................................... 10,000 622,200
------------
908,200
------------
COMPUTERS & PERIPHERALS--1.4%
Hewlett-Packard Company ........................... 20,000 981,200
------------
ELECTRICAL EQUIPMENT--1.8%
Emerson Electric Company .......................... 30,000 1,242,300
------------
ENERGY--11.0%
Copano Energy LLC (A) ............................. 30,000 606,000
Energy Transfer Partners LP (A) ................... 42,500 1,839,825
Enterprise Products Partners LP (A) ............... 20,000 595,800
Exxon Mobil Corporation ........................... 23,000 1,726,610
General Maritime Corporation ...................... 105,000 742,350
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
CHARTWELL
15
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
SCHEDULE OF INVESTMENTS (CONTINUED)
NUMBER OF MARKET
SHARES VALUE
---------- ------------
COMMON STOCK (CONTINUED)
ENERGY (CONTINUED)
Occidental Petroleum Corporation .................. 28,000 $ 2,262,120
------------
7,772,705
------------
FINANCIAL--6.5%
ACE Limited ....................................... 30,000 1,461,300
Lincoln National Corporation ...................... 26,700 611,697
MetLife, Inc. ..................................... 60,000 2,051,400
Star Asia Financial Limited*+ (B)(C) .............. 15,000 471,900
------------
4,596,297
------------
FOOD & STAPLES RETAILING--0.9%
CVS Caremark Corporation .......................... 20,000 620,200
------------
FOOD, BEVERAGE & TOBACCO--1.1%
Kraft Foods, Inc., Class A ........................ 10,000 265,800
Philip Morris International, Inc. ................. 10,000 480,900
------------
746,700
------------
HEALTHCARE--7.9%
Abbott Laboratories ............................... 20,000 1,089,800
Bristol-Myers Squibb Company ...................... 50,000 1,265,500
Merck & Company, Inc. ............................. 40,000 1,448,400
Pfizer, Inc. ...................................... 100,000 1,817,000
------------
5,620,700
------------
HOTELS, RESTAURANTS & LEISURE--0.9%
Darden Restaurants, Inc. .......................... 20,000 628,600
------------
INDUSTRIAL CONGLOMERATES--2.2%
3M Company ........................................ 20,000 1,548,800
------------
METALS & MINING--0.8%
BHP Billiton Limited ADR .......................... 8,000 602,400
------------
MULTILINE RETAIL--2.4%
JC Penney Company, Inc. ........................... 15,000 431,100
Target Corporation ................................ 28,000 1,303,680
------------
1,734,780
------------
PERSONAL PRODUCTS--1.0%
Avon Products, Inc. ............................... 20,000 685,000
------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
CHARTWELL
16
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
SCHEDULE OF INVESTMENTS (CONTINUED)
NUMBER OF MARKET
SHARES VALUE
---------- ------------
COMMON STOCK (CONTINUED)
REAL ESTATE INVESTMENT TRUSTS--4.7%
Annaly Capital Management, Inc. ................... 120,000 $ 2,209,200
MFA Mortgage Investments, Inc. .................... 150,000 1,135,500
------------
3,344,700
------------
ROAD & RAIL--0.9%
Union Pacific Corporation ......................... 10,000 632,600
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT--1.8%
Intel Corporation ................................. 20,000 384,000
Microchip Technology, Inc. ........................ 35,000 918,750
------------
1,302,750
------------
SPECIALTY RETAIL--1.6%
Limited Brands, Inc. .............................. 70,000 1,161,300
------------
TELECOMMUNICATIONS--3.6%
AT&T, Inc. ........................................ 40,500 1,091,070
Frontier Communications Corporation ............... 125,000 987,500
Verizon Communications, Inc. ...................... 15,000 471,900
------------
2,550,470
------------
TRANSPORTATION--0.6%
Seaspan Corporation ............................... 50,000 455,000
------------
UTILITIES--2.4%
Exelon Corporation ................................ 15,000 722,700
Southern Company .................................. 30,000 962,700
------------
1,685,400
------------
TOTAL COMMON STOCK (COST $40,225,622) ............. 42,686,823
------------
EXCHANGE TRADED FUNDS--2.0%
SPDR KBW Bank ..................................... 65,000 1,436,500
------------
TOTAL EXCHANGE TRADED FUNDS (COST $871,731) ....... 1,436,500
------------
PREFERRED STOCK--1.7%
FINANCIAL--1.1%
Solar Cayman Limited*+ (B) ........................ 80,000 776,000
------------
REAL ESTATE INVESTMENT TRUSTS--0.6%
FelCor Lodging Trust, Inc. ........................ 40,000 433,600
------------
TOTAL PREFERRED STOCK (COST $2,200,000) ........... 1,209,600
------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
CHARTWELL
17
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
SCHEDULE OF INVESTMENTS (CONTINUED)
PRINCIPAL MARKET
AMOUNT VALUE
---------- ------------
CORPORATE NOTES/BONDS--50.1%
BASIC INDUSTRY--2.7%
H&E Equipment Services, Inc.
8.375%, 07/15/16 ............................... $1,175,000 $ 1,145,625
Trimas Corporation
9.875%, 06/15/12 ............................... 772,000 741,120
------------
1,886,745
------------
BUILDING MATERIALS--1.1%
Gibraltar Industries, Inc.
8.000%, 12/01/15 ............................... 840,000 798,000
------------
CABLE TELEVISION--4.0%
Cequel Communications Holdings I LLC and Cequel
Capital Corporation+
8.625%, 11/15/17 ............................... 500,000 495,000
CSC Holdings, Inc.
7.875%, 02/15/18 ............................... 750,000 770,625
Echostar DBS Corporation
6.625%, 10/01/14 ............................... 500,000 491,250
Mediacom Broadband LLC
8.500%, 10/15/15 ............................... 750,000 746,250
Virgin Media Finance PLC
9.500%, 08/15/16 ............................... 350,000 369,250
------------
2,872,375
------------
CONSTRUCTION MATERIALS--1.1%
Headwaters, Inc.+
11.375%, 11/01/14 .............................. 750,000 770,625
------------
CONSUMER STAPLES--0.3%
Dean Foods Company
7.000%, 06/01/16 ............................... 200,000 194,000
------------
ENERGY--8.1%
Antero Resources Finance Corporation+
9.375%, 12/01/17 ............................... 500,000 503,750
Cie Generale de Geophysique
7.750%, 05/15/17 ............................... 500,000 496,875
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
CHARTWELL
18
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
SCHEDULE OF INVESTMENTS (CONTINUED)
PRINCIPAL MARKET
AMOUNT VALUE
---------- ------------
CORPORATE NOTES/BONDS (CONTINUED)
ENERGY (CONTINUED)
Cimarex Energy Company
7.125%, 05/01/17 ............................... $ 650,000 $ 650,812
Complete Production Services, Inc.
8.000%, 12/15/16 ............................... 780,000 768,300
Concho Resources, Inc.
8.625%, 10/01/17 ............................... 500,000 516,250
Copano Energy LLC
8.125%, 03/01/16 ............................... 935,000 939,675
Linn Energy LLC
9.875%, 07/01/18 ............................... 185,000 194,250
Newfield Exploration Company
6.625%, 04/15/16 ............................... 450,000 445,500
Plains Exploration & Production Company
7.625%, 06/01/18 ............................... 500,000 490,000
Range Resources Corporation
7.500%, 05/15/16 ............................... 750,000 757,500
------------
5,762,912
------------
FIREARMS AND AMMUNITION--1.1%
Colt Defense LLC+
8.750%, 11/15/17 ............................... 750,000 757,500
------------
GAMING--2.7%
MTR Gaming Group, Inc.
9.000%, 06/01/12 ............................... 700,000 542,500
Seneca Gaming Corporation
7.250%, 05/01/12 ............................... 1,000,000 985,000
Yonkers Racing Corporation+
11.375%, 07/15/16 .............................. 400,000 418,000
------------
1,945,500
------------
HEALTHCARE--1.6%
HCA Inc.
9.125%, 11/15/14 ............................... 500,000 523,750
Omnicare, Inc.
6.875%, 12/15/15 ............................... 650,000 627,250
------------
1,151,000
------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
CHARTWELL
19
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
SCHEDULE OF INVESTMENTS (CONTINUED)
PRINCIPAL MARKET
AMOUNT VALUE
---------- ------------
CORPORATE NOTES/BONDS (CONTINUED)
INDUSTRIAL--1.9%
Anixter, Inc.
10.000%, 03/15/14 .............................. $1,000,000 $ 1,097,500
United Rentals North America, Inc.+
10.875%, 06/15/16 .............................. 270,000 288,225
------------
1,385,725
------------
LEISURE--0.7%
Universal City Development Partners Limited+
8.875%, 11/15/15 ............................... 500,000 488,750
------------
METALS & MINING--2.5%
Arch Western Finance LLC
6.750%, 07/01/13 ............................... 500,000 500,000
Cloud Peak Energy Resources LLC+
8.500%, 12/15/19 ............................... 500,000 497,500
Steel Dynamics, Inc.
7.375%, 11/01/12 ............................... 750,000 751,875
------------
1,749,375
------------
PAPER & FOREST PRODUCTS--3.2%
PE Paper Escrow+
12.000%, 08/01/14 .............................. 250,000 274,868
P H Glatfelter
7.125%, 05/01/16 ............................... 1,190,000 1,185,538
U.S. Corrugated (B)
10.000%, 06/01/13 .............................. 1,000,000 850,000
------------
2,310,406
------------
REAL ESTATE MANAGEMENT--0.6%
Corrections Corp of America
7.750%, 06/01/17 ............................... 300,000 313,500
Geo Group, Inc.+
7.750%, 10/15/17 ............................... 80,000 81,600
------------
395,100
------------
RETAIL--2.8%
Brown Shoe Company, Inc.
8.750%, 05/01/12 ............................... 700,000 707,000
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
CHARTWELL
20
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
SCHEDULE OF INVESTMENTS (CONTINUED)
PRINCIPAL MARKET
AMOUNT VALUE
---------- ------------
CORPORATE NOTES/BONDS (CONTINUED)
RETAIL (CONTINUED)
Couche-Tard US LP
7.500%, 12/15/13 ............................... $ 500,000 $ 508,125
Sonic Automotive, Inc., Series B
8.625%, 08/15/13 ............................... 750,000 742,500
------------
1,957,625
------------
ROAD & RAIL--1.0%
RailAmerica, Inc.+
9.250%, 07/01/17 ............................... 675,000 708,750
------------
SERVICES--2.2%
ARAMARK Corporation
8.500%, 02/01/15 ............................... 500,000 503,750
KAR Holdings, Inc.
8.750%, 05/01/14 ............................... 770,000 785,400
Mobile Mini, Inc.
9.750%, 08/01/14 ............................... 250,000 260,000
------------
1,549,150
------------
TELECOMMUNICATIONS--3.8%
Cincinnati Bell, Inc.
8.375%, 01/15/14 ............................... 750,000 749,062
Clearwire Communications LLC+
12.000%, 12/01/15 .............................. 750,000 743,438
Frontier Communications Corporation
8.250%, 05/01/14 ............................... 150,000 154,875
Hughes Network Systems LLC
9.500%, 04/15/14 ............................... 1,000,000 1,015,000
------------
2,662,375
------------
TRANSPORTATION--1.3%
Stena AB
7.500%, 11/01/13 ............................... 950,000 914,375
------------
UTILITIES--7.4%
AES Corporation+
9.750%, 04/15/16 ............................... 500,000 541,250
Amerigas Partners LP
7.250%, 05/20/15 ............................... 750,000 742,500
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
CHARTWELL
21
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
SCHEDULE OF INVESTMENTS (CONTINUED)
PRINCIPAL
AMOUNT/
NUMBER OF MARKET
SHARES VALUE
---------- ------------
CORPORATE NOTES/BONDS (CONTINUED)
UTILITIES (CONTINUED)
Edison Mission Energy
7.000%, 05/15/17 ............................... $ 650,000 $ 477,750
Elwood Energy LLC
8.159%, 07/05/26 ............................... 872,794 787,392
Ferrellgas Partners LP
6.750%, 05/01/14 ............................... 400,000 386,000
Ferrellgas Partners LP+
9.125%, 10/01/17 ............................... 100,000 104,500
Ipalco Enterprises, Inc.+
7.250%, 04/01/16 ............................... 500,000 501,250
North American Energy Alliance LLC+
10.875%, 06/01/16 .............................. 400,000 419,000
Sierra Pacific Resources
8.625%, 03/15/14 ............................... 750,000 779,062
Southern Star Central Corporation
6.750%, 03/01/16 ............................... 350,000 336,000
Suburban Propane Partners LP
6.875%, 12/15/13 ............................... 190,000 188,100
------------
5,262,804
------------
TOTAL CORPORATE NOTES/BONDS (COST $35,552,676) .... 35,523,092
------------
CASH EQUIVALENT--0.6%
SEI Daily Income Trust, Prime Obligations Fund,
Class A, 0.130% (D) ............................ 381,252 381,252
------------
TOTAL CASH EQUIVALENT (COST $381,252) ............. 381,252
------------
TOTAL INVESTMENTS--114.7% (COST $79,231,281) ...... 81,237,267
------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
CHARTWELL
22
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
SCHEDULE OF INVESTMENTS (CONCLUDED)
WRITTEN MARKET
CONTRACTS VALUE
---------- ------------
COVERED CALL OPTIONS WRITTEN--(0.2)%
Abbott Laboratories, Expires: 12/19/09,
Strike Price: $55 .............................. (200) $ (12,000)
Annaly Capital Management, Inc., Expires: 12/19/09,
Strike Price: $18 .............................. (145) (8,265)
Avon Products, Inc., Expires: 12/19/09,
Strike Price: $35 .............................. (200) (10,000)
CVS Caremark Corporation, Expires: 12/19/09,
Strike Price: $31 .............................. (200) (16,000)
Emerson Electric Company, Expires: 12/19/09,
Strike Price: $44 .............................. (300) (4,500)
Merck & Company, Inc., Expires: 12/19/09,
Strike Price: $36 .............................. (400) (37,600)
Union Pacific Corporation, Expires: 12/19/09,
Strike Price: $65 .............................. (100) (8,500)
Verizon Communications, Inc., Expires: 12/19/09,
Strike Price: $31 .............................. (150) (12,450)
------------
TOTAL WRITTEN OPTION
(PREMIUMS RECEIVED $137,078) ................... (109,315)
------------
OTHER LIABILITIES IN EXCESS OF ASSETS--(14.5)% .... (10,275,323)
------------
NET ASSETS--100.0% ................................ $ 70,852,629
============
* Non - income producing security.
+ Securities are exempt from registration under Rule 144A of the Securities
Act of 1933. These securities may be resold in transactions exempt from
registration normally to qualified institutions. At November 30, 2009,
these securities amounted to $8,841,906 or 12.5% of net assets.
(A) Securities considered Master Limited Partnerships. At November 30, 2009,
these securities amounted to $3,041,625 or 4.3% of net assets.
(B) Securities fair valued in accordance with Fair Value Procedures
(See Note 1).
(C) Security is illiquid. The total value of illiquid securities as of November
30, 2009 was $471,900 or 0.7% of net assets.
(D) The rate reported is the 7-day effective yield as of November 30, 2009.
ADR American Depositary Receipt
LLC Limited Liability Company
LP Limited Partnership
PLC Public Limited Company
SPDR Standard & Poor's Depository Receipts
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
CHARTWELL
23
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
STATEMENT OF ASSETS AND LIABILITIES
AS OF NOVEMBER 30, 2009
ASSETS:
Investments, at value (cost $79,231,281) (Note 1) ....... $ 81,237,267
Interest receivable ..................................... 660,449
Dividends receivable .................................... 175,452
Prepaid expenses and other assets ....................... 46,241
-------------
Total assets ...................................... 82,119,409
-------------
LIABILITIES:
Commercial paper (Note 4) ............................... 9,951,722
Payable for investment securities purchased ............. 848,290
Covered call options written, at value
(premiums received--$137,078) (Note 1) ............... 109,315
Payable for investment management fees (Note 2) ......... 56,249
Payable to custodian .................................... 27,812
Payable for administration fees (Note 2) ................ 12,329
Accrued expenses and other liabilities .................. 261,063
-------------
Total liabilities ................................. 11,266,780
-------------
NET ASSETS .............................................. $ 70,852,629
=============
NET ASSETS CONSIST OF:
Common Stock, $0.01 par value
(authorized 100,000,000 shares) ................... $ 169,060
Additional paid-in capital ........................... 172,817,983
Distributions in excess of net investment income ..... (244,104)
Accumulated net realized losses on investments and
written call options .............................. (103,924,059)
Net unrealized appreciation on investments and
written call options .............................. 2,033,749
-------------
NET ASSETS .............................................. $ 70,852,629
=============
NET ASSET VALUE PER SHARE:
$70,852,629 / 16,905,967 shares of Common Stock issued
and outstanding ................................... $ 4.19
=============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
CHARTWELL
24
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED
NOVEMBER 30, 2009
INVESTMENT INCOME:
Interest ................................................ $ 3,233,159
Dividends ............................................... 2,089,536
Foreign taxes withheld .................................. (1,260)
------------
Total investment income ........................... 5,321,435
------------
EXPENSES:
Investment management fees (Note 2) ..................... 701,467
Commercial paper fees ................................... 202,541
Legal fees .............................................. 154,618
Administration fees (Note 2) ............................ 150,000
Transfer agent fees ..................................... 84,301
Audit fees .............................................. 56,137
Printing and shareholder reports ........................ 40,215
Directors' fees and expenses ............................ 27,000
Custodian fees .......................................... 18,049
Registration fees ....................................... 17,890
Insurance fees .......................................... 16,650
Other operating expenses ................................ 32,533
------------
Total operating expenses ............................. 1,501,401
------------
Interest expense (Note 4) ............................... 421,621
------------
Total expenses ....................................... 1,923,022
Less: Investment management fees waived (Note 2) .. (73,887)
------------
Net expenses ...................................... 1,849,135
------------
NET INVESTMENT INCOME ............................. 3,472,300
------------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized loss on investments ........................ (45,381,796)
Net realized gain on written call options ............... 1,385,878
Change in net unrealized appreciation
on investments and written call options .............. 56,252,324
------------
Net realized and unrealized gain on investments
and written call options ............................. 12,256,406
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .... $ 15,728,706
============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
CHARTWELL
25
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED
NOVEMBER 30, 2009
CASH FLOWS FROM OPERATING ACTIVITIES
Net increase in net assets resulting from operations .............. $ 15,728,706
Adjustments to reconcile net increase in net assets resulting
from operations to net cash provided by operating activities:
Purchase of long-term portfolio investments .................... (53,456,233)
Proceeds from sales of long-term portfolio investments ......... 54,050,052
Net purchase of short-term portfolio investments ............... (45,590,253)
Net proceeds from sales of short-term portfolio investments .... 45,209,001
Realized gain on written call options .......................... (1,385,878)
Premiums received from options written ......................... 8,855,682
Premiums paid to closed options ................................ (7,847,085)
Amortization of premiums on investments ........................ (57,694)
Realized losses from security transactions ..................... 45,381,796
Change in unrealized appreciation from security
transactions and written call options ....................... (56,252,324)
Decrease in interest receivable ................................ 208,909
Increase in dividends receivable ............................... (38,227)
Decrease in prepaid expenses and other assets .................. 11,323
Decrease in payable for securities purchased ................... (604,116)
Decrease in payable for investment management fees ............. (3,336)
Increase in payable for administration fees .................... 5,319
Increase in payable to custodian ............................... 27,812
Increase in accrued expenses and other liabilities ............. 29,491
------------
Net cash provided by operating activities ................... 4,272,945
------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid to shareholders ............................... (6,897,633)
Increase in commercial paper, at value ............................ 9,902
------------
Net cash used in financing activities .......................... (6,887,731)
------------
Net decrease in cash ........................................... (2,614,786)
CASH
Cash at beginning of year ...................................... 2,614,786
------------
Cash at end of year ............................................ $ --
============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
CHARTWELL
26
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
STATEMENT OF CHANGES IN NET ASSETS
FOR THE FOR THE
YEAR ENDED YEAR ENDED
NOVEMBER 30, NOVEMBER 30,
2009 2008
------------ ------------
OPERATIONS:
Net investment income ............................ $ 3,472,300 $ 9,420,942
Net realized loss on investments ................. (45,381,796) (37,833,912)
Net realized gain on written call options ........ 1,385,878 8,825,538
Change in net unrealized appreciation
(depreciation) on investments and written
call options .................................. 56,252,324 (41,822,635)
------------ ------------
Net increase (decrease) in net assets resulting
from operations .................................. 15,728,706 (61,410,067)
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income ............................ (6,607,782) (9,913,146)
Tax return of capital ............................ (289,851) (4,609,079)
------------ ------------
Net decrease in net assets resulting from
dividends and distributions ...................... (6,897,633) (14,522,225)
------------ ------------
Total increase (decrease) in net assets ............. 8,831,073 (75,932,292)
------------ ------------
NET ASSETS:
Beginning of year ................................ 62,021,556 137,953,848
------------ ------------
End of year
(including distributions in excess of net
investment income $(244,104) and
undistributed net investment income of
$703,046, respectively) ....................... $ 70,852,629 $ 62,021,556
============ ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
CHARTWELL
27
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
FINANCIAL HIGHLIGHTS
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE BEEN DERIVED FROM INFORMATION
PROVIDED IN THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED
NOVEMBER 30,
-------------------
2009 2008
-------- --------
NET ASSET VALUE, BEGINNING OF YEAR ........................ $ 3.67 $ 8.16
-------- --------
INCOME/(LOSS) FROM INVESTMENT OPERATIONS: (1)
Net investment income .................................. 0.21 0.56
Net realized and unrealized gain (loss) on investment
transactions and written call options ............... 0.72 4.19)
-------- --------
Total from investment operations .................... 0.93 (3.63)
-------- --------
LESS DIVIDENDS:
Dividends from net investment income ................... (0.39) (0.59)
Tax return of capital .................................. (0.02) (0.27)
-------- --------
Total dividends ..................................... (0.41) (0.86)
-------- --------
NET ASSET VALUE, END OF YEAR .............................. $ 4.19 $ 3.67
======== ========
MARKET VALUE, END OF YEAR ................................. $ 3.65 $ 2.60
======== ========
TOTAL RETURN BASED ON: (2)
Net asset value ........................................ 29.42% (47.75)%
======== ========
Market value ........................................... 59.14% (58.90)%
======== ========
RATIOS AND SUPPLEMENTAL DATA: (3)
Net assets, end of period (000 omitted) ................ $ 70,853 $ 62,022
======== ========
Total expenses including waiver of fees ................ 2.50% 2.41%
Total expenses excluding waiver of fees ................ 2.60% 2.51%
Total operating expenses including waiver of fees (4)... 1.66% 1.22%
Total operating expenses excluding waiver of fees (4)... 1.76% 1.32%
Commercial paper fees and interest expense ............. 0.85% 1.19%
Net investment income including waiver of fees ......... 4.71% 5.97%
Portfolio turnover ..................................... 73% 54%
LEVERAGE ANALYSIS:
Aggregate amount outstanding at end of year
(000 omitted) ....................................... $ 10,000 $ 10,000
Average daily balance of amortized cost of commercial
paper outstanding (000 omitted) ..................... $ 9,960 $ 47,921
Asset coverage per $1,000 at end of year ............... $ 7,425 $ 15,880
----------
(1) Based on average shares outstanding.
(2) Total investment return is calculated assuming a purchase of common stock
on the opening of the first day and a sale on the closing of the last day
of each period reported. Total investment return does not reflect brokerage
commissions. Dividends and distributions, if any, are assumed for the
purposes of this calculation, to be reinvested at prices obtained under the
Fund's dividend reinvestment plan. Total investment returns based on market
value can be significantly greater or less than investment returns based on
net asset value. Returns do not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or the sale of Fund shares.
(3) Ratios are stated as a percentage of managed net assets which includes any
liabilities constituting indebtedness in connection with financial
leverage.
(4) Exclusive of commercial paper fees and interest expense.
Amounts designated as "__" are $0.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
CHARTWELL
28
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR THE YEARS ENDED
NOVEMBER 30,
-------------------
2007 2006
-------- --------
NET ASSET VALUE, BEGINNING OF YEAR ........................ $ 9.55 $ 8.65
-------- --------
INCOME/(LOSS) FROM INVESTMENT OPERATIONS: (1)
Net investment income .................................. 0.80 0.63
Net realized and unrealized gain (loss) on investment
transactions and written call options ............... (1.30) 1.20
-------- --------
Total from investment operations .................... (0.50) 1.83
-------- --------
LESS DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income ................... (0.84) (0.93)
Tax return of capital .................................. (0.05) --
-------- --------
Total dividends ..................................... (0.89) (0.93)
-------- --------
NET ASSET VALUE, END OF YEAR .............................. $ 8.16 $ 9.55
======== ========
MARKET VALUE, END OF YEAR ................................. $ 7.35 $ 9.78
======== ========
TOTAL RETURN BASED ON: (2)
Net asset value ........................................ (6.05)% 22.51%
======== ========
Market value ........................................... (17.19)% 0.36%
======== ========
RATIOS AND SUPPLEMENTAL DATA: (3)
Net assets, end of year (000 omitted) .................. $137,953 $160,613
======== ========
Total expenses including waiver of fees ................ 2.69% 2.59%
Total expenses excluding waiver of fees ................ 2.79% 2.68%
Total operating expenses including waiver of fees (4) .. 1.15% 1.13%
Total operating expenses excluding waiver of fees (4) .. 1.26% 1.24%
Commercial paper fees and interest expense ............. 1.53% 1.44%
Net investment income including waiver of fees ......... 6.33% 5.07%
Portfolio turnover ..................................... 74% 96%
LEVERAGE ANALYSIS:
Aggregate amount outstanding at end of year
(000 omitted) ....................................... $ 55,000 $ 55,000
Average daily balance of amortized cost of commercial
paper outstanding (000 omitted) ..................... $ 54,790 $ 54,659
Asset coverage per $1,000 at end of year ............... $ 3,903 $ 3,980
----------
(1) Based on average shares outstanding.
(2) Total investment return is calculated assuming a purchase of common stock
on the opening of the first day and a sale on the closing of the last day
of each year reported. Total investment return does not reflect brokerage
commissions. Dividends and distributions, if any, are assumed for the
purposes of this calculation, to be reinvested at prices obtained under the
Fund's dividend reinvestment plan. Total investment returns based on market
value can be significantly greater or less than investment returns based on
net asset value. Returns do not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or the sale of Fund shares.
(3) Ratios are stated as a percentage of average weekly net assets which
includes any liabilities constituting indebtedness in connection with
financial leverage.
(4) Exclusive of commercial paper fees and interest expense.
Amounts designated as "--" are $0.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
CHARTWELL
29
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
FINANCIAL HIGHLIGHTS (CONCLUDED)
FOR THE
YEAR ENDED
NOVEMBER 30,
2005
------------
NET ASSET VALUE, BEGINNING OF YEAR ........................ $ 8.96
--------
INCOME/GAIN FROM INVESTMENT OPERATIONS: (1)
Net investment income .................................. 0.61
Net realized and unrealized gain on investment
transactions and written call options ............... 0.08
--------
Total from investment operations .................... 0.69
--------
LESS DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income ................... (0.53)
Distributions in excess ................................ (0.01)
Tax return of capital .................................. (0.46)
--------
Total dividends and distributions ................... (1.00)
--------
NET ASSET VALUE, END OF YEAR .............................. $ 8.65
========
MARKET VALUE, END OF YEAR ................................. $ 10.70
========
TOTAL RETURN BASED ON: (2)
Net asset value ........................................ 8.19%
========
Market value ........................................... 18.14%
========
RATIOS AND SUPPLEMENTAL DATA: (3)
Net assets, end of year (000 omitted) .................. $144,352
========
Total expenses including waiver of fees ................ 2.90%
Total expenses excluding waiver of fees ................ 3.04%
Total operating expenses including waiver of fees (4) .. 1.59%
Total operating expenses excluding waiver of fees (4) .. 1.73%
Commercial paper fees and interest expense ............. 1.31%
Net investment income including waiver of fees ......... 7.00%
Portfolio turnover ..................................... 80%
LEVERAGE ANALYSIS:
Aggregate amount outstanding at end of year
(000 omitted) ....................................... $ 55,000
Average daily balance of amortized cost of commercial
paper outstanding (000 omitted) ..................... $ 54,794
Asset coverage per $1,000 at end of year ............... $ 3,679
----------
(1) Based on average shares outstanding.
(2) Total investment return is calculated assuming a purchase of common stock
on the opening of the first day and a sale on the closing of the last day
of each year reported. Total investment return does not reflect brokerage
commissions. Dividends and distributions, if any, are assumed for the
purposes of this calculation, to be reinvested at prices obtained under the
Fund's dividend reinvestment plan. Total investment returns based on market
value can be significantly greater or less than investment returns based
on net asset value. Returns do not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or the sale of Fund shares.
(3) Ratios are stated as a percentage of average weekly net assets which
includes any liabilities constituting indebtedness in connection with
financial leverage.
(4) Exclusive of commercial paper fees and interest expense.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
CHARTWELL
30
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
NOTES TO FINANCIAL STATEMENTS
Chartwell Dividend and Income Fund, Inc. (the "Fund") was incorporated under
the laws of the State of Maryland on April 6, 1998 and is registered under the
Investment Company Act of 1940 as amended, (the "Act"), as a closed-end,
diversified management investment company. Investment operations commenced on
June 29, 1998. The Fund's primary investment objective is to seek high current
income. Capital appreciation is a secondary objective.
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Financial Accounting Standards Board ("FASB") has issued FASB ASC 105 (formerly
FASB Statement No. 168), THE "FASB ACCOUNTING STANDARDS CODIFICATION(TM)" AND
THE HIERARCHY OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("ASC 105"). ASC 105
established the FASB Accounting Standards Codification(TM) ("Codification" or
"ASC") as the single source of authoritative U.S. generally accepted accounting
principles ("GAAP") recognized by the FASB to be applied by nongovernmental
entities. Rules and interpretive releases of the Securities and Exchange
Commission ("SEC") under authority of federal securities laws are also sources
of authoritative GAAP for SEC registrants. The Codification supersedes all
existing non-SEC accounting and reporting standards. All other
non-grandfathered, non-SEC accounting literature not included in the
Codification will become non-authoritative.
Following the Codification, the FASB will not issue new standards in the form of
Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts.
Instead, it will issue Accounting Standards Updates, which will serve to update
the Codification, provide background information about the guidance and provide
the basis for conclusions on the changes to the Codification.
GAAP is not intended to be changed as a result of the FASB's Codification
project, but it will change the way the guidance is organized and presented. As
a result, these changes will have a significant impact on how companies
reference GAAP in their financial statements and in their accounting policies
for financial statements issued for interim and annual periods ending after
September 15, 2009. The Fund has implemented the Codification as of November 30,
2009.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with GAAP.
USE OF ESTIMATES: The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of increases and decreases in net assets from operations during the reporting
period. Actual results could differ from those estimates.
CHARTWELL
31
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
SECURITY VALUATION: Investment securities of the Fund that are listed on a
securities exchange, except for debt securities, and for which market quotations
are readily available, are valued at the last quoted sales price at the close of
trading on the New York Stock Exchange (normally 4:00 p.m., Eastern Time).
Investment securities of the Fund that are quoted on the NASDAQ market system
are valued at the official closing price, or if there is none, at the last sales
price. If there is no reported sale, these securities and unlisted securities
for which market quotations are not readily available are valued at last bid
price. Debt securities are priced based upon valuations provided by independent,
third-party pricing agents, if available. Such values generally reflect the last
reported sales price if the security is actively traded. The third-party pricing
agents may also value debt securities at an evaluated bid price by employing
methodologies that utilize actual market transactions, broker-supplied
valuations, or other methodologies designed to identify the market value for
such securities. Debt obligations with remaining maturities of sixty days or
less may be valued at their amortized cost, which approximates market value.
Prices for most securities held in the Fund are provided daily by recognized
independent pricing agents. If a security price cannot be obtained from an
independent, third-party pricing agent, the Fund seeks to obtain a bid price
from at least one independent broker. All securities and assets for which
quotations are not readily available are valued in accordance with Fair Value
Procedures established by the Board of Directors (the "Board"). The value of
such securities was $2,097,900 as of November 30, 2009. The Fund's Fair Value
Procedures are implemented through a Fair Value Committee (the "Committee")
designated by the Fund's Board. Some of the more common reasons that may
necessitate that a security be valued using Fair Value Procedures include, among
other things: the security's trading has been halted or suspended; the security
has been de-listed from a national exchange; the security's primary trading
market is temporarily closed at a time when under normal conditions it would be
open; or the security's primary pricing source is not able or willing to provide
a price. When a security is valued in accordance with the Fair Value Procedures,
the Committee will determine the value after taking into consideration relevant
information reasonably available to the Committee.
In accordance with the authoritative guidance on fair value measurements and
disclosure under GAAP, ASC 820 (formerly FASB Statement No. 157), the Fund
discloses fair value of its investments in a hierarchy that prioritizes the
inputs to valuation techniques used to measure the fair value. The objective of
a fair value measurement is to determine the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date (an exit price). Accordingly, the
fair value hierarchy gives the highest priority to quoted prices (unadjusted) in
active markets for identical assets or liabilities (Level 1) and the lowest
priority to unobservable inputs (Level 3). The three levels of the fair value
hierarchy under ASC 820 are described below:
- Level 1 - Unadjusted quoted prices in active markets for identical,
unrestricted assets or liabilities that the Fund has the ability to
access at the measurement date;
CHARTWELL
32
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
- Level 2 - Quoted prices which are not active, or inputs that are
observable (either directly or indirectly) for substantially the full
term of the asset or liability; and
- Level 3 - Prices, inputs or exotic modeling techniques which are both
significant to the fair value measurement and unobservable (supported
by little or no market activity).
Investments are classified within the level of the lowest significant input
considered in determining fair value. Investments classified within Level 3
whose fair value measurement considers several inputs may include Level 1 or
Level 2 inputs as components of the overall fair value measurement.
The following table sets forth information about the level within the fair value
hierarchy at which the Fund's investments were measured at November 30, 2009:
Investments in Securities Level 1 Level 2 Level 3 Total
------------------------- ----------- ----------- ---------- -----------
Common Stock $42,214,923 $ -- $ 471,900(1) $42,686,823
Corporate Notes/
Bonds -- 34,673,092 850,000(2) 35,523,092
Exchange Traded
Fund 1,436,500 -- -- 1,436,500
Preferred Stock 433,600 -- 776,000(1) 1,209,600
Cash Equivalent 381,252 -- -- 381,252
----------- ----------- ---------- -----------
Total Investments in Securities $44,466,275 $34,673,092 $2,097,900 $81,237,267
=========== =========== ========== ===========
Liabilities Level 1 Level 2 Level 3 Total
--------- ------- ------- ---------
Written Options $(109,315) $-- $-- $(109,315)
--------- --- --- ---------
Total Liabilities $(109,315) $-- $-- $(109,315)
========= === === =========
----------
(1) Classified as Financial
(2) Classified as Paper & Forest Products
The following is a reconciliation of the investments in which significant
unobservable inputs (Level 3) were used in determining value:
Common Corporate Preferred
Stock Notes/Bonds Stock Total
--------- ----------- ------------ ------------
BEGINNING BALANCE AS OF
11/30/08 $ 594,000 $550,000 $ 4,647,150 $ 5,791,150
Realized gain (loss) -- -- (16,324,034) (16,324,034)
Change in unrealized
appreciation (depreciation) (122,100) 300,000 12,496,493 12,674,393
Net purchase/sales -- -- (43,609) (43,609)
Net transfers in/and
or out of Level 3 -- -- -- --
--------- -------- ----------- ------------
ENDING BALANCE AS OF
11/30/09 $ 471,900 $850,000 $ 776,000 $ 2,097,900
========= ======== =========== ============
The inputs or methodology used for valuing securities are not necessarily an
indication of the risks associated with investing in those securities.
CHARTWELL
33
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
For the year ended November 30, 2009, there have been no significant changes to
the Fund's fair value methodologies.
CASH AND CASH EQUIVALENTS: Idle cash may be swept into various money market
funds and is classified as cash equivalents on the Schedule of Investments.
Amounts invested are generally available on the same business day.
WRITTEN OPTIONS: When the Fund writes a covered call option, an amount equal to
the premium received by the Fund is included in the Fund's Statement of Assets
and Liabilities as a liability. The amount of the liability is subsequently
marked-to-market to reflect the current market value of the option written.
When a covered written call option expires on its stipulated expiration date, or
if the Fund enters into a closing purchase transaction, the Fund will realize a
gain (or loss if the cost of the closing purchase transaction exceeds the
premium received when the call option was written) without regard to any
unrealized gain or loss on the underlying security, and the liability related to
such option will be extinguished. When a covered written call option is
exercised, the Fund will realize a gain or loss from the sale of the underlying
security and the proceeds of the sale are increased by the premium originally
received. The Fund, as writer of an option, has no control over whether the
underlying securities may be sold (called) and as a result bears the market risk
of an unfavorable change in the price of the securities underlying the written
option.
The Fund has adopted the provisions of Statement of Financial Accounting
Standard No. 161, Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133, which has primarily been
codified into ASC Topic 815 ("ASC 815"). ASC 815 intends to provide users of
financial statements with an enhanced understanding of: (i) how and why an
entity uses derivative instruments; (ii) how derivative instruments and related
hedged items are accounted for under SFAS No. 133 and its related
interpretations: and (iii) how derivative instruments and related hedged items
affect an entity's financial position, financial performance and cash flows.
Adoption of ASC 815 impacted disclosures only and had no impact on the Fund's
financial condition, results of operations or cash flows.
The Fund is permitted to write covered call options on equity securities or
stock indexes. The Fund writes covered call options to enhance return through
price appreciation of the option, increase income, hedge to reduce overall
portfolio risk and/or hedge to reduce individual security risk. As of November
30, 2009, the Fund had $109,315 in covered call options written representing
0.2% of the Fund's net assets.
DIVIDENDS AND DISTRIBUTIONS: The Fund will declare and pay dividends to
shareholders on a monthly basis. Net long-term capital gains, if any, in excess
of capital loss carryforwards are distributed to shareholders annually.
Dividends from net investment income and capital gain distributions, if any, are
determined in accordance with U.S. Federal income tax regulations, which may
differ from GAAP. Dividends and distributions, if any, to shareholders are
recorded on the ex-dividend date.
CHARTWELL
34
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
The Fund currently intends to distribute a monthly fixed amount to shareholders.
The Fund's final distribution for each calendar year may exceed that amount,
however, to the extent necessary for the Fund to have distributed all of its net
investment company taxable income and net capital gains recognized during the
year, if any. If, for any calendar year, the total distributions exceed current
and accumulated earnings and profit, the excess, distributed from the Fund's
assets, will generally be treated as a tax-free return of capital and will
result in a reduction in the shareholder's basis. The Board reserves the right
to change the aforementioned dividend policy from time to time.
BORROWINGS: The Fund issues short-term commercial paper at a discount from par.
The discount is amortized to interest expense over the life of the commercial
paper using the straight-line method. In conjunction with the issuance of the
commercial paper, the Fund entered into a line of credit arrangement with a bank
for $15,000,000. Effective January 25, 2010, the borrowings under the line of
credit are secured by a perfected security interest on all of the Fund's assets,
and the bank has imposed a 0.10% per annum commitment fee on the unused balance.
The line of credit arrangement with the bank has been extended from $15,000,000
to $25,000,000. There were no borrowings under this arrangement during the year
ended November 30, 2009.
ILLIQUID SECURITIES: A security is considered illiquid if it cannot be sold or
disposed of in the ordinary course of business within seven days or less for its
approximate carrying value on the books of the Fund. Valuations of illiquid
securities may differ significantly from the values that would have been used
had an active market for these securities existed. The total value of illiquid
securities as of November 30, 2009 was $471,900 or 0.7% of net assets.
SECURITY TRANSACTIONS AND INVESTMENT INCOME: Security transactions are recorded
on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income is recorded
on the accrual basis. The Fund accretes original issue discount on securities
using the effective interest method.
FEDERAL INCOME TAXES: It is the Fund's intention to continue to meet the
requirements under Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to distribute substantially all of its
taxable income to shareholders. Therefore, no provision for Federal income or
excise tax is required.
The Fund evaluates tax positions taken or expected to be taken in the course of
preparing the Fund's tax returns to determine whether it is "more-likely
than-not" (i.e., greater than 50-percent) that each tax position will be
sustained upon examination by a taxing authority based on the technical merits
of the position. Tax positions not deemed to meet the more-likely-than-not
threshold are recorded as a tax benefit or expense in the current year. The Fund
did not record any tax provision in the current period. However, management's
conclusions regarding tax positions taken may be subject to review and
adjustment at a later date based on factors including, but not limited to,
examination by tax
CHARTWELL
35
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
authorities (i.e., the last 3 tax year ends, as applicable), on-going analysis
of and changes to tax laws, regulations and interpretations thereof.
INVESTMENTS IN REAL ESTATE INVESTMENT TRUSTS ("REITS"): With respect to the
Fund, dividend income is recorded based on the income included in distributions
received from the REIT investments using published REIT reclassifications
including some management estimates when actual amounts are not available.
Distributions received in excess of this estimated amount are recorded as a
reduction of the cost of investments or reclassified to capital gains. The
actual amounts of income, return of capital, and capital gains are only
determined by each REIT after its fiscal year-end, and may differ from the
estimated amounts.
INVESTMENT COMPANY SECURITIES AND EXCHANGE-TRADED FUNDS: The Fund may invest in
shares of other registered investment companies, including exchange-traded funds
("ETFs") within the limitations prescribed by the 1940 Act. ETF shares are
traded like traditional equity securities on a national securities exchange or
NASDAQ. The Fund will indirectly bear its proportionate share of any management
fees and other expenses paid by such other investment companies, which will
increase expenses and decrease returns.
INVESTMENTS IN PREFERRED TERM SECURITIES ("PTSS"): The Fund can invest in
Preferred Term Securities, a type of collateralized debt obligation ("CDO"). A
PTS is a trust collateralized by a pool of capital securities of affiliated
holding corporations, typically of, but not limited to, smaller to medium sized
banks and insurance companies.
The income tranche of these securities, owned by the Fund, receives residual
cash disbursements after the senior tranches are paid a stated rate of interest.
Dividend income from these securities is recorded based on anticipated cash
flows and the internal rate of return of each PTS. Distributions received in
excess of this estimated amount are recorded as a reduction of the cost of
investments or reclassified to capital gains. The actual amounts of income,
return of capital, and capital gains are only determined by each PTS quarterly,
and may differ from the estimated amounts.
In addition to the normal risks associated with fixed income securities (e.g.,
interest rate risk and default risk), PTSs carry additional risks including, but
not limited to: (i) the possibility that distributions from collateral
securities will not be adequate to make interest or other payments; (ii) the
quality of the collateral may decline in value or default; (iii) the Fund may
invest in PTSs that are subordinate to other classes; and (iv) the complex
structure of the security may produce disputes with the issuer or unexpected
investment results. As of November 30, 2009 there were no holdings in Preferred
Term Securities.
NOTE 2. INVESTMENT MANAGEMENT, ADMINISTRATION, CUSTODIAN AGREEMENTS AND OTHER
TRANSACTIONS WITH AFFILIATES
The Fund has entered into an investment management agreement with Chartwell
Investment Partners, (the "Manager"). The Manager manages the
CHARTWELL
36
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
Fund's portfolio and makes investment decisions. For these services, the Fund
pays the Manager a monthly fee at an annual rate of 0.95% of the Fund's Managed
Assets. "Managed Assets" are the average weekly value of the Fund's total
assets minus the sum of the Fund's liabilities, excluding debt related to
leveraging, short-term debt and the aggregate liquidation preference of any
outstanding preferred stock. The Manager has agreed to limit the investment
management fee paid to it by the Fund to 0.85% of the Fund's Managed Assets.
This waiver is voluntary and may be changed at any time.
The Fund has entered into an administration agreement with SEI Investments
Global Funds Services (the "Administrator"). Under such agreement, the
Administrator performs or arranges for the performance of certain administrative
services necessary for the operation of the Fund. The Fund pays a fee to the
Administrator based on the Fund's Managed Assets according to the following
rates: 0.10% on the first $250 million of such Managed Assets and 0.09% on such
Managed Assets in excess of $250 million, subject to a minimum annual fee of
$150,000.
Certain officers and/or directors of the Fund are officers and/or directors of
the Manager. The Fund pays each director, who is not an "affiliated person" as
defined in the Act (a "Disinterested Director"), a fee of $2,000 for each
regular Board Meeting attended, $750 for each special Board Meeting attended,
plus $1,000 per year for audit committee members. Each Disinterested Director is
reimbursed for reasonable out-of-pocket expenses associated with attending Board
and Committee Meetings.
For the year ended November 30, 2009, the Fund incurred a legal expense of
$154,618 for services provided by Drinker Biddle & Reath LLP, counsel for the
Fund. A partner of the firm is an officer of the Fund.
U.S. Bank serves as the custodian for the Fund. The Custodian plays no role in
determining the investment policies of the Fund or which securities are to be
purchased or sold by the Fund.
NOTE 3. PURCHASE AND SALES OF INVESTMENTS
For the year ended November 30, 2009, purchases and sales of investments,
excluding short-term investments, totaled $53,456,233 and $54,050,052,
respectively.
The following table summarizes the Fund's call options written for the year
ended November 30, 2009:
NUMBER OF
CONTRACTS PREMIUMS
--------- -----------
Options outstanding, November 30, 2008 .. 8,500 $ 784,470
Options written ......................... 121,054 8,855,682
Options expired ......................... (52,375) (3,277,922)
Options exercised ....................... (5,326) (270,111)
Options closed .......................... (70,158) (5,955,041)
------- -----------
Options outstanding, November 30, 2009 .. 1,695 $ 137,078
======= ===========
CHARTWELL
37
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
NOTE 4. COMMERCIAL PAPER
As of November 30, 2009, $10,000,000 of commercial paper was outstanding with an
amortized cost of $9,951,722. The average discount rate of commercial paper
outstanding at November 30, 2009 was 3.21%. The average daily balance of
commercial paper outstanding for the year ended November 30, 2009, was
$9,959,934 at a weighted average discount rate of 3.33%. The maximum face amount
of commercial paper outstanding at any time during the year ended November 30,
2009, was $10,000,000. As of November 30, 2009, the Fund had $421,621 in
Interest Expense. The commercial paper has been extended and will mature April
26, 2010, with an interest rate of 3.20% and $10,000,000 outstanding.
NOTE 5. CAPITAL STOCK
There are 100,000,000 shares of $0.01 par value common stock authorized. Of the
16,905,967 shares of common stock outstanding at November 30, 2009, the Manager
owned 23,984 shares.
For the year ended November 30, 2009 and the year ended November 30, 2008, the
Fund issued no shares in connection with the Fund's dividend reinvestment plan.
NOTE 6. MARKET AND CREDIT RISKS
The Fund may invest in high yielding fixed-income securities, which carry
ratings of BB or lower by S&P and/or Ba1 or lower by Moody's. Investments in
these higher yielding securities may be accompanied by a greater degree of
credit risk than higher rated securities. Additionally, lower rated securities
may be more susceptible to adverse economic and competitive industry conditions
than investment grade securities. The Fund may invest up to 15% of its total
assets in illiquid securities and other securities which may not be readily
marketable. In addition, the Fund may purchase securities sold in reliance of
Rule 144A of the Securities Act of 1933. The relative illiquidity of some of the
Fund's portfolio securities may adversely affect the ability of the Fund to
dispose of such securities in a timely manner and at a fair price at times when
it might be necessary or advantageous for the Fund to liquidate portfolio
securities.
NOTE 7. FEDERAL TAX INFORMATION
In accordance with accounting pronouncements, the Fund has recorded several
reclassifications in the capital accounts. These reclassifications have no
impact on the net asset value of the Fund. These differences, which may result
in distribution reclassifications, are primarily due to ordinary gain from the
sale of master limited partnerships, return of capital and expiration of capital
loss carryover. As of November 30, 2009, the Fund recorded the following
reclassifications to increase (decrease) the accounts below:
UNDISTRIBUTED ACCUMULATED ADDITIONAL
NET INVESTMENT REALIZED PAID-IN
INCOME GAIN CAPITAL
-------------- ----------- ------------
$2,188,332 $5,748,049 $(7,936,381)
CHARTWELL
38
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
The tax character of dividends and distributions paid during the last two fiscal
years were as follows:
ORDINARY RETURN
INCOME OF CAPITAL TOTALS
---------- ---------- -----------
2009 $6,607,782 $ 289,851 $ 6,897,633
2008 9,913,146 4,609,079 14,522,225
As of November 30, 2009, the components of Accumulated Losses were as follows:
Capital loss carryforwards $ (99,053,980)
Post-October losses (220,759)
Net unrealized depreciation (2,615,571)
Other temporary differences (244,104)
-------------
Total accumulated losses $(102,134,414)
=============
Post-October losses represent losses realized on investment transactions from
November 1, 2009 through November 30, 2009, that in accordance with federal
income tax regulations the Fund may elect to defer or treat as having arisen in
the following fiscal year.
The following summarizes the capital loss carryforwards as of November 30, 2009.
These capital loss carryforwards are available to offset future net capital
gains.
EXPIRING IN FISCAL YEAR AMOUNT
----------------------- -----------
2010 $30,533,344
2011 771,608
2014 103,382
2016 16,849,903
2017 50,795,743
-----------
Total capital loss carryforwards $99,053,980
===========
During the year ended November 30, 2009, the Fund utilized none of the capital
loss carryforwards to offset capital gains, $7,900,696 of the capital loss
carryforward expired in the current year.
The Federal tax cost as well as the aggregate gross unrealized appreciation and
depreciation on investments excluding written options held by the Fund at
November 30, 2009, were as follows:
Federal Tax Cost ......................... $83,880,602
Aggregate Gross Unrealized Appreciation .. 2,753,974
Aggregate Gross Unrealized Depreciation .. (5,397,309)
-----------
Net Unrealized Depreciation .............. $(2,643,335)
===========
CHARTWELL
39
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
NOTE 8. SUBSEQUENT EVENTS
The Fund has evaluated the need for disclosures and/or adjustments resulting
resulting from subsequent events through January 27, 2009, the date the
financial statements were issued. Based on this evaluation, no adjustments were
required to the financial statements as of November 30, 2009. However, the
following are details relating to subsequent events that have occurred since
November 30, 2009 through January 27, 2010.
The Board of the Fund declared the following dividends:
DECLARATION DATE EX-DATE RECORD DATE PAYABLE DATE DIVIDEND RATE
---------------- ----------------- ----------------- ----------------- -------------
December 1, 2009 December 15, 2009 December 17, 2009 December 31, 2009 $0.034
January 4, 2010 January 19, 2010 January 21, 2010 January 29, 2010 0.034
NOTE 9. INDEMNIFICATIONS
The Fund enters into contracts that contain a variety of indemnifications. The
Fund's maximum exposure under these arrangements is unknown. However, the Fund
has not had prior claims or losses pursuant to these contracts and expects the
risk of loss to be remote.
CHARTWELL
40
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Chartwell Dividend and Income Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Chartwell Dividend and Income Fund, Inc. (the
Fund) as of November 30, 2009, and the related statements of operations and cash
flows for the year then ended, the statements of changes in net assets for each
of the two years in the period then ended, and the financial highlights for each
of the four years in the period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. The financial highlights for the year
ended November 30, 2005 were audited by other auditors, whose report dated
January 27, 2006, expressed an unqualified opinion on those financial
highlights.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. We were
not engaged to perform an audit of the Fund's internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Fund's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of November 30, 2009, by correspondence with the custodian
and brokers or by other appropriate auditing procedures when replies from
brokers were not received. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Chartwell Dividend and Income Fund, Inc. at November 30, 2009, the results of
its operations and cash flows for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and its financial
highlights for each of the four years in the period then ended, in conformity
with U.S. generally accepted accounting principles.
(ERNST & YOUNG LLP)
Philadelphia, Pennsylvania
January 27, 2010
CHARTWELL
41
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
AUTOMATIC DIVIDEND REINVESTMENT PLAN (UNAUDITED)
Pursuant to the Fund's Automatic Dividend Reinvestment Plan (the "Plan"), unless
a shareholder otherwise elects, all dividend and capital gains distributions
will be automatically reinvested in additional shares of common stock of the
Fund by PNC Global Investment Servicing ("PNC Global") formerly known as PFPC,
Inc., as agent for shareholders in administering the Plan (the "Plan Agent").
Shareholders who elect not to participate in the Plan will receive all dividends
and distributions in cash, paid by check mailed directly to the shareholder of
record (or, if the shares are held in street or other nominee name, then to such
nominee) by PNC Global, as dividend paying agent. Such participants may elect
not to participate in the Plan and to receive all distributions of dividends and
capital gains in cash by sending written instructions to PNC Global, as dividend
paying agent, at the address set forth below.
Participation in the Plan is completely voluntary and may be terminated or
resumed at any time without penalty by written notice if received by the Plan
Agent not less than ten days prior to any dividend record date. Otherwise such
termination will be effective with respect to any subsequently declared dividend
or distribution.
Whenever the Fund declares a distribution, an ordinary income dividend or a
capital gain dividend (collectively referred to as "dividends") payable either
in shares or in cash, non-participants in the Plan will receive cash, and
participants in the Plan will receive the equivalent in shares of common stock.
The shares will be acquired by the Plan Agent for the participant's account,
depending upon the circumstances described below, either (i) through receipt of
additional unissued but authorized shares of common stock from the Fund or (ii)
by purchase of outstanding shares of common stock on the open market on the NYSE
or elsewhere. If on the payment date of the dividend, the net asset value per
share of the common stock is equal to or less than the market price per share
plus estimated brokerage commissions (such condition being referred to herein as
"market premium"), the Plan Agent will invest the dividend amount in newly
issued shares on behalf of the participant. The number of newly issued shares of
common stock to be credited to the participant's account will be determined by
dividing the dollar amount of the dividend by the net asset value per share on
the date the shares are issued, provided that the maximum discount from the then
current market price per share on the date of issuance may not exceed 5%. If on
the dividend payment date the net asset value per share is greater than the
market value (such condition being referred to herein as "market discount"), the
Plan Agent will invest the dividend amount in shares acquired on behalf of the
participant in open-market purchases.
In the event of a market discount on the dividend payment date, the Plan Agent
will have until the last business day before the next date on which the shares
trade on the "ex-dividend" basis or in no event more than 30 days after the
dividend payment date to invest the dividend amount in shares acquired in
CHARTWELL
42
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
(UNAUDITED)
open-market purchases. If, before the Plan Agent has completed its open-market
purchases, the market price of a share of common stock exceeds the net asset
value per share, the average per share purchase price paid by the Plan Agent may
exceed the net asset value of the Fund's shares, resulting in the acquisition of
fewer shares than if the dividend had been paid in newly issued shares on the
dividend payment date. The Plan provides that if the Plan Agent is unable to
invest the full dividend amount in open-market purchases during the purchase
period or if the market discount shifts to market premium during the purchase
period, the Plan Agent will cease making open-market purchases and will invest
the uninvested portion of the dividend amount in newly issued shares at the
close of business on the last purchase date.
The Plan Agent maintains all shareholders' accounts in the Plan and furnishes
written confirmation of all transactions in the accounts, including information
needed by shareholders for tax records. Shares in the account of each Plan
participant will be held by the Plan Agent on behalf of the Plan participant,
and each shareholder's proxy will include those shares purchased or received
pursuant to the Plan. The Plan Agent will forward all proxy solicitation
materials to participants and vote proxies for shares held pursuant to the Plan
in accordance with the instructions of the participants.
In the case of shareholders such as banks, brokers or nominees which hold shares
for others who are the beneficial owners, the Plan Agent will administer the
Plan on the basis of the number of shares certified from time to time by the
record shareholders as representing the total amount registered in the record
shareholder's name and held for the account of beneficial owners who are to
participate in the Plan.
There will be no brokerage charges with respect to shares issued directly by the
Fund as a result of dividends or capital gain distributions payable either in
shares or in cash. However, 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 reinvestment of dividends.
The automatic reinvestment of dividends and distributions will not relieve
participants of any Federal, state or local income tax that may be payable (or
required to be withheld) on such dividends.
Shareholders participating in the Plan may receive benefits not available to
shareholders not participating in the Plan. If the market price plus commissions
of the Fund's shares is above the net asset value, participants in the Plan will
receive shares of the Fund at less than they could otherwise purchase them and
will have shares with a cash value greater than the value of any cash
distribution they would have received on their shares. If the market price plus
commissions is below the net asset value, participants will receive
distributions
CHARTWELL
43
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
(UNAUDITED)
in shares with a net asset value greater than the value of any cash distribution
they would have received on their shares. However, there may be insufficient
shares available in the market to make distributions in shares at prices below
the net asset value. Also, since the Fund does not redeem its shares, the price
on resale may be more or less than the net asset value.
Experience under the Plan may indicate that changes are desirable. Accordingly,
the Fund reserves the right to amend or terminate the Plan. There is no direct
service charge to participants in the Plan; however, the Fund reserves the right
to amend the Plan to include a service charge payable by the participants.
All correspondence concerning the Plan should be directed to the Plan Agent at
PNC Global Investment Servicing, P.O. Box 43027, Providence, RI 02940-3027,
Attn: Closed-End Department.
FEDERAL TAX INFORMATION (UNAUDITED)
Information for Federal income tax purposes is presented as an aid to
shareholders in reporting the dividend distributions for the year ended November
30, 2009.
ADDITIONAL INFORMATION (UNAUDITED)
During the year, there have been no material changes in the Fund's investment
objective or fundamental policies that have not been approved by the
shareholders, other than the changes to the investment policies regarding
investments in securities issued by other investment companies and temporary
investments described on pages 3 and 4. There have been no changes in the Fund's
charter or By-Laws that would delay or prevent a change in control of the Fund
which have not been approved by the shareholders. There have been no material
changes in the principal risk factors associated with investment in the Fund.
EFFECTS OF LEVERAGE (UNAUDITED)
Leverage of $60 million in commercial paper was initially sold by the Fund on
July 28, 1999. As of November 30, 2009, the Fund had $10 million outstanding at
3.21% per annum maturing on January 25, 2010. All interest rates include fees
due to the broker-dealer. The Fund must experience an annual return of 0.40% to
cover interest payments on the commercial paper.
The following table explains the potential effects of leverage on the equity
returns of common shareholders:
Assumed return on portfolio
(net of expenses) ........... (10.00)% (5.00)% 0.00% 5.00% 10.00%
Corresponding return to common
stockholder ................. (11.89) (6.17)% (0.46)% 5.26% 10.97%
CHARTWELL
44
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
(UNAUDITED)
Assumes $70 million assets attributable to common shareholders; $10 million
aggregate leverage with an average interest rate of 3.21%. All figures appearing
above are hypothetical returns generated to assist investors in understanding
the effects of leverage. Actual returns may be greater or less than those
appearing in the table.
HOW TO OBTAIN A COPY OF THE FUND'S QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission for the first and third quarters of each fiscal year on
Form N-Q within sixty days after the end of the period. The Fund's Forms N-Q are
available on the Commission's website at http://www.sec.gov, and may be reviewed
and copied at the Commission's Public Reference Room in Washington, D.C.
Information on the operation of the Public Reference Room may be obtained by
calling 1-800-SEC-0330.
HOW TO OBTAIN A COPY OF THE FUND'S PROXY VOTING POLICIES
A description of the policies and procedures that are used by the Fund's
investment adviser to vote proxies relating to the Fund's portfolio securities
as well as information relating to how the Fund voted proxies relating to
portfolio securities during the most recent 12-month period ended June 30 is
available (i) without charge, upon request, by calling the Fund toll-free at
(866) 585-6552; (ii) on the Fund's website at www.chartwellip.com; and (iii) on
the SEC's website at http://www.sec.gov.
CHARTWELL
45
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
DIRECTOR AND OFFICER INFORMATION (UNAUDITED)
The business and affairs of the Fund are managed under the direction of the
Fund's Board of Directors and the Fund's officers appointed by the Board of
Directors. The tables below present information about each Director and officer
of the Fund. The Directors of each class serve for terms of three years or, when
filling a vacancy, for the remainder of the full term of the class of Directors
in
DIRECTORS OF THE FUND
TERM OF
POSITION(S) OFFICE AND
NAME, ADDRESS, HELD WITH LENGTH OF
AND AGE THE FUND TIME SERVED
--------------------------- -------------- -----------------
DISINTERESTED DIRECTORS
C. Warren Ormerod Director Term Expires 2012
73 yrs. old (Since 2001)
Marie D. Fairchild, CPA/ABV Director Term Expires 2011
56 yrs. old (Since 2008)
Kenneth F. Herlihy Director Term Expires 2012
80 yrs. old (Since 1998)
INTERESTED DIRECTORS*
Winthrop S. Jessup Director, Term Expires 2011
64 yrs. old Chairman (Since 1998)
and President
Bernard P. Schaffer Director and Term Expires 2010
65 yrs. old Vice President (Since 1998)
----------
* These directors are considered to be "interested persons" of the Fund as
defined in the Investment Company Act of 1940 because they are partners in
the investment adviser (Chartwell Investment Partners, L.P.) and are
officers of the Fund.
CHARTWELL
46
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
which the vacancy occurred and until their successors have been duly elected and
qualified. Officers of the Fund are elected by the Board of Directors and,
subject to the earlier termination of office, each officer holds office for the
term of one year and until his or her successor is elected and qualified. Unless
otherwise noted, the business address of each Officer and Director is c/o
Chartwell Investment Partners, 1235 Westlakes Drive, Suite 400, Berwyn,
Pennsylvania 19312.
NUMBER OF
PORTFOLIOS
IN THE FUND
PRINCIPAL OCCUPATION(S) COMPLEX OVERSEEN OTHER DIRECTORSHIPS
DURING PAST 5 YEARS BY DIRECTOR HELD BY BOARD MEMBER
------------------------------------------ ---------------- -----------------------
Chairman and Managing Director, 1 None
NorthStar Asset Management (since
2000). Managing Partner, Stratton
Management Company (1992-2000).
Shareholder, Ragone, Lacatena 1 None
Fairchild & Beppel, P.C. (Certified
Public Accounting Firm).
Sculptor, who has worked 1 None
independently since his
retirement from the mutual
fund industry in 1987.
Limited Partner, Chartwell Investment 1 Georgia Banking Company
Partners, L.P. and Chartwell G.P., Inc. (since 1998).
(since 1997); Managing Partner, Chartwell
Investment Partners, L.P. and Chartwell
G.P., Inc. (1997-2005), Director and Chief
Executive Officer, Rigel Capital LLC
(investment adviser) (since 2009).
Managing Partner and Portfolio 1 None
Manager of Chartwell Investment
Partners, L.P. and Partner of Chartwell
G.P., Inc. (since 1997).
CHARTWELL
47
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
DIRECTOR AND OFFICER INFORMATION (UNAUDITED) (CONTINUED)
TERM OF
POSITION(S) OFFICE AND
NAME, ADDRESS, HELD WITH LENGTH OF
AND AGE THE FUND TIME SERVED
-------------------------------- --------------------------- ------------
OFFICERS OF THE FUND
Winthrop S. Jessup Chairman of the Board, (Since 1998)
64 yrs. old President and Director
Bernard P. Schaffer Vice President and (Since 1998)
65 yrs. old Director
Kevin A. Melich Vice President (Since 1998)
67 yrs. old
Timothy J. Riddle Vice President (Since 1998)
54 yrs. old
G. Gregory Hagar Vice President (Since 1998)
41 yrs. old and Treasurer, (Since 2004)
Chief Financial Officer and
Chief Compliance Officer
Andrew S. Toburen Vice President (Since 2003)
38 yrs. old
Michael P. Malloy Secretary (Since 1998)
50 yrs. old
One Logan Square
18th and Cherry Streets
Philadelphia, Pennsylvania 19103
Maria E. Pollack Assistant (Since 1998)
64 yrs. old Secretary
CHARTWELL
48
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
PRINCIPAL OCCUPATION(S)
DURING PAST 5 YEARS
--------------------------------------------------------------------------------
Limited Partner, Chartwell Investment Partners, L.P. and Chartwell G.P., Inc.
(since 1997); Managing Partner, Chartwell Investment Partners, L.P. and
Chartwell G.P., Inc. (1997-2005); Director and Chief Executive Officer, Rigel
Capital LLC (investment adviser) (since 2009).
Managing Partner and Portfolio Manager of Chartwell Investment Partners, L.P.
and Partner of Chartwell G.P., Inc. (since 1997).
Managing Partner and Portfolio Manager of Chartwell Investment Partners, L.P.
and Chartwell G.P., Inc. (since 1997).
Managing Partner of Chartwell Investment Partners, L.P. and of Chartwell G.P.,
Inc. (since 1997).
Managing Partner (since 2007), Chief Financial Officer (since 1997) and Chief
Compliance Officer (since 2004) of Chartwell Investment Partners, L.P.
Fixed Income Portfolio Manager for Chartwell Investment Partners, L.P. (since
1999).
Partner in the law firm of Drinker Biddle & Reath LLP (since 1993).
Director of Client Administration for Chartwell Investment Partners, L.P. (since
1997).
CHARTWELL
49
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
NOTES TO SHAREHOLDERS (UNAUDITED)
For shareholders that do not have a November 30, 2009 tax year end, this notice
is for informational purposes only. For shareholders with a November 30, 2009
tax year end, please consult your tax advisor as to the pertinence of this
notice. For the fiscal year ended November 30, 2009, the Fund is designating the
following items with regard to distributions paid during the year.
ORDINARY QUALIFYING INTEREST
INCOME RETURN TOTAL QUALIFYING DIVIDEND RELATED
DISTRIBUTIONS OF CAPITAL DISTRIBUTIONS DIVIDENDS(1) INCOME(2) DIVIDENDS(3)
------------- ---------- ------------- ------------ ---------- -------------
CHARTWELL DIVIDEND AND
INCOME FUND, INC. 95.80% 4.20% 100.00% 22.16% 19.87% 38.33%
(1) Qualifying dividends represent dividends which qualify for the corporate
dividends received deduction.
(2) The percentage in this column represents the amount of "Qualifying Dividend
Income" as created by the Jobs and Growth Tax Relief Reconciliation Act of
2003 and is reflected as a percentage of "Ordinary Income Distributions."
It is the intention of the Fund to designate the maximum amount permitted
by the law.
(3) The percentage in this column represents the amount of "Interest Related
Dividends" as created by the American Jobs Creation Act of 2004 and is
reflected as a percentage of Net Investment Income distributions that is
exempt from U.S. withholding tax when paid to foreign investors.
The information reported herein may differ from the information and
distributions taxable to the shareholders for the calendar year ending December
31, 2009. Complete information will be computed and reported in conjunction with
your 2009 Form 1099-DIV.
CHARTWELL
50
NOTES
CHARTWELL DIVIDEND AND INCOME FUND, INC. NOVEMBER 30, 2009
DIRECTORS
Winthrop S. Jessup, Chairman
Marie D. Fairchild
Kenneth F. Herlihy
C. Warren Ormerod
Bernard P. Schaffer
OFFICERS
Winthrop S. Jessup, President
G. Gregory Hagar, Vice President, Treasurer,
Chief Financial Officer and Chief Compliance Officer
Bernard P. Schaffer, Vice President
Kevin A. Melich, Vice President
Timothy J. Riddle, Vice President
Andrew S. Toburen, Vice President
Michael P. Malloy, Secretary
Maria E. Pollack, Assistant Secretary
INVESTMENT MANAGER
Chartwell Investment Partners, L.P.
1235 Westlakes Drive, Suite 400
Berwyn, PA 19312
ADMINISTRATOR
SEI Investments Global Funds Services
One Freedom Valley Drive
Oaks, PA 19456
CUSTODIAN
U.S. Bank
Two Liberty Place
Philadelphia, PA 19102
TRANSFER AGENT
PNC Global Investment Servicing
P.O. Box 43027
Providence, RI 02940-3027
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young, LLP
2001 Market Street, Suite 4000
Philadelphia, PA 19103
LEGAL COUNSEL
Drinker Biddle & Reath LLP
One Logan Square
18th & Cherry Streets
Philadelphia, PA 19103
This report, including the financial statements herein, is transmitted to the
shareholders of Chartwell Dividend and Income Fund, Inc. It is not a prospectus,
circular or representation intended for use in the purchase of shares of the
Fund or any securities mentioned in the report. Past performance results should
not be considered a representation of future performance. Statements and other
information contained in this report are as dated and are subject to change.
Past performance is no guarantee of future results. Share prices will fluctuate,
so that a share may be worth more or less than its original cost when sold. The
investment adviser's commentaries included in this report contain certain
forward-looking statements about the factors that may affect the performance of
the Fund in the future. These statements are based on Fund management's
predictions and expectations concerning certain future events and their expected
impact on the Fund, such as performance of the economy as a whole and of
specific industry sectors, changes in the levels of interest rates, the impact
of developing world events and other factors that may influence the future
performance of the Fund. Management believes these forward-looking statements to
be reasonable, although they are inherently uncertain and difficult to predict.
Actual events may cause adjustments in portfolio management strategies from
those currently expected to be employed.
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940 that the Fund may purchase, from time to time, shares of its
common stock in the open market.
ITEM 2. CODE OF ETHICS.
The Registrant has adopted a code of ethics that applies to the Registrant's
principal executive officer and principal financial officer. A copy of
Registrant's code is filed herewith.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The Registrant's Board of Directors has determined that Registrant has an audit
committee financial expert serving on its Audit Committee. The audit committee
financial expert serving the Registrant's Audit Committee is Marie D. Fairchild,
CPA/ABV, who is "independent" as defined in Item 3(a)(2) of this form.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Fees billed by Registrant's principal accountant related to the Registrant.
Registrant's principal accountant billed the Registrant aggregate fees for
professional services rendered to the Registrant for the last two fiscal years
as follows:
2009 2008
---------------------------------------------------- --------------------------------------------------
All fees and All non-audit Description of All fees and All non-audit Description of
services to the services to the Services services to services to the Services
Registrant Registrant's the Registrant Registrant's
service service
affiliates that affiliates that
were were
pre-approved by pre-approved by
the Registrant's the
Audit Committee Registrant's
pursuant to Rule Audit Committee
2-01(c)(7)(ii) pursuant to
of Regulation Rule
S-X. 2-01(c)(7)(ii)
of Regulation
S-X.
(a) Audit $46,000 N/A Audit fees $45,000 N/A Audit fees
Fees include amounts include amounts
related to the related to the
audit of the audit of the
Registrant's Registrant's
annual annual
financial financial
statements and statements and
services services
normally normally
provided by the provided by the
accountant in accountant in
connection with connection with
statutory and statutory and
regulatory regulatory
filings. filings.
(b) Audit-Relat $ 0 $0 $0 $ 0 $0 $0
Fees
(c) Tax Fees $ 6,600(1) $0 $0 $ 6,600(1) $0 $0
(d) All $ 0(2) $0 $0 $21,500(2) $0 $0
Other
Fees
Notes:
(1) Fees for review of the Fund's federal, excise and state tax returns.
(2) Fees for agreed upon procedures performed in relation to the Fund's
commercial paper issuance program.
(e)(1) Audit Committee Pre-Approval Policies and Procedures: The Registrant's
Audit Committee has not adopted pre-approval policies and procedures. Instead,
the Audit Committee or its Chairman approves an a case-by-case basis each audit
or non-audit service before the engagement.
(e)(2) 0%, 0% and 0%, respectively, of the audit-related fees, tax fees and
other fees listed in the table above were approved by the Registrant's Audit
Committee pursuant to the "de minimis" exception of Rule 2-01(c)(7)(i)(C) of
Regulation S-X. In addition, 0%, 0% and 0%, respectively, of the audit related,
fees, tax fees and other fees to the Registrant's service affiliates listed in
the table above were approved by the Registrant's Audit Committee pursuant to
the "de minimis" exception of Rule 2-01(c)(7)(i)(C) of Regulation S-X.
(f) Not applicable.
(g) The aggregate non-audit fees and services billed by the Registrant's
principal accountant for services rendered to the Registrant and the
Registrant's investment adviser for the Registrant's fiscal year ended November
30, 2009 and the fiscal year ended November 30, 2008 were $127,850 and $151,600,
respectively.
(H) The Registrant's Audit Committee has considered whether the provision of
non-audit services that were rendered to the Registrant's investment adviser and
any entity controlling, controlled by, or under common control with Registrant's
investment adviser that were not pre-approved pursuant to paragraph (c)(7)(ii)
of Rule 2-01 of Regulation S-X is compatible with maintaining the principal
accountant's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
(a) The Registrant has a separately-designated standing Audit Committee
established in accordance with Section 3(a)(58)(A) of the Exchange Act. The
committee members are: Kenneth F. Herlihy, C. Warren Ormerod and Marie D.
Fairchild.
(b) Not applicable
ITEM 6. SCHEDULE OF INVESTMENTS
(a) Schedules of Investment in securities of unaffiliated issuers as of the
close of the reporting period are included as part of the report to shareholders
filed under Item 1 of this form.
(b) Not applicable
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The Registrant has delegated the voting of proxies relating to its voting
securities to its investment adviser, Chartwell Investment Partners, L.P. (the
"Adviser"), subject to the general oversight by the Registrant's Board of
Directors. The Registrant expects the Adviser to vote proxies related to the
Registrant's portfolio securities for which it has voting authority consistent
with the Registrant's best economic interests. The Adviser has adopted its own
Proxy Voting Policies and Procedures which address, among other things,
conflicts of interests that may arise between the interests of the Registrant
and the interests of the Adviser and its affiliates. The Adviser's Proxy Voting
Policies and Procedures is includes as an Exhibit hereto.
CHARTWELL INVESTMENT PARTNERS
PROXY VOTING POLICIES AND PROCEDURES
ADOPTED APRIL 11, 1997
AS AMENDED FEBRUARY, 2009
As Further Amended July, 2009
PURPOSE. Chartwell Investment Partners ("Chartwell") has adopted these Proxy
Voting Policies and Procedures ("Policies") to seek to ensure that it exercises
voting authority on behalf of Chartwell clients in a manner consistent with the
best interests of each client and its agreement with the client.
SCOPE. These Policies apply where clients have delegated the authority and
responsibility to Chartwell to decide how to vote proxies. Chartwell does not
accept or retain authority to vote proxies in accordance with individual client
guidelines (with the exception of Clients who wish to instruct Chartwell not to
vote in accordance with AFL-CIO Key Vote Survey recommendations, as described
below). Clients that wish to arrange to vote proxies in accordance with their
own guidelines may elect to do so at any time by notifying Chartwell. Chartwell
generally will follow these Policies if asked to make recommendations about
proxy voting to clients who request that advice but have not delegated proxy
voting responsibility to Chartwell.
GUIDING PRINCIPLES. Chartwell believes that voting proxies in the best interests
of each client means making a judgment as to what voting decision is most likely
to maximize total return to the client as an investor in the securities being
voted, and casting the vote accordingly. For this reason, Chartwell's evaluation
of the possible impact of a proxy vote on the economic interests of company
shareholders similarly situated to Chartwell's clients will be the primary
factor governing Chartwell's proxy voting decisions.
USE OF INDEPENDENT PROXY VOTING SERVICE. Chartwell has retained RiskMetrics
Group, an independent proxy voting service, to assist it in analyzing specific
proxy votes with respect to securities held by Chartwell clients and to handle
the mechanical aspects of casting votes. Historically, Chartwell has placed
substantial reliance on RiskMetrics Group's (RMG - formerly ISS) analyses and
recommendations and generally gives instructions to RMG/ISS to vote proxies in
accordance with RMG/ISS' recommendations, unless Chartwell reaches a different
conclusion than RMG/ISS about how a particular matter should be voted. RMG/ISS'
proxy voting recommendations typically are made available to Chartwell about a
week before the proxy must be voted, and are reviewed and monitored by members
of the Proxy Voting Committee (and, in certain cases, by Chartwell portfolio
managers), with a view to determining whether it is in the best interests of
Chartwell's clients to vote proxies as recommended by RMG/ISS, or whether client
proxies should be voted on a particular proposal in another manner. In addition,
Chartwell generally votes in accordance with AFL-CIO Key Votes Survey, a list of
proposals and meetings based on the AFL-CIO Proxy Voting Guidelines. To the
extent that any of the proxy voting positions stated in these Policies are
inconsistent with a Key Vote Survey recommendation, Chartwell will generally
vote in accordance with the Key Vote Survey recommendation on all impacted
securities unless any client has chosen to instruct Chartwell to refrain from
doing so. In that case, Chartwell will vote the client's securities position in
accordance with these Policies (which may or may not cause the vote to be the
same as the Key Vote Survey recommendation).
ADMINISTRATION OF POLICIES. Chartwell has established a Proxy Voting Committee
to oversee and administer the voting of proxies on behalf of clients, comprised
of approximately five representatives of the firm's compliance and operations
departments. The Committee's responsibilities include reviewing and updating
these Policies as may be appropriate from time to time; identifying and
resolving any material conflicts of interest on the part of Chartwell or its
personnel that may affect particular proxy votes; evaluating and monitoring, on
an ongoing basis, the analyses, recommendations and other services provided by
RMG/ISS or another third party retained to assist Chartwell in carrying out its
proxy voting responsibilities; when deemed appropriate by the Committee,
consulting with Chartwell portfolio managers and investment professionals on
particular proposals or categories of proposals presented for vote; and
determining when and how client proxies should be voted other than in accordance
with the general rules and criteria set forth
in Chartwell's Proxy Voting Guidelines or with the recommendations of RMG or
another independent proxy voting service retained by Chartwell..
CONFLICTS OF INTEREST. It is Chartwell's policy not to exercise its authority to
decide how to vote a proxy if there is a material conflict of interest between
Chartwell's interests and the interests of the client that owns the shares to be
voted that could affect the vote on that matter. To seek to identify any such
material conflicts, a representative of the Proxy Voting Committee screens all
proxies and presents any potential conflicts identified to the Committee for
determination of whether the conflict exists and if so, whether it is material.
Conflicts of interest could result from a variety of circumstances, including,
but not limited to, significant personal relationships between executive
officers of an issuer and Chartwell personnel, a current or prospective
investment adviser-client relationship between an issuer or a pension plan
sponsored by an issuer and Chartwell, a significant ownership interest by
Chartwell or its personnel in the issuer and various other business, personal or
investment relationships. Generally, a current or prospective adviser-client
relationship will not be considered material for these purposes if the net
advisory revenues to Chartwell have not in the most recent fiscal year and are
not expected in the current fiscal year to exceed 1/2 of 1 percent of
Chartwell's annual advisory revenue.
Currently, the Proxy Voting Committee has determined that voting in accordance
with AFL-CIO Key Votes Survey recommendations is not a material conflict of
interest. In reaching this decision, the Committee recognized that Chartwell has
many union clients and many clients that are not union-oriented. By voting all
impacted securities positions in accordance with AFL-CIO recommendations, it
could be said that Chartwell is attempting to retain or attract existing and
prospective union clients. However, the overall number of proxy issues in the
AFL-CIO Key Votes Survey on which Chartwell has historically voted is
approximately 14 - 30 out of a total of approximately 500 company meetings and
thousands of proxy votes cast by Chartwell each year. Chartwell does not use its
AFL-CIO Key Votes Survey rankings for marketing purposes so to the extent any
client or prospect becomes aware of how Chartwell votes in the Surveys, it does
so on its own. Recognizing that deciding this is not a material conflict of
interest is fundamentally subjective, Chartwell nonetheless discloses its
practices to clients and invites clients to instruct Chartwell not to change any
vote in these Policies to be consistent with an AFL-CIO Key Votes Survey
recommendation (even though voting consistently with these Policies may result
in voting the same way).
In the event the Committee determines that there is a material conflict of
interest that may affect a particular proxy vote, Chartwell will NOT make the
decision how to vote the proxy in accordance with these Policies unless the
Policies specify how votes shall be cast on that particular type of matter,
i.e., "for" or "against" the proposal. Where the Policies provide that the
voting decision will be made on a "case-by-case" basis, Chartwell will either
request the client to make the voting decision, or the vote will be cast in
accordance with the recommendations of RMG/ISS or another independent proxy
voting service retained by Chartwell for that purpose. Chartwell also will not
provide advice to clients on proxy votes without first disclosing any material
conflicts to the client requesting such advice.
WHEN CHARTWELL DOES NOT VOTE PROXIES. CHARTWELL MAY NOT VOTE PROXIES RESPECTING
CLIENT SECURITIES IN CERTAIN CIRCUMSTANCES, INCLUDING, BUT NOT LIMITED TO,
SITUATIONS WHERE (A) THE SECURITIES ARE NO LONGER HELD IN A CLIENT'S ACCOUNT;
(B) THE PROXY AND OTHER RELEVANT MATERIALS ARE NOT RECEIVED IN SUFFICIENT TIME
TO ALLOW ANALYSIS OR AN INFORMED VOTE BY THE VOTING DEADLINE; (C) CHARTWELL
CONCLUDES THAT THE COST OF VOTING THE PROXY WILL EXCEED THE EXPECTED POTENTIAL
BENEFIT TO THE CLIENT; (D) THE SECURITIES HAVE BEEN LOANED OUT PURSUANT TO A
CLIENT'S SECURITIES LENDING PROGRAM AND ARE UNAVAILABLE TO VOTE; OR (E) IN THE
CASE OF VOTING IN ACCORDANCE WITH AFL-CIO KEY VOTES SURVEY RECOMMENDATIONS, A
CLIENT HAS INSTRUCTED CHARTWELL NOT TO VOTE IN ACCORDANCE WITH SUCH
RECOMMENDATIONS BUT TO VOTE IN ACCORDANCE WITH THESE POLICIES (WHICH MAY OR MAY
NOT BE THE SAME ON A GIVEN PROXY ISSUE).
Proxy Voting Guidelines
Generally, Chartwell votes all proxies in accordance with the following
guidelines. These guidelines may be changed or supplemented from time to time.
Votes on matters not covered by these guidelines will be
determined in accordance with the principles set forth above. Client guidelines
may be inconsistent with these guidelines and may cause Chartwell to vote
differently for different clients on the same matter.
1. OPERATIONAL ITEMS
ADJOURN MEETING
Generally vote AGAINST proposals to provide management with the authority to
adjourn an annual or special meeting absent compelling reasons to support the
proposal.
Vote FOR proposals that relate specifically to soliciting votes for a merger or
transaction if supporting that merger or transaction. Vote AGAINST proposals if
the wording is too vague or if the proposal includes "other business".
AMEND QUORUM REQUIREMENTS
Vote AGAINST proposals to reduce quorum requirements for shareholder meetings
below a majority of the shares outstanding unless there are compelling reasons
to support the proposal.
AMEND MINOR BYLAWS
Vote FOR bylaw or charter changes that are of a housekeeping nature (updates or
corrections).
AUDITOR INDEMNIFICATION AND LIMITATION OF LIABILITY
Consider the issue of auditor indemnification and limitation of liability on a
CASE BY CASE BASIS. Factors to be assessed include, but are not limited to:
- The terms of the auditor agreement - the degree to which these
agreements impact shareholders' rights;
- Motivation and rationale for establishing the agreements;
- Quality of disclosure; and
- Historical practices in the audit area.
WITHHOLD or vote AGAINST members of an audit committee in situations where there
is persuasive evidence that the audit committee entered into an inappropriate
indemnification agreement with its auditor that limits the ability of the
company, or its shareholders, to pursue legitimate legal recourse against the
audit firm.
AUDITOR RATIFICATION
Vote FOR proposals to ratify auditors, unless any of the following apply:
- An auditor has a financial interest in or association with the company
and is therefore not independent;
- There is reason to believe that the independent auditor has rendered
an opinion which is neither accurate nor indicative of the company's
financial position;
- Poor accounting practices are identified that rise to a serious level
of concern, such as: fraud; misapplication of GAAP; and material
weaknesses identified in Section 404 disclosures; or
- Fees for non-audit services ("Other" fees) are excessive.
Non-audit fees are excessive if:
Non-audit ("other") fees >audit fees + audit-related fees + tax
compliance/preparation fees
Tax compliance and preparation include the preparation of original and amended
tax returns, refund claims and tax payment planning. All other services in the
tax category, such as tax advice, planning or consulting should be added to
"Other" fees. If the breakout of tax fees cannot be determined, add all tax fees
to "Other" fees.
In circumstances where "Other" fees include fees related to significant one-time
capital structure events: initial public offerings, bankruptcy emergence and
spin-offs; and the company makes public disclosure of the amount and nature of
those fees which are an exception to the standard "non-audit fee" category, then
such fees may be excluded from the non-audit fees considered in determining the
ratio of non-audit to
audit/audit-related fees/tax compliance and preparation for purposes of
determining whether non-audit fees are excessive.
Vote CASE BY CASE on shareholder proposals asking companies to prohibit or limit
their auditors from engaging in non-audit services.
Vote CASE BY CASE on shareholder proposals asking for audit firm rotation,
taking into account
- The tenure of the audit firm;
- The length of rotation specified in the proposal;
- Any significant audit-related issues at the company;
- The number of Audit Committee meetings held each year;
- The number of financial experts serving on the committee; and
- Whether the company has a periodic renewal process where the auditor
is evaluated for both audit quality and competitive price.
CHANGE COMPANY NAME
Vote FOR proposals to change the corporate name.
CHANGE DATE, TIME, OR LOCATION OF ANNUAL MEETING
Vote FOR management proposals to change the date, time, and/or location of the
annual meeting unless the proposed change is unreasonable.
Vote AGAINST shareholder proposals to change the date, time, and/or location of
the annual meeting unless the current scheduling or location is unreasonable.
TRANSACT OTHER BUSINESS
Vote AGAINST proposals to approve other business when it appears as voting item.
2. BOARD OF DIRECTORS
VOTING ON DIRECTOR NOMINEES IN UNCONTESTED ELECTIONS
- Vote on director nominees should be determined on a CASE-BY-CASE
basis.
Vote AGAINST or WITHHOLD(1) from individual directors who:
- Attend less than 75 percent of the board and committee meetings
without a valid excuse (such as illness, service to the nation, work
on behalf of the company);
- Sit on more than six public company boards;
- Are CEOs of public companies who sit on the boards of more than two
public companies besides their own--withhold only at their outside
boards.
Vote AGAINST or WITHHOLD from all nominees of the board of directors, (except
from new nominees, who should be considered on a CASE-BY-CASE basis) if:
- The company's proxy indicates that not all directors attended 75
percent of the aggregate of their board and committee meetings, but
fails to provide the required disclosure of the names of the directors
involved. If this information cannot be obtained, withhold from all
incumbent directors;
- The company's poison pill has a dead-hand or modified dead-hand
feature. Vote against/ withhold every year until this feature is
removed;
- The board adopts or renews a poison pill without shareholder approval,
does not commit to putting it to shareholder vote within 12 months of
adoption (or in the case of a newly public company, does not commit to
put the pill to a shareholder vote within 12 months following the
IPO), or reneges on a commitment to put the pill to a vote, and has
not yet received a withhold/ against recommendation for this issue;
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(1) In general, companies with a plurality vote standard use "Withhold" as the
valid contrary vote option in director elections; companies with a majority
vote standard use "Against". However, it will vary by company and the proxy
must be checked to determine the valid contrary vote option for the
particular company.
- The board failed to act on a shareholder proposal that received
approval by a majority of the shares outstanding the previous year (a
management proposal with other than a FOR recommendation by management
will not be considered as sufficient action taken);
- The board failed to act on a shareholder proposal that received
approval of the majority of shares cast for the previous two
consecutive years (a management proposal with other than a FOR
recommendation by management will not be considered as sufficient
action taken);
- The board failed to act on takeover offers where the majority of the
shareholders tendered their shares;
- At the previous board election, any director received more than 50
percent withhold/against votes of the shares cast and the company has
failed to address the issue(s) that caused the high withhold/against
vote;
- The board is classified, and a continuing director responsible for a
problematic governance issue at the board/committee level that would
warrant a withhold/against vote recommendation is not up for election
- any or all appropriate nominees (except new) may be held
accountable;
- The board lacks accountability and oversight, coupled with sustained
poor performance relative to peers. Sustained poor performance is
measured by one- and three-year total shareholder returns in the
bottom half of a company's four-digit GICS industry group (Russell
3000 companies only).
Vote AGAINST or WITHHOLD from Inside Directors and Affiliated Outside Directors
(per the Classification of Directors below) when:
- The inside or affiliated outside director serves on any of the three
key committees: audit, compensation, or nominating;
- The company lacks an audit, compensation, or nominating committee so
that the full board functions as that committee;
- The company lacks a formal nominating committee, even if board attests
that the independent directors fulfill the functions of such a
committee;
- The full board is less than majority independent.
Vote AGAINST or WITHHOLD from the members of the Audit Committee if:
- The non-audit fees paid to the auditor are excessive;
- The company receives an adverse opinion on the company's financial
statements from its auditor; or
- There is persuasive evidence that the audit committee entered into an
inappropriate indemnification agreement with its auditor that limits
the ability of the company, or its shareholders, to pursue legitimate
legal recourse against the audit firm.
Vote CASE-BY-CASE on members of the Audit Committee and/or the full board if
poor accounting practices, which rise to a level of serious concern, such as:
fraud; misapplication of GAAP; and material weaknesses identified in Section 404
disclosures, are identified.
Examine the severity, breadth, chronological sequence and duration, as well as
the company's efforts at remediation or corrective actions in determining
whether negative vote recommendations are warranted against the members of the
Audit Committee who are responsible for the poor accounting practices, or the
entire board.
Vote AGAINST or WITHHOLD from the members of the Compensation Committee if:
- There is a negative correlation between the chief executive's pay and
company performance (see discussion under Equity Compensation Plans);
- The company reprices underwater options for stock, cash or other
consideration without prior shareholder approval, even if allowed in
their equity plan;
- The company fails to submit one-time transfers of stock options to a
shareholder vote;
- The company fails to fulfill the terms of a burn rate commitment they
made to shareholders;
- The company has backdated options (see "Options Backdating" policy);
- The company has poor compensation practices (see "poor Pay practices"
policy). Poor pay practices may warrant withholding votes from the CEO
and potentially the entire board as well.
Vote AGAINST or WITHHOLD from directors, individually or the entire board, for
egregious actions or failure to replace management as appropriate.
2009 CLASSIFICATION OF DIRECTORS
INSIDE DIRECTOR (I)
- Employee of the company or one of its affiliates(1);
- Non-employee officer of the company if among the five most highly paid
individuals (excluding interim CEO);
- Listed as a Section 16 officer(1);
- Current interim CEO;
- Beneficial owner of more than 50 percent of the company's voting power
(this may be aggregated if voting power is distributed among more than
one member of a defined group);
AFFILIATED OUTSIDE DIRECTOR (AO)
- Board attestation that an outside director is not independent;
- Former CEO of the company (3 & 4),
- Former CEO of an acquired company within the past five years(4);
- Former interim CEO if the service was longer than 18 months. If the
service was between 12 and 18 months, an assessment of the interim
CEO's employment agreement will be made (5);
- Former executive(2) of the company, an affiliate or an acquired firm
within the past five years;
- Executive(2) of a former parent or predecessor firm at the time the
company was sold or split off from the parent/predecessor within the
past five years;
- Executive(2), former executive, general or limited partner of a joint
venture or partnership with the company;
- Relative(6) of a current Section 16 officer of company or its
affiliates;
- Relative(6) of a current employee of company or its affiliates where
additional factors raise concern (which may include, but are not
limited to, the following: a director related to numerous employees;
the company or its affiliates employ relatives of numerous board
members; or a non-Section 16 officer in a key strategic role);
- Relative (6) of former Section 16 officer, of company or its affiliate
within the last five years;
- Currently provides (or a relative(6) provides) professional
services(7) to the company, to an affiliate of the company or an
individual officer of the company or one of its affiliates in excess
of $10,000 per year;
- Employed by (or a relative(6) is employed by) a significant customer
or supplier(8);
- Has (or a relative (6) has) any transactional relationship with the
company or its affiliates excluding investments in the company through
a private placement (8);
- Any material financial tie or other related party transactional
relationship to the company;
- Party to a voting agreement to vote in line with management on
proposals being brought to shareholder vote;
- Has (or a relative (6) has) an interlocking relationship as defined by
the SEC involving members of the board of directors or its
Compensation and Stock Option Committee(10);
- Founder(11) of the company but not currently an employee;
- Is (or a relative(6) is) a trustee, director or employee of a
charitable or non-profit organization that receives grants or
endowments(8) from the company or its affiliates (1).
INDEPENDENT OUTSIDE DIRECTOR (IO)
- No material(12) connection to the company other than a board seat.
FOOTNOTES:
(1) "Affiliate" includes a subsidiary, sibling company or parent company. The
standard for applying the affiliate designation is the 50 percent control
ownership by the parent company.
(2) (Executives" (officers subject to Section 16 of the Securities and Exchange
Act of 1934) include the chief executive, operating, financial, legal,
technology and accounting officers of a company (including the president,
treasurer, secretary, controller, or any vice president in charge of a
principal business unit, division or policy function). A non-employee
director serving as an officer due to statutory requirements (e.g.,
corporate secretary) will be classified as an Affiliated Outsider. If the
company provides additional disclosure that the director is not receiving
additional compensation for serving in that capacity, then the director
will be classified as an Independent Outsider.
(3) Includes any former CEO of the company prior to the company's initial
public offering (IPO).
(4) When there is a former CEO of a special purpose acquisition company (SPAC)
serving on the board of an acquired company, such directors are generally
classified as independent unless determined otherwise, taking into account
the following factors: the applicable listing standards determination of
such director's independence; any operating ties to the firm; and if there
are any other conflicting relationships or related party transactions.
(5) The terms of the interim CEO's employment contract are reviewed to
determine if it contains severance pay, long-term health and pension
benefits or other such standard provisions typically contained in contracts
of permanent, non-temporary CEOs. Another consideration is if a formal
search process was underway for a full-time CEO at the time.
(6) "Relative" follows the SEC's new definition of "immediate family members"
which covers spouses, parents, children, step-parents, step-children,
siblings, in-laws, and any person (other than a tenant or employee) sharing
the household of any director, nominee for director, executive officer or
significant shareholder of the company.
(7) Professional services can be characterized as advisory in nature and
generally include the following: investment banking/financial advisory
services; commercial banking (beyond deposit services); investment
services; insurance services; accounting/audit services; consulting
services; marketing services; and legal services. The case of participation
in a banking syndicate by a non-lead bank should be considered a
transaction (and hence subject to the associated materiality test) rather
than a professional relationship.
(8) If the company makes or receives annual payments exceeding the greater of
$200,000 or 5 percent of the recipient's gross revenues. (The recipient is
the party receiving the financial proceeds from the transaction.)
(9) Dissident directors who are parties to a voting agreement pursuant to a
settlement arrangement will generally be classified as independent unless
determined otherwise, taking into account the following factors: the terms
of the agreement; the duration of the standstill provision in the
agreement; the limitations and requirements of actions that are agreed
upon; if the dissident director nominee(s) is subject to the standstill;
and if there are any conflicting relationships or related party
transactions.
(10) Interlocks include: (a) executive officers serving as directors on each
other's compensation or similar committees (or, in the absence of such a
committee, on the board); or (b) executive officers sitting on each other's
boards and at least one serves on the other's compensation or similar
committees (or, in the absence of such a committee, on the board).
(11) The operating involvement of the Founder with the company will be
considered. Little to no operating involvement may cause the Founder to be
deemed as an independent outsider.
(12) For purposes of director independence classification, "material" will be
defined as a standard of relationship (financial, personal or otherwise)
that a reasonable person might conclude could potentially influence one's
objectivity in the boardroom in a manner that would have a meaningful
impact on an individual's ability to satisfy requisite fiduciary standards
on behalf of shareholders.
AGE LIMITS
Vote AGAINST shareholder or management proposals to limit the tenure of outside
directors through mandatory retirement ages.
BOARD SIZE
Vote FOR proposals seeking to fix the board size or designate a range for the
board size.
Vote AGAINST proposals that give management the ability to alter the size of the
board outside of a specified range without shareholder approval.
CLASSIFICATION/DECLASSIFICATION OF THE BOARD
Vote AGAINST proposals to classify the board.
Vote FOR proposals to repeal classified boards and to elect all directors
annually.
CUMULATIVE VOTING
Generally vote AGAINST proposals to eliminate cumulative voting.
Generally vote FOR proposals to restore or provide for cumulative voting unless:
- The company has proxy access or a similar structure(2) to allow
shareholders to nominate directors to the company's ballot; and
- The company has adopted a majority vote standard, with a carve-out for
plurality voting in situations where there are more nominees than
seats, and a director resignation policy to address failed elections.
Vote FOR proposals for cumulative voting at controlled companies (insider voting
power > 50%).
DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY PROTECTION
Vote CASE BY CASE on proposals on director and officer indemnification and
liability protection using Delaware law as the standard.
Vote AGAINST proposals to eliminate entirely directors' and officers' liability
for monetary damages for violating the duty of care.
Vote AGAINST indemnification proposals that would expand coverage beyond just
legal expenses to liability for acts, such as negligence, that are more serious
violations of fiduciary obligation than mere carelessness.
Vote AGAINST proposals that would expand the scope of indemnification to provide
for mandatory indemnification of company officials in connection with acts that
previously the company was permitted to provide indemnification for at the
discretion of the company's board (i.e. "permissive indemnification") but that
previously the company was not required to indemnify.
Vote FOR only those proposals providing such expanded coverage in cases when a
director's or officer's legal defense was unsuccessful if both of the following
apply:
- If the director was found to have acted in good faith and in a manner
that he reasonably believed was in the best interests of the company;
and
- If only the director's legal expenses would be covered.
ESTABLISH/AMEND NOMINEE QUALIFICATIONS
Vote CASE BY CASE on proposals that establish or amend director qualifications.
Votes should be based on how reasonable the criteria are and to what degree they
may preclude dissident nominees from joining the board.
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(2) "Similar structure" would be a structure that allows shareholders to
nominate candidates who the company will include on the management ballot
in ADDITION TO management's nominees, and their bios are included in
management's proxy.
Vote AGAINST shareholder proposals requiring two candidates per board seat.
ESTABLISHMENT OF BOARD COMMITTEES SHAREHOLDER PROPOSALS
Generally vote AGAINST shareholder proposals to establish a new standing board
committee, as such proposals seek a specific oversight mechanism/structure that
potentially limits a company's flexibility to determine an appropriate oversight
mechanism for itself. However, the following factors will be considered:
- Existing oversight mechanisms (including current committee structure)
regarding the issue for which board oversight is sought;
- Level of disclosure regarding the issue for which board oversight is
sought;
- Company performance related to the issue for which board oversight is
sought;
- Board committee structure compared to that of other companies in its
industry sector; and/or
- The scope and structure of the proposal.
ESTABLISHMENT OF BOARD POLICY ON SHAREHOLDER ENGAGEMENT
Generally vote FOR shareholder proposals requesting that the board establish an
internal mechanism/ process, which may include a committee, in order to improve
communications between directors and shareholders, unless the company has the
following features, as appropriate:
- Established a communication structure that goes beyond the exchange
requirements to facilitate the exchange of information between
shareholders and members of the board;
- Effective disclosed information with respect to this structure to its
shareholders;
- Company has not ignored majority-supported shareholder proposals or a
majority withhold vote on a director nominee; and
- The company has an independent chairman or a lead director. This
individual must be made available for periodic consultation and direct
communication with major shareholders.
FILLING VACANCIES/REMOVAL OF DIRECTORS
Vote AGAINST proposals that provide that directors may be removed only for
cause.
Vote FOR proposals to restore shareholders' ability to remove directors with or
without cause.
Vote AGAINST proposals that provide that only continuing directors may elect
replacements to fill board vacancies.
Vote FOR proposals that permit shareholders to elect directors to fill board
vacancies.
INDEPENDENT CHAIR (SEPARATE CHAIR/CEO)
Generally vote FOR shareholder proposals requiring that the chairman's position
be filled by an independent director, unless the company satisfies ALL of the
following criteria:
The company maintains the following counterbalancing governance structure:
- Designated lead director, elected by and from the independent board
members with clearly delineated and comprehensive duties. (The role
may alternatively reside with a presiding director, vice chairman, or
rotating lead director; however, the director must serve a minimum of
one year in order to qualify as a lead director.) The duties should
include, but are not limited to, the following:
- Presides at all meetings of the board at which the chairman is
not present, including executive sessions of the independent
directors,
- Serves as liaison between the chairman and the independent
directors,
- Approves information sent to the board,
- Approves meeting agendas for the board,
- Approves meetings schedules to assure that there is sufficient
time for discussion of all agenda items,
- Has the authority to call meetings of the independent directors,
- If requested by major shareholders, ensures that he is available
for consultation and direct communication;
- Two-thirds independent board;
- All independent key committees;
- Established governance guidelines;
- A company in the Russell 3000 universe must not have exhibited
sustained poor total shareholder return (TSR) performance, defined as
one- and three-year TSR in the bottom half of the company's four-digit
GICS industry group (using Russell 3000 companies only), unless there
has been a change in the Chairman/CEO position within that time. For
companies not in the Russell 3000 universe, the company must not have
underperformed both its peers and index on the basis of both one-year
and three-year total shareholder returns, unless there has been a
change in the Chairman/CEO position within that time;
The company does not have any problematic governance or management issues,
examples of which include, but are not limited to:
- Egregious compensation practices;
- Multiple related-party transactions or other issues putting director
independence at risk;
- Corporate and/or management scandals;
- Excessive problematic corporate governance provisions; or
- Flagrant actions by management or the board with potential or realized
negative impacts on shareholders.
MAJORITY OF INDEPENDENT DIRECTORS/ESTABLISHMENT OF COMMITTEES
Vote FOR shareholder proposals asking that a majority or more of directors be
independent unless the board composition already meets the proposed threshold of
independent outsider (See Classification of Directors).
Vote FOR shareholder proposals asking that board audit, compensation, and/or
nominating committees be composed exclusively of independent directors if they
currently do not meet that standard.
MAJORITY VOTE SHAREHOLDER PROPOSALS
Generally vote FOR precatory and binding resolutions requesting that the board
change the company's bylaws to stipulate that directors need to be elected with
an affirmative majority of votes cast, provided it does not conflict with the
state laws where the company is incorporated. Binding resolutions need to allow
for a carve-out for a plurality vote standard when there are more nominees than
board seats.
Companies are strongly encouraged to also adopt a post-election policy (also
known as a director resignation policy) that will provide guidelines so that the
company will promptly address the situation of a holdover director.
OPEN ACCESS
Vote shareholder proposals asking for open or proxy access on a CASE-BY-CASE
basis, taking into account:
- The ownership threshold proposed in the resolution;
- The proponent's rationale for the proposal at the targeted company in
terms of board and director conduct.
PERFORMANCE/GOVERNANCE EVALUATION FOR DIRECTORS
Vote WITHHOLD/AGAINST on all director nominees if the board lacks accountability
and oversight, coupled with sustained poor performance relative to peers.
Sustained poor performance is measured by one- and three-year total shareholder
returns in the bottom half of a company's four-digit GICS industry group
(Russell 3000 companies only).
Evaluate board accountability and oversight at companies that demonstrate
sustained poor performance. Problematic provisions include but are not limited
to:
- A classified board structure;
- A supermajority vote requirement;
- Majority vote standard for director elections with no carve out for
contested elections;
- The inability for shareholders to call special meetings;
- The inability for shareholders to act by written consent;
- A dual-class structure; and/or
- A non-shareholder-approved poison pill.
If a company exhibits sustained poor performance, coupled with a lack of board
accountability and oversight, also take into consideration the company's
five-year total shareholder return and five-year operational metrics in the
evaluation.
STOCK OWNERSHIP REQUIREMENTS
Generally vote AGAINST shareholder proposals that mandate a minimum amount of
stock that directors must own in order to qualify as a director or to remain on
the board. While stock ownership on the part of directors is desired, the
company should determine the appropriate ownership requirement.
Vote CASE BY CASE on shareholder proposals asking that the company adopt a
holding or retention period for its executives (for holding stock after the
vesting or exercise of equity awards), taking into account any stock ownership
requirements or holding period/retention ratio already in place and the actual
ownership level of executives.
TERM LIMITS
Vote AGAINST shareholder or management proposals to limit the tenure of outside
directors through term limits. However, scrutinize boards where the average
tenure of all directors exceeds 15 years for independence from management and
for sufficient turnover to ensure that new perspectives are being added to the
board.
VOTE NO CAMPAIGNS
In cases where companies are targeted in connection with public "vote no"
campaigns, evaluate director nominees under the existing governance policies for
voting on director nominees in uncontested elections. In issuing vote
recommendations, consider arguments submitted by shareholders and other
publicly-available information.
3. PROXY CONTESTS
VOTING FOR DIRECTOR NOMINEES IN CONTESTED ELECTIONS
Vote CASE BY CASE on the election of directors in contested elections,
considering the following factors:
- Long-term financial performance of the target company relative to its
industry;
- Management's track record;
- Background to the proxy contest;
- Qualifications of director nominees (both slates);
- Strategic plan of dissident slate and quality of critique against
management;
- Likelihood that the proposed goals and objectives can be achieved
(both slates);
- Stock ownership positions.
REIMBURSING PROXY SOLICITATION EXPENSES
Vote CASE BY CASE on proposals to reimburse proxy solicitation expenses. When
voting in conjunction with support of a dissident slate, vote FOR the
reimbursement of all appropriate proxy solicitation expenses associated with the
election.
Generally vote FOR shareholder proposals calling for the reimbursement of
reasonable costs incurred in connection with nominating one or more candidates
in a contested election where the following apply:
- The election of fewer than 50% of the directors to be elected is
contested in the election;
- One or more of the dissident's candidates is elected;
- Shareholders are not permitted to cumulate their votes for directors;
and
- The election occurred, and the expenses were incurred after the
adoption of this bylaw.
CONFIDENTIAL VOTING
Vote FOR shareholder proposals requesting that corporations adopt confidential
voting, use independent vote tabulators, and use independent inspectors of
election, as long as the proposal includes a provision for proxy contests as
follows: In the case of a contested election, management should be permitted to
request that the dissident group honor its confidential voting policy. If the
dissidents agree, the policy remains in place. If the dissidents will not agree,
the confidential voting policy is waived.
Vote FOR management proposals to adopt confidential voting.
4. ANTITAKEOVER DEFENSES AND VOTING RELATED ISSUES
ADVANCE NOTICE REQUIREMENTS FOR SHAREHOLDER PROPOSALS/NOMINATIONS
Vote CASE BY CASE on advance notice proposals, supporting those proposals which
allow shareholders to submit proposals/nominations as close to the meeting date
as reasonably possible and within the broadest window possible, recognizing the
need to allow sufficient notice for company, regulatory and shareholder review.
To be reasonable, the company's deadline for shareholder notice of a
proposal/nominations must not be more than 60 days prior to the meeting, with a
submittal window of at least 30 days prior to the deadline. The submittal window
is the period under which a shareholder must file his proposal/ nominations
prior to the deadline.
In general, support additional efforts by companies to ensure full disclosure in
regard to a proponent's economic and voting position in the company so long as
the informational requirements are reasonable and aimed at providing
shareholders with the necessary information to review such proposal.
AMEND BYLAWS WITHOUT SHAREHOLDER CONSENT
Vote AGAINST proposals giving the board exclusive authority to amend the bylaws.
Vote FOR proposals giving the board the ability to amend the bylaws in addition
to shareholders.
POISON PILLS
Vote FOR shareholder proposals requesting that the company submit its poison
pill to a shareholder vote or redeem it UNLESS the company has (1) A shareholder
approved poison pill in place; or (2) The company has adopted a policy
concerning the adoption of a pill in the future specifying that the board will
only adopt a shareholder rights plan if either:
- Shareholders have approved the adoption of the plan; or
- The board, in its exercise of its fiduciary responsibilities,
determines that it is in the best interest of shareholders under the
circumstances to adopt a pill without the delay in adoption that would
result from seeking stockholder approval (i.e. the "fiduciary out"
provision). A poison pill adopted under this fiduciary out will be put
to a shareholder ratification vote within 12 months of adoption or
expire. If the pill is not approved by a majority of the votes cast on
this issue, the plan will immediately terminate.
Vote FOR shareholder proposals calling for poison pills to be put to a vote
within a time period of less than one year after adoption. If the company has no
non-shareholder-approved poison pill in place and has adopted a policy with the
provisions outlined above, vote AGAINST the proposal. If these conditions are
not met, vote FOR the proposal, but with the caveat that a vote within 12 months
would be considered sufficient.
Vote CASE BY CASE on management proposals on poison pill ratification, focusing
on the features of the shareholder rights plan. Rights plans should contain the
following attributes:
- No lower than a 20% trigger, flip-in or flip-over;
- A term of no more than three years;
- No dead-hand, slow-hand, no-hand or similar feature that limits the
ability of a future board to redeem the pill;
- Shareholder redemption feature (qualifying offer clause); if the board
refuses to redeem the pill 90 days after a qualifying offer is
announced, 10 percent of the shares may call a special meeting or seek
a written consent to vote on rescinding the pill.
In addition, the rationale for adopting the pill should be thoroughly explained
by the company. In examining the request for the pill, take into consideration
the company's existing governance structure, including: board independence,
existing takeover defenses and any problematic governance concerns.
For management proposals to adopt a poison pill for the stated purpose of
preserving a company's net operating losses ("NOL pills"), the following factors
should be considered:
- The trigger (NOL pills generally have a trigger slightly below 5%);
- The value of the NOLs;
- The term;
- Shareholder protection mechanisms (sunset provision, causing
expiration of the pill upon exhaustion or expiration of NOLs); and
- Other factors that may be applicable.
In addition, vote WITHHOLD/AGAINST the entire board of directors (except new
nominees, who should be considered on a CASE-BY-CASE basis) if the board adopts
or renews a poison pill without shareholder approval, does not commit to putting
it to a shareholder vote within 12 months of adoption (or in the case of a newly
public company, does not commit to put the pill to a shareholder vote within 12
months following the IPO), or reneges on a commitment to put the pill to a vote
and has not yet received a withhold recommendation for this issue.
SHAREHOLDER ABILITY TO ACT BY WRITTEN CONSENT
Vote AGAINST proposals to restrict or prohibit shareholder ability to take
action by written consent.
Vote FOR proposals to allow or make easier shareholder action by written
consent.
SHAREHOLDER ABILITY TO CALL SPECIAL MEETINGS
Vote AGAINST proposals to restrict or prohibit shareholder ability to call
special meetings.
Vote FOR proposals that remove restrictions on the right of shareholders to act
independently of management.
5. MERGERS AND CORPORATE RESTRUCTURINGS
OVERALL APPROACH
For mergers and acquisitions, review and evaluate the merits and drawbacks of
the proposed transaction, balancing various and sometimes countervailing factors
including:
- VALUATION - Is the value to be received by the largest shareholders
(or paid by the acquirer) reasonable? While the fairness opinion may
provide an initial starting point for assessing valuation
reasonableness, emphasis is placed on the offer premium, market
reaction and strategic rationale.
- MARKET REACTION - How has the market responded to the proposed deal? A
negative market reaction should cause closer scrutiny of a deal.
- STRATEGIC RATIONALE - Does the deal make sense strategically? From
where is the value derived? Cost and revenue synergies should not be
overly aggressive or optimistic, but reasonably achievable. Management
should also have a favorable track record of successful integration of
historical acquisitions.
- NEGOTIATIONS AND PROCESS - Were the terms of the transaction
negotiated at arm's-length? Was the process fair and equitable? A fair
process helps to ensure the best price for shareholders. Significant
negotiation "wins" can also signify the deal makers' competency. The
comprehensiveness of the sales process (e.g., full auction, partial
auction, no auction) can also
affect shareholder value.
- CONFLICTS OF INTEREST - Are insiders benefiting from the transaction
disproportionately and inappropriately as compared to non-insider
shareholders? As the result of potential conflicts, the directors and
officers of the company may be more likely to vote to approve a merger
than if they did not hold these interests. Consider whether these
interests may have influenced these directors and officers to support
or recommend the merger. The CIC figure presented in the "RMG/ISS
Transaction Summary" section of this report is an aggregate figure
that can in certain cases be a misleading indicator of the true value
transfer from shareholders to insiders. Where such figure appears to
be excessive, analyze the underlying assumptions to determine whether
a potential conflict exists.
- GOVERNANCE - Will the combined company have a better or worse
governance profile than the current governance profiles of the
respective parties to the transaction? If the governance profile is to
change for the worse, the burden is on the company to prove that other
issues (such as valuation) outweigh any deterioration in governance.
APPRAISAL RIGHTS
Vote FOR proposals to restore, or provide shareholders with, rights of
appraisal.
ASSET PURCHASES
Vote CASE BY CASE on asset purchase proposals, considering the following
factors:
- Purchase price;
- Fairness opinion;
- Financial and strategic benefits;
- How the deal was negotiated;
- Conflicts of interest;
- Other alternatives for the business;
- Non-completion risk.
ASSET SALES
Vote CASE BY CASE on asset sales, considering the following factors:
- Impact on the balance sheet/working capital;
- Potential elimination of diseconomies;
- Anticipated financial and operating benefits;
- Anticipated use of funds;
- Value received for the asset;
- Fairness opinion;
- How the deal was negotiated;
- Conflicts of interest.
BUNDLED PROPOSALS
Vote CASE BY CASE on bundled or "conditional" proxy proposals. In the case of
items that are conditioned upon each other, examine the benefits and costs of
the packaged items. In instances when the joint effect of the conditioned items
is not in shareholders' best interests, vote AGAINST the proposals. If the
combined effect is positive, support such proposals.
CONVERSION OF SECURITIES
Vote CASE BY CASE on proposals regarding conversion of securities. When
evaluating these proposals, the investor should review the dilution to existing
shareholders, the conversion price relative to market value, financial issues,
control issues, termination penalties, and conflicts of interest.
Vote FOR the conversion if it is expected that the company will be subject to
onerous penalties or will be forced to file for bankruptcy if the transaction is
not approved.
CORPORATE REORGANIZATION/DEBT RESTRUCTURING/PREPACKAGED BANKRUPTCY PLANS/REVERSE
LEVERAGED BUYOUTS/WRAP PLANS
Vote CASE-BY-CASE on proposals to increase common and/or preferred shares and to
issue shares as part of a debt restructuring plan, taking into consideration the
following:
- Dilution to existing shareholders' position;
- Terms of the offer;
- Financial issues;
- Management's efforts to pursue other alternatives;
- Control issues;
- Conflicts of interest.
Vote FOR the debt restructuring if it is expected that the company will file for
bankruptcy if the transaction is not approved.
FORMATION OF HOLDING COMPANY
Vote CASE-BY-CASE on proposals regarding the formation of a holding company,
taking into consideration the following:
- The reasons for the change;
- Any financial or tax benefits;
- Regulatory benefits;
- Increases in capital structure;
- Changes to the articles of incorporation or bylaws of the company.
Absent compelling financial reasons to recommend the transaction, vote AGAINST
the formation of a holding company if the transaction would include either of
the following:
- Increases in common or preferred stock in excess of the allowable
maximum (see discussion under "Capital Structure");
- Adverse changes in shareholder rights.
GOING PRIVATE AND GOING DARK TRANSACTIONS (LBOS AND MINORITY SQUEEZE-OUTS) Vote
CASE-BY-CASE on going private transactions, taking into account the following:
- Offer price/premium;
- Fairness opinion;
- How the deal was negotiated;
- Conflicts of interest;
- Other alternatives/offers considered; and
- Non-completion risk.
Vote CASE-BY-CASE on "going dark" transactions, determining whether the
transaction enhances shareholder value by taking into consideration:
- Whether the company has attained benefits from being publicly-traded
(examination of trading volume, liquidity and market research of the
stock);
- Balanced interests of continuing vs. cashed-out shareholders, taking
into account the following:
- Are all shareholders able to participate in the transaction?
- Will there be a liquid market for remaining shareholders
following the transaction?
- Does the company have strong corporate governance?
- Will insiders reap the gains of control following the proposed
transactions?
- Does the state of incorporation have laws requiring continued
reporting that may benefit shareholders?
JOINT VENTURES
Vote CASE-BY-CASE on proposals to form joint ventures, taking into account the
following:
- Percentage of assets/business contributed;
- Percentage ownership;
- Financial and strategic benefits;
- Governance structure;
- Conflicts of interest;
- Other alternatives;
- Noncompletion risk.
LIQUIDATIONS
Vote CASE-BY-CASE on liquidations, taking into account the following:
- Management's efforts to pursue other alternatives;
- Appraisal value of assets; and
- The compensation plan for executives managing the liquidation.
Vote FOR the liquidation if the company will file for bankruptcy if the proposal
is not approved.
MERGERS AND ACQUISITIONS/ISSUANCE OF SHARES TO FACILITATE MERGER OR ACQUISITION
Vote CASE-BY-CASE on mergers and acquisitions, determining whether the
transaction enhances shareholder value by giving consideration to items listed
under "Mergers and Corporate Restructurings: Overall Approach".
PRIVATE PLACEMENTS/WARRANTS/CONVERTIBLE DEBENTURES
Vote CASE-BY-CASE on proposals regarding private placements, taking into
consideration:
1. Dilution to existing shareholders' position.
- The amount and timing of shareholder ownership dilution should be
weighed against the needs and proposed shareholder benefits of
the capital infusion.
2. Terms of the offer - discount/premium in purchase price to investor,
including any fairness opinion; conversion features; termination
penalties; exit strategy.
- The terms of the offer should be weighed against the alternatives
of the company and in light of company's financial issues.
- When evaluating the magnitude of a private placement discount or
premium, considerations will be whether it is affected by
liquidity, due diligence, control and monitoring issues, capital
scarcity, information asymmetry and anticipation of future
performance.
3. Financial issues include but are not limited to examining the
following:
- Company's financial situation;
- Degree of need for capital;
- Use of proceeds;
- Effect of the financing on the company's cost of capital;
- Current and proposed cash burn rate; and
- Going concern viability and the state of the capital and credit
markets.
4. Management's efforts to pursue alternatives and whether the company
engaged in a process to evaluate alternatives. A fair, unconstrained
process helps to ensure the best price for shareholders. Financing
alternatives can include joint ventures, partnership, merger or sale
of part or all of the company.
5. Control issues:
- Change in management;
- Change in control;
- Guaranteed board and committee seats;
- Standstill provisions;
- Voting agreements;
- Veto power over certain corporate actions.
Minority versus majority ownership and corresponding minority discount
or majority control premium.
6. Conflicts of interest
- Conflicts of interest should be viewed from the perspective of
the company and the investor.
- Were the terms of the transaction negotiated at arm's-length? Are
managerial incentives aligned with shareholder interests?
7. Market reaction
- The market's response to the proposed deal. A negative market
reaction is a cause for concern. Market reaction may be addressed
by analyzing the one-day impact on the unaffected stock price.
Vote FOR the private placement if it is expected that the company will file for
bankruptcy if the transaction is not approved.
SPECIAL PURPOSE ACQUISITION CORPORATIONS (SPACS)
Vote on a CASE-BY-CASE basis on SPAC mergers and acquisitions taking into
account the following:
- Valuation - Is the value being paid by the SPAC reasonable? SPACs
generally lack an independent fairness opinion and the financials on
the target may be limited. Compare the conversion price with the
intrinsic value of the target company provided in the fairness
opinion. Also, evaluate the proportionate value of the combined entity
attributable to the SPAC IPO shareholders versus the pre-merger value
of SPAC. Additionally, a private company discount may be applied to
the target, if it is a private entity.
- Market reaction - How has the market responded to the proposed deal? A
negative market reaction may be a cause for concern. Market reaction
may be addressed by analyzing the one-day impact on the unaffected
stock price.
- Deal timing - A main drive for most transactions is that the SPAC
charter typically requires the deal to be complete within 18 to 24
months, or the SPAC is to be liquidated. Evaluate the valuation,
market reaction and potential conflicts of interest for deals that are
announced close to the liquidation date.
- Negotiations and process - What was the process undertaken to identify
potential target companies within specified industry or location
specified in charter? Consider the background of the sponsors.
- Conflicts of interest - How are sponsors benefiting from the
transaction compared to IPO shareholders? Potential conflicts could
arise if a fairness opinion is issued by the insiders to qualify the
deal rather than a third party, or if management is encouraged to pay
a higher price for the target because of an 80% rule (the charter
requires that the fair market value of the target is at least equal to
80% of net assets of the SPAC). Also, there may be a sense of urgency
by the management team of the SPAC to close the deal since its charter
typically requires a transaction to be completed within the 18-24
month timeframe.
- Voting agreements - Are the sponsors entering into any voting
agreements/tender offers with shareholders who are likely to vote
AGAINST the proposed merger or exercise conversion rights?
- Governance - What is the impact of having the SPAC CEO or founder on
key committees following the proposed merger?
SPIN-OFFS
Vote CASE-BY-CASE on spin-offs, considering:
- Tax and regulatory advantages;
- Planned use of the sale proceeds;
- Valuation of spin-off;
- Fairness opinion;
- Benefits to the parent company;
- Conflicts of interest;
- Managerial incentives;
- Corporate governance changes;
- Changes in the capital structure.
VALUE MAXIMIZATION PROPOSALS
Vote CASE-BY-CASE on shareholder proposals seeking to maximize shareholder value
by hiring a financial advisor to explore strategic alternatives, selling the
company or liquidating the company and distributing the proceeds to
shareholders. These proposals should be evaluated based on the following
factors:
- Prolonged poor performance with no turnaround in sight;
- Signs of entrenched board and management;
- Strategic plan in place for improving value;
- Likelihood of receiving reasonable value in a sale or dissolution; and
- Whether company is actively exploring its strategic options, including
retaining a financial advisor.
6. STATE OF INCORPORATION
CONTROL SHARE ACQUISITION PROVISIONS
Control share acquisition statutes function by denying shares their voting
rights when they contribute to ownership in excess of certain thresholds. Voting
rights for those shares exceeding ownership limits may only be restored by
approval of either a majority or supermajority of disinterested shares. Thus,
control share acquisition statutes effectively require a hostile bidder to put
its offer to a shareholder vote or risk voting disenfranchisement if the bidder
continues buying up a large block of shares.
Vote FOR proposals to opt out of control share acquisition statutes unless doing
so would enable the completion of a takeover that would be detrimental to
shareholders.
Vote AGAINST proposals to amend the charter to include control share acquisition
provisions.
Vote FOR proposals to restore voting rights to the control shares.
CONTROL SHARE CASH-OUT PROVISIONS
Control share cash-out statutes give dissident shareholders the right to
"cash-out" of their position in a company at the expense of the shareholder who
has taken a control position. In other words, when an investor crosses a preset
threshold level, remaining shareholders are given the right to sell their shares
to the acquirer, who must buy them at the highest acquiring price.
Vote FOR proposals to opt out of control share cash-out statutes.
DISGORGEMENT PROVISIONS
Disgorgement provisions require an acquirer or potential acquirer of more than a
certain percentage of a company's stock to disgorge, or pay back, to the company
any profits realized from the sale of that company's stock purchased 24 months
before achieving control status. All sales of company stock by the acquirer
occurring within a certain period of time (between 18 months and 24 months)
prior to the investor's gaining control status are subject to these
recapture-of-profits provisions.
Vote FOR proposals to opt out of state disgorgement provisions.
FAIR PRICE PROVISIONS
Vote CASE-BY-CASE on proposals to adopt fair price provisions (provisions that
stipulate that an acquirer must pay the same price to acquire all shares as it
paid to acquire the control shares), evaluating factors such as the vote
required to approve the proposed acquisition, the vote required to repeal the
fair price provision, and the mechanism for determining the fair price.
Generally vote AGAINST fair price provisions with shareholder vote requirements
greater than a majority of disinterested shares.
FREEZE-OUT PROVISIONS
Vote FOR proposals to opt out of state freeze-out provisions. Freeze-out
provisions force an investor who surpasses a certain ownership threshold in a
company to wait a specified period of time before gaining control of the
company.
GREENMAIL
Greenmail payments are targeted share repurchases by management of company stock
from individuals or groups seeking control of the company. Since only the
hostile party receives payment, usually at a
substantial premium over the market value of its shares, the practice
discriminates against all other shareholders.
Vote FOR proposals to adopt anti-greenmail charter or bylaw amendments or
otherwise restrict a company's ability to make greenmail payments.
Vote CASE-BY-CASE on anti-greenmail proposals when they are bundled with other
charter or bylaw amendments.
REINCORPORATION PROPOSALS
Vote CASE-BY-CASE on proposals to change a company's state of incorporation,
taking into consideration both financial and corporate governance concerns,
including:
- The reasons for reincorporating;
- Comparison of company's governance p4ractices and provisions prior to
and following the reincorporation; and
- Comparison of corporation laws of original state and destination
state.
Vote FOR reincorporation when the economic factors outweigh any neutral or
negative governance changes.
STAKEHOLDER PROVISIONS
Vote AGAINST proposals that ask the board to consider non-shareholder
constituencies or other non-financial effects when evaluating a merger or
business combination.
STATE ANTITAKEOVER STATUTES
Vote CASE-BY-CASE on proposals to opt in or out of state takeover statutes
(including control share acquisition statutes, control share cash-out statutes,
freeze-out provisions, fair price provisions, stakeholder laws, poison pill
endorsements, severance pay and labor contract provisions, anti-greenmail
provisions, and disgorgement provisions).
7. CAPITAL STRUCTURE
ADJUSTMENTS TO PAR VALUE OF COMMON STOCK
Vote FOR management proposals to reduce the par value of common stock.
COMMON STOCK AUTHORIZATION
Vote CASE-BY-CASE on proposals to increase the number of shares of common stock
authorized for issuance. Take into account company-specific factors which
include, at a minimum, the following:
- Specific reasons/rationale for the proposed increase;
- The dilutive impact of the request as determined through an allowable
cap generated by RiskMetrics' quantitative model;
- The board's governance structure and practices; and
- Risks to shareholders of not approving the request.
Vote FOR proposals to approve increases beyond the allowable increase when a
company's shares are in danger of being delisted or if a company's ability to
continue to operate as a going concern is uncertain.
DUAL-CLASS STOCK
Vote AGAINST proposals to create a new class of common stock with superior
voting rights.
Vote AGAINST proposals at companies with dual-class capital structures to
increase the number of authorized shares of the class of stock that has superior
voting rights.
Vote FOR proposals to create a new class of nonvoting or sub-voting common stock
if:
- It is intended for financing purposes with minimal or no dilution to
current shareholders;
- It is not designed to preserve the voting power of an insider or
significant shareholder.
ISSUE STOCK FOR USE WITH RIGHTS PLAN
Vote AGAINST proposals that increase authorized common stock for the explicit
purpose of implementing a non-shareholder approved shareholder rights plan
(poison pill).
PREEMPTIVE RIGHTS
Vote CASE-BY-CASE on shareholder proposals that seek preemptive rights, taking
into consideration: the size of a company, the characteristics of its
shareholder base, and the liquidity of the stock.
PREFERRED STOCK
Vote CASE-BY-CASE on proposals to increase the number of shares of preferred
stock authorized for issuance. Take into account company-specific factors which
include, at a minimum, the following:
- Specific reasons/rationale for the proposed increase;
- The dilutive impact of the request as determined through an allowable
cap generated by RiskMetrics' quantitative model;
- The board's governance structure and practices; and
- Risks to shareholders of not approving the request.
Vote AGAINST proposals authorizing the creation of new classes of preferred
stock with unspecified voting, conversion, dividend distribution, and other
rights ("blank check" preferred stock).
Vote FOR proposals to create "declawed" blank check preferred stock (stock that
cannot be used as a takeover defense).
Vote FOR proposals to authorize preferred stock in cases where the company
specifies the voting, dividend, conversion, and other rights of such stock and
the terms of the preferred stock appear reasonable.
Vote AGAINST proposals to increase the number of blank check preferred stock
authorized for issuance when no shares have been issued or reserved for a
specific purpose.
RECAPITALIZATION
Vote CASE-BY-CASE on recapitalizations (reclassifications of securities) taking
into account the following:
- More simplified capital structure;
- Enhanced liquidity;
- Fairness of conversion terms;
- Impact on voting power and dividends;
- Reasons for the reclassification;
- Conflicts of interest; and
- Other alternatives considered.
REVERSE STOCK SPLITS
Vote FOR management proposals to implement a reverse stock split when the number
of authorized shares will be proportionately reduced.
Vote FOR management proposals to implement a reverse stock split to avoid
delisting.
Vote CASE-BY-CASE on proposals to implement a reverse stock split that do not
proportionately reduce the number of shares authorized for issue based on the
allowable increase calculated using the Capital Structure model.
SHARE REPURCHASE PROGRAMS
Vote FOR management proposals to institute open-market share repurchase plans in
which all shareholders may participate on equal terms.
STOCK DISTRIBUTIONS: SPLITS AND DIVIDENDS
Vote FOR management proposals to increase the common share authorization for a
stock split or share dividend, provided that the increase in authorized shares
would not result in an excessive number of shares available for issuance as
determined using a model developed by RMG.
TRACKING STOCK
Vote CASE-BY-CASE on the creation of tracking stock, weighing the strategic
value of the transaction against such factors as:
- Adverse governance changes;
- Excessive increases in authorized capital stock;
- Unfair method of distribution;
- Diminution of voting rights;
- Adverse conversion features;
- Negative impact on stock option plans; and
- Alternatives such as spin-offs.
8. EXECUTIVE AND DIRECTOR COMPENSATION
EQUITY COMPENSATION PLANS
Vote CASE-BY-CASE on equity-based compensation plans. Vote AGAINST the equity
plan if any of the following factors apply:
- The total cost of the company's equity plans is unreasonable;
- The plan expressly permits the repricing of stock options/stock
appreciate rights (SARs) without prior shareholder approval;
- The CEO is a participant in the proposed equity-based compensation
plan, and there is a disconnect between CEO pay and the company's
performance where over 50 percent of the year-over-year increase is
attributed to equity awards;
- The company's three-year burn rate exceeds the greater of 2% and the
mean plus 1 standard deviation of its industry group;
- The plan provides for the acceleration of vesting of equity awards
even though an actual change in control may not occur (e.g., upon
shareholder approval of a transaction or the announcement of a tender
offer); or
- The plan is a vehicle for poor pay practices.
Each of these factors is further described below:
COST OF EQUITY PLANS
Generally vote AGAINST equity plans if the cost is unreasonable. For
non-employee director plans, vote FOR the plan if certain factors are met (see
Director Compensation section).
The cost of the equity plans is expressed as Shareholder Value Transfer (SVG),
which is measured using a binomial option pricing model that assesses the amount
of shareholders' equity flowing out of the company to employees and directors.
SVT is expressed as both a dollar amount and as a percentage of market value and
includes the new shares proposed, shares available under existing plans and
shares granted but unexercised. All award types are valued. For omnibus plans,
unless limitations are placed on the most expensive types of awards (for
example, full value awards), the assumption is made that all awards to be
granted will be the most expensive types. See discussion of specific types of
awards.
The Shareholder Value Transfer is reasonable if it falls below the
company-specific allowable cap. The allowable cap is determined as follows: The
top quartile performers in each industry group (using the Global Industry
Classification Standard GICS) are identified. Benchmark SVT levels for each
industry are established based on these top performers' historic SVT. Regression
analyses are run on each industry group to identify the variables most strongly
correlated to SVT. The benchmark industry SVT level is then adjusted upwards or
downwards for the specific company by plugging the company-specific performance
measures, size and cash compensation into the industry cap equations to arrive
at the company's allowable cap.
For the December 1, 2008, March 1, June 1 and September 1, 2009 quarterly data
downloads, RMG will use the 400-day volatility for the shareholder value
calculation. RMG intends to revert to the 200-day volatility for the December 1,
2009 and subsequent quarterly data downloads. Also, for those specified time
periods, RMG will use the 90-day average stock price at the quarterly data
download, and intends to revert to the 200-day average stock price for the
December 1, 2009 and subsequent quarterly data downloads.
REPRICING PROVISIONS
Vote AGAINST plans that expressly permit the repricing of underwater stock
options without prior shareholder approval, even if the cost of the plan is
reasonable. Also, vote AGAINST or WITHHOLD from members of the Compensation
Committee who approved and/or implemented an option exchange program by
repricing and buying out underwater options for stock, cash or other
consideration or canceling underwater options and regranting options with a
lower exercise price without prior shareholder approval, even if such repricings
are allowed in their equity plan.
Vote AGAINST plans if the company has a history of repricing options without
shareholder approval, and the applicable listing standards would not preclude
them from doing so.
PAY-FOR PERFORMANCE DISCONNECT
Generally, vote AGAINST plans and/or WITHHOLD votes from the Compensation
Committee members if:
- There is a pay for performance disconnect between the CEO's pay and
company's stock performance;
- The main source of the pay increase (over half) is equity based; and
- The CEO is a participant of the equity proposal.
A pay for performance disconnect is defined as an increase in CEO's total
compensation, and the company's one-year and three-year total shareholder
returns are in the bottom half of its industry group (i.e., four-digit GICS -
Global Industry Classification Group). CEO total compensation is defined as the
sum of base salary, bonus, non-equity incentives, grand date full value of stock
awards and options, target value of performance shares/units, change in pension
value and nonqualified deferred compensation earnings, and all other
compensation.
The pay for performance policy first identifies companies that are in the bottom
half of each four-digit GICS coupled with an increase in total direct
compensation for the CEO. Examine the Compensation Discussion & Analysis
("CD&A") to understand the source of increase. Is the increase attributed to
performance-based compensation such as performance-based stock awards with
pre-established performance measures or time-based restricted stock? The CD&A
should provide enlightening and meaningful disclosure with respect to the
committee decisions on executive pay and the underlying rationale for increases
in pay despite poor stock performance. Newly appointed CEOs that have not been
with the company for the past two complete fiscal years are exempted from the
policy. Please note that this is a case-by-case analysis that requires detailed
examination of the company's CD&A.
To potentially mitigate the withhold vote recommendations, consider whether a
company evidenced a commitment to pay for performance principles by (1) stating
that the compensation committee has reviewed all components of CEO compensation,
(2) providing a tally sheet under various termination scenarios, (3) disclosing
performance measures and goals for all performance-based compensation, (4)
committing to grant at least 50 percent of equity awards where the grant or
vesting is tied to pre-established performance conditions, and (5) committing
that the compensation committee has the sole authority to hire or fire
compensation consultants. To provide complete transparency to shareholders, the
commitment must be publicly disclosed.
On a CASE-BY-CASE basis, vote for equity plans and FOR compensation committee
members with a pay-for-performance disconnect if compensation committee members
can present strong and compelling evidence of improved committee performance.
This evidence must go beyond the usual compensation committee report disclosure.
This additional evidence necessary includes all of the following:
- The compensation committee has reviewed all components of the CEO's
compensation, including the following:
- Base salary, bonus, long-term incentives;
- Accumulative realized and unrealized stock option and restricted
stock gains;
- Dollar value of perquisites and other personal benefits to the
CEO and the total cost to the company;
- Earnings and accumulated payment obligations under the company's
nonqualified deferred compensation program;
- Actual projected payment obligations under the company's
supplemental executive retirement plan (SERPs).
- A tally sheet with all of the above components should be disclosed for
the following termination scenarios:
- Payment if termination occurs within 12 months: $______;
- Payment if "not for cause" termination occurs within 12 months:
$_______;
- Payment if "change of control" termination occurs within 12
months: $______.
- The compensation committee is committed to providing additional
information on the named executives' annual cash bonus program and/or
long-term incentive cash plan for the current fiscal year. The
compensation committee will provide full disclosure of the qualitative
and quantitative performance criteria and hurdle rates used to
determine the payouts of the cash program. From this disclosure,
shareholders will know the minimum level of performance required for
any cash bonus to be delivered, as well as the maximum cash bonus
payable for superior performance.
The repetition of the compensation committee report does not meet RMG's
requirement of compelling and strong evidence of improved disclosure. The level
of transparency and disclosure is at the highest level where shareholders can
understand the mechanics of the annual cash bonus and/or long-term incentive
cash plan based on the additional disclosure.
- The compensation committee is committed to granting a substantial
portion of performance-based equity awards to the named executive
officers. A substantial portion of performance-based awards would be
at least 50 percent of the shares awarded to each of the named
executive officers. Performance-based equity awards are earned or paid
out on the achievement of company performance targets. The company
will disclose the details of the performance criteria (e.g., return on
equity) and the hurdle rates (e.g., 15 percent) associated with the
performance targets. From this disclosure, shareholders will know the
minimum level of performance required for any equity grants to be
made. The performance-based equity awards do not refer to
non-qualified stock options(3) or performance-accelerated grants.4
Instead, performance-based equity awards are performance-contingent
grants where the individual will not receive the equity grant by not
meeting the target performance and vice versa.
The level of transparency and disclosure is at the highest level where
shareholders can understand the mechanics of the performance-based equity awards
based on the additional disclosure.
- The compensation committee has the sole authority to hire and fire
outside compensation consultants. The role of the outside compensation
consultant is to assist the compensation committee to analyze
executive pay packages or contracts and understand the company's
financial measures.
THREE-YEAR BURN RATE/BURN RATE COMMITMENT
Generally vote AGAINST plans if the company's most recent three-year burn rate
exceeds one standard deviation in excess of the industry mean (per the following
Burn Rate Table) and is over two percent of common shares outstanding. The
three-year burn rate policy does not apply to non-employee director plans unless
outside directors receive a significant portion of shares each year.
The annual burn rate is calculated as follows:
Annual Burn rate = (# of options granted + # of full value shares awarded *
Multiplier) / Weighted Average common shares outstanding)
However, vote FOR equity plans if the company fails this burn rate test but the
company commits in a public filing to a three-year average burn rate equal to
its GICS group burn rate mean plus one standard deviation (or 2%, whichever is
greater), assuming all other conditions for voting FOR the plan have been met.
----------
(3) Non-qualified stock options are not performance-based awards unless the
grant or the vesting of the stock options is tied to the achievement of a
pre-determined and disclosed performance measure. A rising stock market
will generally increase share prices of all companies, in spite of the
company's underlying performance.
(4) Performance-accelerated grants are awards that vest earlier based on the
achievement of a specified measure. However, these grants will ultimately
vest over time even without the attainment of the goal(s).
If a company fails to full its burn-rate commitment, vote AGAINST or WITHHOLD
from the compensation committee.
For the December 1, 2008, March 1, June 1 and September 1, 2009 quarterly data
downloads, RMG will use the 400-day volatility for the shareholder value
transfer and burn rate policies. RMG intends to revert to the 200-day volatility
for the December 1, 2009 and subsequent quarterly data downloads.
BURN RATE TABLE FOR 2009
RUSSELL 3000
NON-RUSSELL 3000
STANDARD MEAN + STANDARD MEAN+
GICS DESCRIPTION MEAN DEVIATION STDEV MEAN DEVIATION STDEV
--- ----------- ----- --------- ------ ----- --------- ------
1010 Energy 1.75% 1.35% 3.09% 2.41% 2.75% 5.15%
1510 Materials 1.22% 0.91% 2.14% 2.17% 1.63% 3.80%
2010 Capital Goods 1.69% 1.83% 3.52% 2.71% 2.44% 5.15%
2020 Commercial Services & Supplies 2.21% 1.79% 4.01% 2.50% 2.19% 4.69%
2030 Transportation 1.82% 1.36% 3.18% 1.86% 1.59% 3.45%
2510 Automobiles & Components 1.86% 1.19% 3.05% 1.86% 1.19% 3.05%
2520 Consumer Durables & Apparel 2.06% 1.38% 3.44% 2.33% 2.46% 4.79%
2530 Consumer Services 2.11% 1.21% 3.32% 2.75% 2.39% 5.14%
2540 Media 1.87% 1.38% 3.25% 3.16% 2.98% 6.13%
2550 Retailing 1.84% 1.27% 3.12% 2.79% 1.83% 4.62%
3010,
3020,3030 Consumer Staples 1.77% 1.35% 3.12% 2.39% 2.06% 4.45%
3510 Health Care Equipment & Services 2.72% 1.67% 4.39% 3.63% 3.01% 6.64%
3520 Pharmaceuticals & Biotechnology 3.40% 2.36% 5.76% 4.98% 4.49% 9.46%
4010 Banks 1.20% 0.97% 2.18% 1.40% 1.50% 2.89%
4020 Diversified Financials 2.94% 2.62% 5.56% 5.12% 5.93% 11.05%
4030 Insurance 1.23% 0.98% 2.22% 2.49% 2.22% 4.71%
4040 Real Estate 1.07% 0.99% 2.05% 1.33% 1.52% 2.85%
4510 Software & Services 4.05% 2.72% 6.76% 5.57% 4.56% 10.12%
4520 Technology Hardware & Equipment 3.24% 2.29% 5.52% 3.54% 2.76% 6.30%
4530 Semiconductors & Semiconductor Equipment 3.69% 2.02% 5.72% 4.95% 2.84% 7.79%
5010 Telecommunications Services 2.16% 1.57% 3.74% 2.92% 3.00% 5.92%
5510 Utilities 0.81% 0.83% 1.64% 0.87% 1.00% 1.86%
For companies that grant both full value awards and stock options to their
employees, apply a premium on full value awards for the past three fiscal years.
The guideline for applying the premium is as follows:
Stock Price Volatility MULTIPLIER
---------------------- --------------------------------------------------
54.6% and higher 1 full-value award will count as 1.5 option shares
36.1% or higher and less than 54.6% 1 full-value aware will count as 2.0 option shares
24.9% or higher and less than 36.1% 1 full-value award will count as 2.5 option shares
16.5% or higher and less than 24.9% 1 full-value award will count as 3.0 option shares
7.9% or higher and less than 16.5% 1 full-value award will count as 3.5 option shares
Less than 7.9% 1 full-value award will count as 4.0 option shares
LIBERAL DEFINITION OF CHANGE-IN-CONTROL
Generally vote AGAINST equity plans if the plan provides for the acceleration of
vesting of equity awards even though an actual change in control may not occur.
Examples of such a definition could include, but are not limited to,
announcement or commencement of a tender offer, provisions for acceleration upon
a "potential" takeover, shareholder approval of a merger or other transactions
or similar language.
POOR PAY PRACTICES
Vote AGAINST or WITHHOLD from compensation committee members, CEO, and
potentially the entire board, if the company has poor compensation practices.
Vote AGAINST equity plans if the plan is a vehicle for poor compensation
practices.
The following practices, while not exhaustive, are examples of poor compensation
practices that may warrant voting against or withholding votes:
- Egregious employment contracts:
- Contracts containing multi-year guarantees for salary increases,
bonuses, and equity compensation;
- Excessive perks/tax reimbursements:
- Overly generous perquisites, which may include, but are not
limited to the following: personal use of corporate aircraft,
personal security systems maintenance and/or installation, car
allowances;
- Reimbursement of income taxes on executive perquisites or other
payments;
- Perquisites for former executives, such as car allowances,
personal use of corporate aircraft or other inappropriate
arrangements.
- Abnormally large bonus payouts without justifiable performance linkage
or proper disclosure:
- Performance metrics that are changed, canceled or replaced during
the performance period without adequate explanation of the action
and the link to performance.
- Egregious pension/SERP (supplemental executive retirement plan)
payouts:
- Inclusion of additional years of service not worked that result
in significant payouts;
- Inclusion of performance-based equity awards in the pension
calculation;
- New CEO with overly generous new hire package:
- Excessive "make whole" provisions;
- Any of the poor pay practices listed in this policy.
- Excessive severance and/or change-in-control provisions:
- Inclusion of excessive change-in-control or severance payments,
especially those with a multiple in excess of 3X cash pay;
- Payments upon an executive's termination in connection with
performance failure;
- Change-in-control payouts without loss of job or substantial
diminution of job duties (single-triggered);
- New or materially amended employment or severance agreements that
provide for modified single triggers, under which an executive
may voluntarily leave for any reason and still receive the
change-in-control severance package;
- Liberal change in control definition in individual contracts or
equity plans which could result in payments to executives without
an actual change in control occurring;
- New or materially amended employment or severance agreements that
provide for an excise tax gross-up. Modified gross-ups would be
treated in the same manner as full gross-ups;
- Perquisites for former executives such as car allowances,
personal use of corporate aircraft, or other inappropriate
arrangements.
- Dividends or dividend equivalents paid on unvested performance shares
or units;
- Poor disclosure practices:
- Unclear explanation of how the CEO is involved in the pay setting
process;
- Retrospective performance targets and methodology not discussed;
- Methodology for benchmarking practices and/or peer group not
disclosed and explained;
- Internal Pay Disparity:
- Excessive differential between CEO total pay and that of next
highest-paid named executive officer (NEO);
- Options backdating (covered in a separate policy;
- Other excessive compensation payouts or poor pay practices at the
company.
SPECIFIC TREATMENT OF CERTAIN AWARD TYPES IN EQUITY PLAN EVALUATIONS:
DIVIDEND EQUIVALENT RIGHTS
Options that have Dividend Equivalent Rights (DERs) associated with them will
have a higher calculated award value than those without DERs under the binomial
model based on the value of these dividend streams. The higher value will be
applied to new shares, shares available under existing plans, and shares awarded
but not exercised per the plan specifications. DERs transfer more shareholder
equity to employees and non-employee directors, and this cost should be
captured.
LIBERAL SHARE RECYCLING PROVISIONS
Under net share counting provisions, shares tendered by an option holder to pay
for the exercise of an option, shares withheld for taxes or shares repurchased
by the company on the open market can be recycled back into the equity plan for
awarding again. All awards with such provisions should be valued as full-value
awards. Stock-settled stock appreciation rights (SSARs) will also be considered
as full-value awards if a company counts only the net shares issued to employees
towards their plan reserve.
OPERATING PARTNERSHIP (OP) UNITS IN EQUITY PLAN ANALYSIS OF REAL ESTATE
INVESTMENT TRUSTS (REITS)
For Real Estate Investment Trusts (REITS), include the common shares issuable
upon conversion of outstanding Operating Partnership (OP) units in the share
count for the purposes of determining: (1) market capitalization in the
Shareholder Value Transfer (SVT) analysis and (2) shares outstanding in the burn
rate analysis.
OPTION OVERHANG COST
Companies with sustained positive stock performance and high overhang cost
attributable to in-the-money options outstanding in excess of six years may
warrant a carve-out of these options from the overhang as long as the dilution
attributable to the new share request is reasonable and the company exhibits
sound compensation practices. Consider, on a CASE-BY-CASE basis, a carve-out of
a portion of cost attributable to overhang, considering the following criteria:
- PERFORMANCE: Companies with sustained positive stock performance will
merit greater scrutiny. Five-year total shareholder return (TSR),
year-over-year performance, and peer performance could play a
significant role in this determination.
- OVERHANG DISCLOSURE: Assess whether optionees have held in-the-money
options for a prolonged period (thus reflecting their confidence in
the prospects of the company). Note that this assessment would require
additional disclosure regarding a company's overhang. Specifically,
the following disclosure would be required:
- The number of in-the-money options outstanding in excess of six
or more years with a corresponding weighted average exercise
price and weighted average contractual remaining term;
- The number of all options outstanding less than six years and
underwater options outstanding in excess of six years with a
corresponding weighted average exercise price and weighted
average contractual remaining term;
- The general vesting provisions of options grants; and
- The distribution of outstanding option grants with respect to the
named executive officers,
- DILUTION: Calculate the expected duration of the new share request in
addition to all shares currently available for grant under the equity
compensation program, based on the company's three-year average burn
rate (or a burn-rate commitment that the company makes for future
years). The expected duration will be calculated by multiplying the
company's unadjusted (options and full-value awards accounted on a
one-for-one basis) three-year average burn rate by the most recent
fiscal year's weighted average shares outstanding (as used in the
company's calculation of basic EPS) and divide the sum of the new
share request and all available shares under the company's equity
compensation program by the product. For example, an expected duration
in excess of five years could be considered problematic; and
- COMPENSATION PRACTICES: An evaluation of overall practices could
include: (1) stock option repricing provisions, (2) high concentration
ratios (of grants to top executives), or (3) additional practices
outlined in the Poor Pay Practices policy.
OTHER COMPENSATION PROPOSALS AND POLICIES
401(K) EMPLOYEE BENEFIT PLANS
Vote FOR proposals to implement a 401(k) savings plan for employees.
ADVISORY VOTE ON EXECUTIVE COMPENSATION (SAY-ON-PAY) MANAGEMENT PROPOSALS
Vote CASE-BY-CASE on management proposals for an advisory vote on executive
compensation. Vote AGAINST these resolutions in cases where boards have failed
to demonstrate good stewardship of investors' interests regarding executive
compensation practices. The following principles and factors should be
considered:
1. The following FIVE GLOBAL PRINCIPLES APPLY TO ALL MARKETS:
- Maintain appropriate pay-for-performance alignment with emphasis on
long-term shareholder value: This principle encompasses overall
executive pay practices, which must be designed to attract, retain,
and appropriately motivate the key employees who drive shareholder
value creation over the long term. It will take into consideration,
among other factors: the linkage between pay and performance; the mix
between fixed and variable pay; performance goals; and equity-based
plan costs.
- Avoid arrangements that risk "pay for failure". This principle
addresses the use and appropriateness of long or indefinite contracts,
excessive severance packages, and guaranteed compensation;
- Maintain an independent and effective compensation committee: This
principle promotes oversight of executive pay programs by directors
with appropriate skills, knowledge, experience, and a sound process
for compensation decision-making (e.g., including access to
independent expertise and advice when needed);
- Provide shareholders with clear, comprehensive compensation
disclosures: This principle underscores the importance of informative
and timely disclosures that enable shareholders to evaluate executive
pay practices fully and fairly;
- Avoid inappropriate pay to non-executive directors: This principle
recognizes the interests of shareholders in ensuring that compensation
to outside directors does not compromise their independence and
ability to make appropriate judgments in overseeing managers' pay and
performance. At the market level, it may incorporate a variety of
generally accepted best practices.
2. For U. S. companies, vote CASE-BY-CASE considering the following factors in
the context of each company's specific circumstances and the board's
disclosed rationale for its practices.
RELATIVE CONSIDERATIONS
- Assessment of performance metrics relative to business strategy, as
discussed and explained in the CD&A;
- Evaluation of peer groups used to set target pay or award
opportunities;
- Alignment of company performance and executive pay trends over time
(e.g., performance down: pay down);
- Assessment of disparity between total pay of the CEO and other Named
Executive Officers (NEOs).
DESIGN CONSIDERATIONS:
- Balance of fixed versus performance-driven pay;
- Assessment of excessive practices with respect to perks, severance
packages, supplemental executive pension plans, and burn rates.
COMMUNICATION CONSIDERATIONS:
- Evaluation of information and board rationale provided in CDBA about
how compensation is determined (e.g., why certain elements and pay
targets are used, and specific incentive plan goals, especially
retrospective goals);
- Assessment of board's responsiveness to investor input and engagement
on compensation issues (e.g., in responding to majority-supported
shareholder proposals on executive pay topics).
DIRECTOR COMPENSATION
Vote CASE-BY-CASE on compensation plans for non-employee directors, based on the
cost of the plans against the company's allowable cap.
On occasion, director stock plans that set aside a relatively small number of
shares when combined with employee or executive stock compensation plans will
exceed the allowable cap. Vote for the plan if ALL of the following qualitative
factors in the board's compensation are met and disclosed in the proxy
statement:
- Director stock ownership guidelines with a minimum of three times the
annual cash retainer;
- Vesting schedule or mandatory holding/deferral period:
- A minimum vesting of three years for stock options or restricted
stock; or
- Deferred stock payable at the end of a three-year deferral
period.
- Mix between cash and equity:
- A balanced mix of cash and equity, for example, 40% cash/60%
equity or 50% cash/50% equity; or
- If the mix is heavier on the equity component, the vesting
schedule or deferral period should be more stringent, with the
lesser of five years or the term of directorship.
- No retirement/benefits and perquisites provided to non-employee
directors; and
- Detailed disclosure provided on cash and equity compensation delivered
to each non-employee director for the most recent fiscal year in a
table. The column headers for the table may include the following:
name of each non-employee director, annual retainer, board meeting
fees, committee retainer, committee-meeting fees, and equity grants.
DIRECTOR RETIREMENT PLANS
Vote AGAINST retirement plans for non-employee directors.
Vote FOR shareholder proposals to eliminate retirement plans for non-employee
directors.
EMPLOYEE STOCK OWNERSHIP PLANS (ESOPS)
Vote FOR proposals to implement an ESOP or increase authorized shares for
existing ESOPs, unless the number of shares allocated to the ESOP is excessive
(more than five percent of outstanding shares).
EMPLOYEE STOCK PURCHASE PLANS--QUALIFIED PLANS
Vote CASE-BY-CASE on qualified employee stock purchase plans. Vote FOR employee
stock purchase plans where all of the following apply:
- Purchase price is at least 85 percent of fair market value;
- Offering period is 27 months or less; and
- The number of shares allocated to the plan is ten percent or less of
the outstanding shares.
Vote AGAINST qualified employee stock purchase plans where any of the following
apply:
- Purchase price is less than 85 percent of fair market value; or
- Offering period is greater than 27 months; or
- The number of shares allocated to the plan is more than ten percent of
the outstanding shares.
EMPLOYEE STOCK PURCHASE PLANS--NON-QUALIFIED PLANS
Vote CASE-BY-CASE on nonqualified employee stock purchase plans. Vote FOR
nonqualified employee stock purchase plans with all of the following features:
- Broad-based participation (i.e., all employees of the company with the
exclusion of individuals with 5 percent or more of beneficial
ownership of the company);
- Limits on employee contribution, which may be a fixed dollar amount or
expressed as a percent of base salary;
- Company matching contribution up to 25 percent of employer's
contribution, which is effectively a discount of 20 percent from
market value;
- No discount on the stock price on the date of purchase since there is
a company matching contribution.
Vote AGAINST nonqualified employee stock purchase plans when any of the plan
features do not meet the above criteria. If the company matching contribution
exceeds 25 percent of employee's contribution, evaluate the cost of the plan
against its allowable cap.
INCENTIVE BONUS PLANS AND TAX DEDUCTIBILITY PROPOSALS (OBRA-RELATED COMPENSATION
PROPOSALS)
Vote FOR proposals that simply amend shareholder-approved compensation plans to
include administrative features or place a cap on the annual grants any one
participant may receive to comply with the provisions of Section 162(m) of the
Internal Revenue Code.
Vote FOR proposals to add performance goals to existing compensation plans to
comply with the provisions of Section 162(m) unless they are clearly
inappropriate.
Votes to amend existing plans to increase shares reserved and to qualify for
favorable tax treatment under the provisions of Section 162(m) are considered on
a CASE-BY-CASE basis using a proprietary, quantitative model developed by RMG.
Generally vote FOR cash or cash and stock bonus plans that are submitted to
shareholders for the purpose of exempting compensation from taxes under the
provisions of Section 162(m) if no increase in shares is requested.
Vote AGAINST proposals if the compensation committee does not fully consist of
independent outsiders, as defined in RMG's classification of director
independence.
OPTIONS BACKDATING
In cases where a company has practiced options backdating, vote AGAINST or
WITHHOLD on a CASE-BY-CASE basis from the members of the compensation committee,
depending on the severity of the practices and the subsequent corrective actions
on the part of the board. Vote AGAINST or WITHHOLD from the compensation
committee members who oversaw the questionable options grant practices or from
current compensation committee members who fail to respond to the issue
proactively, depending on several factors, including, but not limited to:
- Reason and motive for the options backdating issue, such as
inadvertent vs. deliberate grant date changes;
- Length of time of options backdating;
- Size of restatement due to options backdating;
- Corrective actions taken by the board or compensation committee, such
as canceling or repricing backdated options, or recoupment of option
gains on backdated grants;
- Adoption of a grant policy that prohibits backdating and creation of a
fixed grant schedule or window period for equity grants going forward.
OPTION EXCHANGE PROGRAMS/REPRICING OPTIONS
Vote CASE-BY-CASE on management proposals seeking approval to exchange/reprice
options taking into consideration:
- Historic trading patterns--the stock price should not be so volatile
that the options are likely to be back "in the money" over the near
term;
- Rationale for the repricing--was the stock price decline beyond
management's control?
- Is this a value-for-value exchange?
- Are surrendered stock options added back to the plan reserve?
- Options vesting--does the new option vest immediately, or is there a
black-out period?
- Term of the option--the term should remain the same as that of the
replaced option;
- Exercise price--should be set at fair market or a premium to market;
- Participants--executive officers and directors should be excluded.
If the surrendered options are added back to the equity plans for re-issuance,
then take into consideration the company's three-year average burn rate. In
addition to the above considerations, evaluate the intent, rationale and timing
of the repricing proposal. The proposal should clearly articulate why the board
is choosing to conduct an exchange program at this point in time. Repricing
underwater options after a recent precipitous drop in the company's stock price
demonstrates poor timing. Repricing after a recent decline in stock price
triggers additional scrutiny and a potential AGAINST vote on the proposal. At a
minimum, the decline should not have happened within the past year. Also,
consider the terms of the surrendered options, such as the grant date, exercise
price and vesting schedule. Grant dates of surrendered options should be far
enough back (two to three years) so as not to suggest that repricings are being
done to take advantage of short-term downward price movements. Similarly, the
exercise price of surrendered options should be above the 52-week high for the
stock price.
Vote FOR shareholder proposals to put option repricings to a shareholder vote.
STOCK PLANS IN LIEU OF CASH
Vote CASE-BY-CASE on plans which provide participants with the option of taking
all or a portion of their cash compensation in the form of stock.
Vote FOR non-employee director only equity plans which provide a
dollar-for-dollar cash for stock exchange.
Vote CASE-BY-CASE on plans which do not provide a dollar-for-dollar cash for
stock exchange. In cases where the exchange is not dollar-for-dollar, the
request for new or additional shares for such equity program will be considered
using the binomial option pricing model. In an effort to capture the total cost
of total compensation, RMG will not make any adjustments to carve out the
in-lieu-of-cash compensation.
TRANSFER STOCK OPTIONS (TSO PROGRAMS
One-time Transfers: Vote AGAINST or WITHHOLD votes from compensation committee
members if they fail to submit one-time transfers to shareholders for approval.
Vote CASE-BY-CASE on one-time transfers. Vote FOR if:
- Executive officers and non-employee directors are excluded from
participating;
- Stock options are purchased by third-party financial institutions at a
discount to their fair value using option pricing models such as
Black-Scholes or a Binomial Option Valuation or other appropriate
financial models;
- There is a two-year minimum holding period for sale proceeds (cash or
stock) for all participants.
Additionally, management should provide a clear explanation of why options are
being transferred to a third-party institution and whether the events leading up
to a decline in stock price were beyond management's control. A review of the
company's historic stock price volatility should indicate if the options are
likely to be back "in-the-money" over the near term.
Ongoing TSO program: Vote AGAINST equity plan proposals if the details of
ongoing TSO programs are not provided to shareholders. Since TSOs will be one of
the award types under a stock plan, the ongoing TSO program, structure and
mechanics must be disclosed to shareholders. The specific criteria to be
considered in evaluating these proposals include, but are not limited, to the
following:
- Eligibility;
- Vesting;
- Bid-price;
- Term of options;
- Cost of the program and impact of the TSOs on company's total option
expense;
- Option repricing policy.
Amendments to existing plans that allow for introduction of transferability of
stock options should make clear that only options granted post-amendment shall
be transferable.
SHAREHOLDER PROPOSALS ON COMPENSATION
ADVISORY VOTE ON EXECUTIVE COMPENSATION (SAY-ON PAY)
Generally vote FOR shareholder proposals that call for non-binding shareholder
ratification of the compensation of the named Executive Officers and the
accompanying narrative disclosure of material factors provided to understand the
Summary Compensation Table.
BAILOUT BILL/EXECUTIVE COMPENSATION RESOLUTIONS
Vote CASE-BY-CASE on shareholder proposals that call for the imposition of
compensation limits at companies that are participating in the Capital Purchase
Program established under the Troubled Asset Relief Program (TARP). Limits under
the proposal include an emphasis on performance-vested equity awards, cap on
bonus compensation, equity retention requirements, limits on retirement and
severance benefits.
While there are components of the program RMG would not support on a stand-alone
basis, we consider the proposal to be a symbolic call on companies receiving
this relief to adhere to higher compensation standards, a number of which were
proposed in earlier drafts of the legislation. As such, the following factors
will be taken into account:
- The absence of evidence that the Compensation Committee has taken
substantial steps to review practices to reflect the dramatically
different circumstances of the current environment, including the
optics of maintaining former practices while taking tax-payer moneys.
- Problematic pay practices, current and past, particularly those which
shareholders believe may have promoted a risk-taking environment that
was ultimately in the detriment of shareholders' long-term interests.
COMPENSATION CONSULTANTS--DISCLOSURE OF BOARD OR COMPANY'S UTILIZATION
Generally vote FOR shareholder proposals seeking disclosure regarding the
Company, Board, or Compensation Committee's use of compensation consultants,
such as company name, business relationship(s) and fees paid.
DISCLOSURE/SETTING LEVELS OR TYPES OF COMPENSATION FOR EXECUTIVES AND DIRECTORS
Generally vote FOR shareholder proposals seeking additional disclosure of
executive and director pay information, provided the information requested is
relevant to shareholders' needs, would not put the company at a competitive
disadvantage relative to its industry, and is not unduly burdensome to the
company.
Vote AGAINST shareholder proposals seeking to set absolute levels on
compensation or otherwise dictate the amount or form of compensation.
Vote AGAINST shareholder proposals requiring director fees be paid in stock
only.
Vote CASE-BY-CASE on all other shareholder proposals regarding executive and
director pay, taking into account company performance, pay level versus peers,
pay level versus industry, and long-term corporate outlook.
GOLDEN COFFINS/EXECUTIVE DEATH BENEFITS
Generally vote FOR proposals calling for companies to adopt a policy of
obtaining shareholder approval for any future agreements and corporate policies
that could oblige the company to make payments or awards following the death of
a senior executive in the form of unearned salary or bonuses, accelerated
vesting or the continuation in force of unvested equity grants, perquisites and
other payments or awards made in lieu of compensation. This would not apply to
any benefit programs or equity plan proposals for which the broad-based employee
population is eligible.
PAY FOR SUPERIOR PERFORMANCE
Generally vote FOR shareholder proposals based on a case-by-case analysis that
requests the board establish a pay-for-superior-performance standard in the
company's executive compensation plan for senior executives. The proposal has
the following principles:
- Sets compensation targets for the Plan's annual and long-term
incentive pay components at or below the peer group median;
- Delivers a majority of the Plan's target long-term compensation
through performance-vested, not simply time-vested, equity awards;
- Provides the strategic rationale and relative weightings of the
financial and non-financial performance metrics or criteria used in
the annual and performance-vested long-term incentive components of
the plan;
- Establishes performance targets for each plan financial metric
relative to the performance of the company's peer companies;
- Limits payment under the annual and performance-vested long-term
incentive components of the plan to when the company's performance on
its selected financial performance metrics exceeds peer group median
performance.
Consider the following factors in evaluating this proposal:
- What aspects of the company's annual and long-term equity incentive
programs are performance driven?
- If the annual and long-term equity incentive programs are performance
driven, are the performance criteria and hurdle rates disclosed to
shareholders or are they benchmarked against a disclosed peer group?
- Can shareholders assess the correlation between pay and performance
based on the current disclosure?
- What type of industry and stage of business cycle does the company
belong to?
PERFORMANCE-BASED AWARDS
Vote CASE-BY-CASE on shareholder proposals requesting that a significant amount
of future long-term incentive compensation awarded to senior executives shall be
performance-based and requesting that the board adopt and disclose challenging
performance metrics to shareholders, based on the following analytical steps:
- First, vote FOR shareholder proposals advocating the use of
performance-based equity awards, such as performance contingent
options or restricted stock, indexed options or premium-priced
options, unless the proposal is overly restrictive or if the company
has demonstrated that it is using a "substantial" portion of
performance-based awards for its top executives. Standard stock
options and performance-accelerated awards do not meet the criteria to
be considered as performance-based awards. Further, premium-priced
options should have a premium of at least 25 percent and higher to be
considered performance-based awards.
- Second, assess the rigor of the company's performance-based equity
program. If the bar set for the performance-based program is too low
based on the company's historical or peer group comparison, generally
vote FOR the proposal. Furthermore, if target performance results in
an above-target payout, vote FOR the shareholder proposal due to
program's poor design. If the company does not disclose the
performance metric of the performance-based equity program, vote FOR
the shareholder proposal regardless of the outcome of the first step
to the test.
In general, vote FOR the shareholder proposal if the company does not meet both
of the above two steps.
PENSION PLAN INCOME ACCOUNTING
Generally vote FOR shareholder proposals to exclude pension plan income in the
calculation of earnings used in determining executive bonuses/compensation.
PRE-ARRANGED TRADING PLANS (10B5-1 PLANS)
Generally vote FOR shareholder proposals calling for certain principles
regarding the use of prearranged trading plans (10b5-1 plans) for executives.
These principles include:
- Adoption, amendment or termination of a 10b5-1 Plan must be disclosed
within two business days in a Form 8-K;
- Amendment or early termination of a 10b5-1 Plan is allowed only under
extraordinary circumstances, as determined by the board;
- Ninety days must elapse between adoption or amendment of a 10b5-1 Plan
and initial trading under the plan;
- Reports on Form 4 must identify transactions made pursuant to a 10b5-1
Plan;
- An executive may not trade in company stock outside the 10b5-1 Plan;
- Trades under a 10b5-1 Plan must be handled by a broker who does not
handle other securities transactions for the executive.
RECOUP BONUSES
Vote on a CASE-BY-CASE basis on proposals to recoup unearned incentive bonuses
or other incentive payments made to senior executives if it is later determined
that the figures upon which incentive compensation is earned later turn out to
have been in error. This is in line with the clawback provision in the Troubled
Asset Relief program. Many companies have adopted policies that permit
recoupment in cases where fraud, misconduct or negligence significantly
contributed to a restatement of financial results that led to the awarding of
unearned incentive compensation. RMG will take into consideration:
- If the company has adopted a formal recoupment bonus policy;
- If the company has chronic restatement history or material financial
problems; or
- If the company's policy substantially addresses the concerns raised by
the proponent.
SEVERANCE AGREEMENTS FOR EXECUTIVES/GOLDEN PARACHUTES
Vote FOR shareholder proposals requiring that golden parachutes or executive
severance agreements be submitted for shareholder ratification, unless the
proposal requires shareholder approval prior to entering into employment
contracts.
Vote on a CASE-BY-CASE basis on proposals to ratify or cancel golden parachutes.
An acceptable parachute should include, but is not limited to, the following:
- The triggering mechanism should be beyond the control of management;
- The amount should not exceed three times base amount (defined as the
average annual taxable W-2 compensation during the five years prior to
the year in which the change of control occurs);
- Change-in-control payments should be double-triggered, i.e., (1) after
a change in control has taken place, and (2) termination of the
executive as a result of the change in control. Change in control is
defined as a change in the company ownership structure.
SHARE BUYBACK HOLDING PERIODS
Generally vote AGAINST shareholder proposals prohibiting executives from selling
shares of company stock during periods in which the company has announced that
it may or will be repurchasing shares of its stock. Vote FOR the proposal when
there is a pattern of abuse by executives exercising options or selling shares
during periods of share buybacks.
STOCK OWNERSHIP OR HOLDING PERIOD GUIDELINES
Generally vote AGAINST shareholder proposals that mandate a minimum amount of
stock that directors must own in order to qualify as a director or to remain on
the board. While we favor stock ownership on the part of directors, the company
should determine the appropriate ownership requirement.
Vote CASE-BY-CASE on shareholder proposals asking companies to adopt policies
requiring Named Executive Officers to retain 75% of the shares acquired through
compensation plans while employed and/or for two years following the termination
of their employment, and to report to shareholders regarding this policy. The
following factors will be taken into account:
- Whether the company has any holding period, retention ratio or officer
ownership requirements in place. These should consist of:
- Rigorous stock ownership guidelines, or
- A holding period requirement coupled with a significant long-term
ownership requirement, or
- A meaningful retention ratio.
- Actual officer stock ownership and the degree to which it meets or
exceeds the proponent's suggested holding period/retention ratio or
the company's own stock ownership or retention requirements.
- Problematic pay practices, current and past, which may promote a
short-term versus a long-term focus.
A rigorous stock ownership guideline should be at least 10x base salary for the
CEO, with the multiple declining for other executives. A meaningful retention
ratio should constitute at least 50 percent of the stock received from equity
awards (on a net proceeds basis) held on a long-term basis, such as the
executive's tenure with the company or even a few years past the executive's
termination with the company.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS (SERPS)
Generally vote FOR shareholder proposals requesting to put extraordinary
benefits contained in SERP agreements to a shareholder vote unless the company's
executive pension plans do not contain excessive benefits beyond what is offered
under employee-wide plans.
Generally vote FOR shareholder proposals requesting to limit the executive
benefits provided under the company's supplemental executive retirement plan
(SERP) by limiting covered compensation to a senior executive's annual salary
and excluding of all incentive or bonus pay from the plan's definition of
covered compensation used to establish such benefits.
TERMINATION OF EMPLOYMENT PRIOR TO SEVERANCE PAYMENT AND ELIMINATING ACCELERATED
VESTING OF UNVESTED EQUITY
Vote CASE-BY-CASE on shareholder proposals seeking a policy requiring
termination of employment prior to severance payment and eliminating accelerated
vesting of unvested equity. Change-in-control payouts without loss of job or
substantial diminution of job duties (single-triggered) are considered a poor
pay practice under RMG policy and may even result in withheld votes from
compensation committee members. The second component of this proposal - related
to the elimination of accelerated vesting - requires more careful consideration.
The following factors will be taken into consideration regarding this policy:
- The company's current treatment of equity in change-of-control
situations (i.e., is it double triggered, does it allow for the
assumption of equity by acquiring company, the treatment of
performance shares);
- Current employment agreements, including potential poor pay practices
such as gross-ups embedded in those agreements.
TAX GROSS-UP PROPOSALS
Generally vote FOR proposals calling for companies to adopt a policy of not
providing tax gross-up payments to executives, except in situations where
gross-ups are provided pursuant to a plan, policy, or arrangement applicable to
management employees of the company, such as a relocation or expatriate tax
equalization policy.
9. CORPORATE SOCIAL RESPONSIBILITY (CSR) ISSUES
OVERALL APPROACH
When evaluating social and environmental shareholder proposals, the following
factors are considered:
- Whether adoption of the proposal is likely to enhance or protect
shareholder value;
- Whether the information requested concerns business issues that relate
to a meaningful percentage of the company's business as measured by
sales, assets, and earnings;
- The degree to which the company's stated position on the issues raised
in the proposal could affect its reputation or sales, or leave it
vulnerable to a boycott or selective purchasing;
- Whether the issues presented are more appropriately/effectively dealt
with through governmental or company-specific action;
- Whether the company has already responded in some appropriate manner
to the request embodied in the proposal;
- Whether the company's analysis and voting recommendation to
shareholders are persuasive;
- What other companies have done in response to the issue addressed in
the proposal;
- Whether the proposal itself is well framed and the cost of preparing
the report is reasonable;
- Whether implementation of the proposal's request would achieve the
proposal's objectives;
- Whether the subject of the proposal is best left to the discretion of
the board;
- Whether the requested information is available to shareholders either
from the company or from a publicly available source; and
- Whether providing this information would reveal proprietary or
confidential information that would place the company at a competitive
disadvantage.
ANIMAL WELFARE
ANIMAL TESTING
Generally vote AGAINST proposals to phase out the use of animals in product
testing unless:
- The company is conducting animal testing programs that are unnecessary
or not required by regulation;
- The company is conducting animal testing when suitable alternatives
are accepted and used at industry peers; or
- There are recent, significant fines or litigation related to the
company's treatment of animals.
ANIMAL WELFARE POLICIES
Generally vote FOR proposals seeking a report on the company's animal welfare
standards unless:
- The company has already published a set of animal welfare standards
and monitors compliance;
- The company's standards are comparable to or better than those of
industry peers; and
- There are no recent, significant fines or litigation related to the
company's treatment of animals.
CONTROLLED ATMOSPHERE KILLING (CAK)
Generally vote AGAINST proposals requesting the implementation of CAK methods at
company and/or supplier operations unless such methods are required by
legislation or generally accepted as the industry standard.
Vote CASE-BY-CASE on proposals requesting a report on the feasibility of
implementing CAK methods at company and/or supplier operations, considering the
availability of existing research conducted by the company or industry groups on
this topic and any fines or litigation related to current animal processing
procedures at the company.
CONSUMER ISSUES
GENETICALLY MODIFIED INGREDIENTS
Generally, vote AGAINST proposals asking suppliers, genetic research companies,
restaurants and food retail companies to voluntarily label genetically
engineered (GE) ingredients in their products and/or eliminate GE ingredients.
The cost of labeling and/or phasing out the use of GE ingredients may not be
commensurate with the benefits to shareholders and is an issue better left to
regulators.
Vote CASE-BY-CASE on proposals asking for a report on the feasibility of
labeling products containing GE ingredients taking into account:
- The company's business and the proportion of it affected by the
resolution;
- The quality of the company's disclosure on GE product labeling,
related voluntary initiatives, and how this disclosure compares with
industry peer disclosure; and
- Company's current disclosure on the feasibility of GE product
labeling, including information on the related costs.
Generally vote AGAINST proposals seeking a report on the social, health and
environmental effects of genetically modified organisms (GMOs). Studies of this
sort are better undertaken by regulators and the scientific community.
Generally vote AGAINST proposals to completely phase out GE ingredients from the
company's products or proposals asking for reports outlining the steps necessary
to eliminate GE ingredients from the company's products. Such resolutions
presuppose that there are proven health risks to GE ingredients (an issue better
left to federal regulators) that may outweigh the economic benefits derived from
biotechnology.
CONSUMER LENDING
Vote CASE-BY-CASE on requests for reports on the company's lending guidelines
and procedures, including the establishment of a board committee for oversight,
taking into account:
- Whether the company has adequately disclosed mechanisms in place to
prevent abusive lending practices;
- Whether the company has adequately disclosed the financial risks of
the lending products in question;
- Whether the company has been subject to violations of lending laws or
serious lending controversies;
- Peer companies' policies to prevent abusive lending practices.
PHARMACEUTICAL PRICING, ACCESS TO MEDICINES AND PRODUCT REIMPORTATION
Generally vote AGAINST proposals requesting that companies implement specific
price restraints on pharmaceutical products unless the company fails to adhere
to legislative guidelines or industry norms in its product pricing.
Vote CASE-BY-CASE on proposals requesting that the company evaluate/report on
its product pricing policies or its access to medicine policies, considering:
- The nature of the company's business and the potential for
reputational and market risk exposure;
- The existing disclosure of relevant policies;
- Deviation from established industry norms;
- The company's existing, relevant initiatives to provide research
and/or products to disadvantaged consumers;
- Whether the proposal focuses on specific products or geographic
regions; and
- The potential cost and scope of the requested report.
Generally vote FOR proposals requesting that companies report on the financial
and legal impact of their prescription drug reimportation policies unless such
information is already publicly disclosed.
Generally vote AGAINST proposals requesting that companies adopt specific
policies to encourage or constrain prescription drug reimportation. Such matters
are more appropriately the province of legislative activity and may place the
company at a competitive disadvantage relative to its peers.
PRODUCT SAFETY AND TOXIC/HAZARDOUS MATERIALS
Generally vote FOR proposals requesting the company to report on its policies,
initiatives/procedures and oversight mechanisms related to toxic/hazardous
materials or product safety in its supply chain, unless:
- The company already discloses similar information through existing
reports or policies such as a Supplier Code of Conduct and/or a
sustainability report;
- The company has formally committed to the implementation of a
toxic/hazardous materials and/or product safety and supply chain
reporting and monitoring program based on industry norms or similar
standards within a specified time frame; and
- The company has not been recently involved in relevant significant
controversies, significant fines, or litigation.
Vote CASE-BY-CASE on resolutions requesting that companies develop a feasibility
assessment to phase-out of certain toxic/hazardous materials or evaluate and
disclose the potential financial and legal risks associated with utilizing
certain chemicals, considering:
- The company's current level of disclosure regarding its product safety
policies, initiatives and oversight mechanisms;
- Current regulations in the markets in which the company operates; and
- Recent significant controversy, litigation or fines stemming from
toxic/hazardous materials at the company.
- Generally vote AGAINST resolutions requiring that a company
reformulate its products.
TOBACCO
Vote CASE-BY-CASE on resolutions regarding the advertisement of tobacco
products, considering:
- Recent related fines, controversies, or significant litigation;
- Whether the company complies with relevant laws and regulations on the
marketing of tobacco;
- Whether the company's advertising restrictions deviate from those of
industry peers;
- Whether the company entered into the Master Settlement Agreement,
which restricts marketing of tobacco to youth;
- Whether restrictions on marketing to youth extend to foreign
countries.
Vote CASE-BY-CASE on proposals regarding second-hand smoke, considering:
- Whether the company complies with all laws and regulations;
- The degree that voluntary restrictions beyond those mandated by law
might hurt the company's competitiveness;
- The risk of any health-related liabilities.
Generally vote AGAINST resolutions to cease production of tobacco-related
products, to avoid selling products to tobacco companies, to spin-off
tobacco-related businesses, or prohibit investment in tobacco equities. Such
business decisions are better left to company management or portfolio managers.
Generally vote AGAINST proposals regarding tobacco product warnings. Such
decisions are better left to public health authorities.
DIVERSITY
BOARD DIVERSITY
Generally vote FOR reports on the company's efforts to diversify the board,
unless:
- The board composition is reasonably inclusive in relation to companies
of similar size and business; or
- The board already reports on its nominating procedures and diversity
initiatives.
Generally vote AGAINST proposals that would call for the adoption of specific
committee charter language regarding diversity initiatives unless the company
fails to publicly disclose existing equal opportunity or non-discrimination
policies.
Vote CASE-BY-CASE on proposals asking the company to increase the representation
of women and minorities on the board, taking into account:
- The degree of board diversity;
- Comparison with peer companies;
- Established process for improving board diversity;
- Existence of independent nominating committee;
- Use of outside search firm;
- History of EEO violations.
EQUALITY OF OPPORTUNITY
Generally vote FOR proposals requesting a company disclose its diversity
policies or initiatives, or proposals requesting disclosure of a company's
comprehensive workforce diversity data, including requests for EEO-1 data,
unless:
- The company publicly discloses its comprehensive equal opportunity
policies and initiatives;
- The company already publicly discloses comprehensive workforce
diversity data; and
- The company has no recent EEO-related violations or litigation.
Generally vote AGAINST proposals seeking information on the diversity efforts of
suppliers and service providers. Such requests may pose a significant cost and
administrative burden on the company.
GENDER IDENTITY, SEXUAL ORIENTATION, AND DOMESTIC PARTNER BENEFITS
Generally vote FOR proposals seeking to amend a company's EEO statement or
diversity policies to prohibit discrimination based on sexual orientation and/or
gender identity, unless the change would result in excessive costs for the
company.
Generally vote AGAINST proposals to extend company benefits to, or eliminate
benefits from domestic partners. Decisions regarding benefits should be left to
the discretion of the company.
CLIMATE CHANGE AND THE ENVIRONMENT
CLIMATE CHANGE
Generally vote FOR resolutions requesting that a company disclose information on
the impact of climate change on the company's operations and investments
considering:
- The company already provides current, publicly-available information
on the perceived impact that climate change may have on the company,
as well as associated policies and procedures to address such risks
and/or opportunities;
- The company's level of disclosure is comparable to that of industry
peers; and
- There are no significant controversies, fines, penalties or litigation
associated with the company's environmental performance.
CONCENTRATED AREA FEEDING OPERATIONS (CAFOS)
Vote FOR resolutions requesting that companies report to shareholders on the
risks and liabilities associated with CAFOs unless:
- The company has publicly disclosed its environmental management
policies for its corporate and contract farming operations, including
compliance monitoring; and
- The company publicly discloses company and supplier farm environmental
performance data; or
- The company does not have company-owned CAFOs and does not directly
source from contract farm CAFOs.
ENERGY EFFICIENCY
Generally vote FOR proposals requesting a company report on its comprehensive
energy efficiency policies, unless:
- The company complies with applicable energy efficiency regulations and
laws and discloses its participation in energy efficiency policies and
programs, including disclosure of benchmark data, targets and
performance measures; or
- The proponent requests adoption of specific energy efficiency goals
within specific timelines.
FACILITY AND OPERATIONAL SAFETY/SECURITY
Vote CASE-BY-CASE on resolutions requesting that companies report on safety
and/or security risks associated with their operations and/or facilities,
considering:
- The company's compliance with applicable regulations and guidelines;
- The company's current level of disclosure regarding its security and
safety policies, procedures and compliance monitoring; and
- The existence of recent, significant violations, fines or controversy
regarding the safety and security of the company's operations and/or
facilities.
GREENHOUSE GAS EMISSIONS
Generally vote FOR proposals requesting a report on greenhouse gas emissions
from company operations and/or products unless:
- The company already provides current, publicly-available information
on the impacts that greenhouse gas emissions may have on the company
as well as associated company policies and procedures to address
related risks and/or opportunities;
- The company's level of disclosure is at least comparable to that of
industry peers; and
- There are no significant controversies, fines, penalties or litigation
associated with the company's greenhouse gas emissions.
Generally vote AGAINST proposals that call for reduction in greenhouse gas
emissions by specific amounts or within a specific timeframe, unless:
- The company lags behind industry standards; and
- The company has been the subject of recent, significant violations,
fines, litigation or controversy related to greenhouse gas emissions.
OPERATIONS IN PROTECTED AREAS
Generally vote FOR requests for reports outlining potential environmental damage
from operations in protected regions unless:
- Operations in the specified regions are not permitted by current laws
or regulations;
- The company does not currently have operations or plans to develop
operations in these protected regions; or
- The company's disclosure on its operations and environmental policies
in these regions is comparable to industry peers.
RECYCLING
Vote CASE-BY-CASE on proposals to adopt a comprehensive recycling strategy,
taking into account:
- The nature of the company's business;
- The extent that peer companies are recycling;
- The timetable prescribed by the proposal and the costs and
methods of implementation;
- Whether the company has a poor environmental track record, such
as violations of applicable regulations.
RENEWABLE ENERGY
Generally vote FOR requests for reports on the feasibility of developing
renewable energy sources unless the report is duplicative of existing disclosure
or irrelevant to the company's line of business.
Generally, vote AGAINST proposals requesting that the company invest in
renewable energy sources. Such decisions are best left to management's
evaluation of the feasibility and financial impact that such programs may have
on the company.
GENERAL CORPORATE ISSUES
CHARITABLE CONTRIBUTIONS
Vote AGAINST proposals restricting the company from making charitable
contributions.
Charitable contributions are generally useful for assisting worthwhile causes
and for creating goodwill in the community. In the absence of bad faith,
self-dealing or gross negligence, management should determine which
contributions are in the best interests of the company.
CSR COMPENSATION-RELATED PROPOSALS
Vote CASE-BY-CASE on proposals to report on ways of linking executive
compensation to non-financial criteria, such as corporate downsizings, customer
or employee satisfaction, community involvement, human rights, environmental
performance or predatory lending. Such resolutions should be evaluated in the
context of:
- The relevance of the non-financial criteria in question to the
company;
- The degree to which non-financial criteria are already included in the
company's executive compensation structure and publicly disclosed;
- The degree to which non-financial criteria are used by peer companies
in setting executive compensation;
- Significant company violations or controversies associated with social
and/or environmental performance or compensation practices;
- The company's current level of disclosure regarding environmental and
social performance;
- Independence of the compensation committee.
Generally vote AGAINST proposals calling for an analysis of the pay disparity
between corporate executives and other employees. Such comparisons may be
arbitrary in nature and/or provide information of limited value to shareholders.
HEALTH PANDEMICS
Vote CASE-BY-CASE on requests for reports outlining the impact of health
pandemics (such as HIV/ AIDS, Malaria, Tuberculosis and Avian Flue) on the
company's operations and how the company is responding to the situation, taking
into account:
- The scope of the company's operations in the affected/relevant
area(s);
- The company's existing healthcare policies, including benefits and
healthcare access; and
- Company donations to relevant healthcare providers.
Vote AGAINST proposals asking companies to establish, implement and report on a
standard of response to health pandemics (such as HIV/AIDS, Malaria,
Tuberculosis and Avian Flu), unless the company has significant operations in
the affected markets and has failed to adopt policies and/or procedures to
address these issues comparable to those of industry peers.
LOBBYING EXPENDITURES/INITIATIVES
Vote CASE-BY-CASE on proposals requesting information on a company's lobbying
initiatives, considering:
- Significant controversies, fines or litigation surrounding a company's
public policy activities;
- The company's current level of disclosure on lobbying strategy; and
- The impact that the policy issue may have on the company's business
operations.
POLITICAL CONTRIBUTIONS AND TRADE ASSOCIATIONS SPENDING
Generally vote AGAINST proposals asking the company to affirm political
nonpartisanship in the workplace so long as:
- There are no recent, significant controversies, fines or litigation
regarding the company's political contributions or trade association
spending; and
- The company has procedures in place to ensure that employee
contributions to company-sponsored political action committees (PACs)
are strictly voluntary and prohibit coercion.
Vote AGAINST proposals to publish in newspapers and public media the company's
political contributions. Such publications could present significant cost to the
company without providing commensurate value to shareholders.
Vote CASE-BY-CASE on proposals to improve the disclosure of a company's
political contributions and trade association spending considering:
- Recent significant controversy or litigation related to the company's
political contributions or governmental affairs; and
- The public availability of a company policy on political contributions
and trade association spending including information on the types of
organizations supported, the business rationale for supporting these
organizations, and the oversight and compliance procedures related to
such expenditures of corporate assets.
Vote AGAINST proposals barring the company from making political contributions.
Businesses are affected by legislation at the federal, state and local level and
barring contributions can put the company at a competitive disadvantage.
Vote AGAINST proposals asking for a list of company executives, directors,
consultants, legal counsels, lobbyists or investment bankers that have prior
government service and whether such service had a bearing on the business of the
company. Such a list would be burdensome to prepare without providing any
meaningful information to shareholders.
INTERNATIONAL ISSUES, LABOR ISSUES, AND HUMAN RIGHTS
COMMUNITY SOCIAL AND ENVIRONMENTAL IMPACT ASSESSMENTS
Vote CASE-BY-CASE on requests for reports outlining policies and/or the
potential (community) social and/or environmental impact of company operations
considering:
- Current disclosure of applicable policies and risk assessment
report(s) and risk management procedures;
- The impact of regulatory non-compliance, litigation, remediation or
reputational loss that may be associated with failure to manage the
company's operations in question, including the management of relevant
community and stakeholder relations;
- The nature, purpose and scope of the company's operations in the
specific region(s);
- The degree to which company policies and procedures are consistent
with industry norms; and
- Scope of the resolution.
FOREIGN MILITARY SALES/OFFSETS
Vote AGAINST reports on foreign military sales or offsets. Such disclosures may
involve sensitive and confidential information. Moreover, companies must comply
with government controls and reporting on foreign military sales.
INTERNET PRIVACY AND CENSORSHIP
Vote CASE-BY-CASE on resolutions requesting the disclosure and implementation of
Internet privacy and censorship policies and procedures considering:
- The level of disclosure of policies and procedures relating to
privacy, freedom of speech, Internet censorship and government
monitoring of the Internet;
- Engagement in dialogue with governments and/or relevant groups with
respect to the Internet and the free flow of information;
- The scope of business involvement and of investment in markets that
maintain government censorship or monitoring of the Internet;
- The market-specific laws or regulations applicable to Internet
censorship or monitoring that may be imposed on the company; and
- The level of controversy or litigation related to the company's
international human rights policies and procedures.
LABOR AND HUMAN RIGHTS STANDARDS
Generally vote FOR proposals requesting a report on company or company supplier
labor and/or human rights standards and policies unless such information is
already publicly disclosed.
Vote CASE-BY-CASE on proposals to implement company or company supplier labor
and/or human rights standards and policies, considering:
- The degree to which existing relevant policies and practices are
disclosed;
- Whether or not existing relevant policies are consistent with
internationally recognized standards;
- Whether company facilities and those of its suppliers are monitored
and how;
- Company participation in fair labor organizations or other
internationally recognized human rights initiatives;
- Scope and nature of business conducted in markets known to have higher
risk of workplace labor/human rights abuse;
- Recent significant company controversies, fines or litigation
regarding human rights at the company or its suppliers;
- The scope of the request; and
- Deviation from industry sector peer company standards and practices.
MACBRIDE PRINCIPLES
Generally vote AGAINST proposals to endorse or increase activity on the MacBride
Principles, unless:
- The company has formally been found to be out of compliance with
relevant Northern Ireland fair employment laws and regulations;
- Failure to implement the MacBride Principles would put the company in
an inconsistent position and/or at a competitive disadvantage compared
with industry peers;
- Failure to implement the MacBride principles would subject the company
to excessively negative financial impacts due to laws that some
municipalities have passed regarding their contracting operations and
companies that have not implemented the MacBride principles; or
- The company has had recent, significant controversies, fines or
litigation regarding religious-based employment discrimination in
Northern Ireland.
NUCLEAR AND DEPLETED URANIUM WEAPONS
Generally vote AGAINST proposals asking a company to cease production or report
on the risks associated with the use of depleted uranium munitions or nuclear
weapons components and delivery systems, including disengaging from current and
proposed contracts. Such contracts are monitored by government agencies, serve
multiple military and non-military uses, and withdrawal from these contracts
could have a negative impact on the company's business.
OPERATIONS IN HIGH RISK MARKETS
Vote CASE-BY-CASE on requests for a report on a company's potential financial
and reputational risks associated with operations in "high-risk" markets, such
as a terrorism-sponsoring state or politically/socially unstable region, taking
into account:
- The nature, purpose and scope of the operations and business involved
that could be affected by social or political disruption;
- Current disclosure of applicable risk assessment(s) and risk
management procedures;
- Compliance with U. S. sanctions and laws;
- Consideration of other international policies, standards, and laws;
and
- Whether the company has been recently involved in recent, significant
controversies, fines or litigation related to its operation in "high
risk" markets.
OUTSOURCING/OFFSHORING
Vote CASE-BY-CASE on proposals calling for companies to report on the risks
associated with outsourcing, considering:
- Controversies surrounding operations in the relevant market(s);
- The value of the requested report to shareholders;
- The company's current level of disclosure of relevant information on
outsourcing and plant closure procedures; and
- The company's existing human rights standards relative to industry
peers.
SUSTAINABILITY
SUSTAINABILITY REPORTING
Generally, vote FOR proposals requesting the company to report on policies,
initiatives and oversight mechanisms related to social, economic and
environmental sustainability, unless:
- The company already discloses similar information through existing
reports or policies such as an Environment, Health and Safety (EHS)
report, a comprehensive Code of Corporate Conduct and/or a Diversity
Report; or
- The company has formally committed to the implementation of a
reporting program based on Global Reporting Initiative (GRI)
guidelines or a similar standard within a specified timeframe.
10. MUTUAL FUND PROXIES
ELECTION OF DIRECTORS
Vote CASE-BY-CASE on the election of directors and trustees, following the same
guidelines for uncontested directors for public company shareholder meetings.
However, mutual fund boards do not usually have compensation committees, so do
not withhold for the lack of this committee.
CONVERTING CLOSED-END FUND TO OPEN-END FUND
Vote CASE-BY-CASE on conversion proposals, considering the following factors:
- Past performance as a closed-end fund;
- Market in which the fund invests;
- Measures taken by the board to address the discount; and
- Past shareholder activism, board activity, and votes on related
proposals.
PROXY CONTESTS
Vote CASE-BY-CASE on proxy contests, considering the following factors:
- Past performance relative to its peers;
- Market in which fund invests;
- Measures taken by the board to address the issues;
- Past shareholder activism, board activity, and votes on related
proposals;
- Strategy of the incumbents versus the dissidents;
- Independence of directors;
- Experience and skills of director candidates;
- Governance profile of the company;
- Evidence of management entrenchment.
INVESTMENT ADVISORY AGREEMENTS
Vote CASE-BY-CASE on investment advisory agreements, considering the following
factors:
- Proposed and current fee schedules;
- Fund category/investment objective;
- Performance benchmarks;
- Share price performance as compared with peers;
- Resulting fees relative to peers;
- Assignments (where the advisor undergoes a change of control).
APPROVING NEW CLASSES OR SERIES OF SHARES
Vote FOR the establishment of new classes or series of shares.
PREFERRED STOCK PROPOSALS
Vote CASE-BY-CASE on the authorization for or increase in preferred shares,
considering the following factors:
- Stated specific financing purpose;
- Possible dilution for common shares;
- Whether the shares can be used for antitakeover purposes;
1940 ACT POLICIES
Vote CASE-BY-CASE on policies under the Investment Advisor Act of 1940,
considering the following factors:
- Potential competitiveness;
- Regulatory developments;
- Current and potential returns; and
- Current and potential risk.
Generally vote FOR these amendments as long as the proposed changes to not
fundamentally alter the investment focus of the fund and do comply with the
current SEC interpretation.
CHANGING A FUNDAMENTAL RESTRICTION TO A NONFUNDAMENTAL RESTRICTION
Vote CASE-BY-CASE on proposals to change a fundamental restriction to a
non-fundamental restriction, considering the following factors:
- The fund's target investments;
- The reasons given by the fund for the change; and
- The projected impact of the change on the portfolio.
CHANGE FUNDAMENTAL INVESTMENT OBJECTIVE TO NONFUNDAMENTAL
Vote AGAINST proposals to change a fund's fundamental investment objective to
non-fundamental.
NAME CHANGE PROPOSALS
Vote CASE-BY-CASE on name change proposals, considering the following factors:
- Political/economic changes in the target market;
- Consolidation in the target market; and
- Current asset composition.
CHANGE IN FUND'S SUBCLASSIFICATION
Vote CASE-BY-CASE on changes in a fund's sub-classification, considering the
following factors:
- Potential competitiveness;
- Current and potential returns;
- Risk of concentration;
- Consolidation in target industry.
DISPOSITION OF ASSETS/TERMINATION/LIQUIDATION
Vote CASE-BY-CASE on proposals to dispose of assets, to terminate or liquidate,
considering the following factors:
- Strategies employed to salvage the company;
- The fund's past performance;
- The terms of the liquidation.
CHANGES TO THE CHARTER DOCUMENT
Vote CASE-BY-CASE on changes to the charter document, considering the following
factors:
- The degree of change implied by the proposal;
- The efficiencies that could result;
- The state of incorporation;
- Regulatory standards and implications.
Vote AGAINST any of the following changes:
- Removal of shareholder approval requirement to reorganize or terminate
the trust or any of its series;
- Removal of shareholder approval requirement for amendments to the new
declaration of trust;
- Removal of shareholder approval requirement to amend the fund's
management contract, allowing the contract to be modified by the
investment manager and the trust management, as permitted by the 1940
Act;
- Allow the trustees to impose other fees in addition to sales charges
on investment in a fund, such as deferred sales charges and redemption
fees that may be imposed upon redemption of a fund's shares;
- Removal of shareholder approval requirement to engage in and terminate
subadvisory arrangements.
- Removal of shareholder approval requirement to change the domicile of
the fund.
CHANGING THE DOMICILE OF A FUND
Vote CASE-BY-CASE on re-incorporations, considering the following factors:
- Regulations of both states;
- Required fundamental policies of both states;
- The increased flexibility available.
AUTHORIZING THE BOARD TO HIRE AND TERMINATE SUBADVISORS WITHOUT SHAREHOLDER
APPROVAL Vote AGAINST proposals authorizing the board to hire/terminate
subadvisors without shareholder approval.
DISTRIBUTION AGREEMENTS
Vote CASE-BY-CASE on distribution agreement proposals, considering the following
factors:
- Fees charged to comparably-sized funds with similar objectives;
- The proposed distributor's reputation and past performance;
- The competitiveness of the fund in the industry;
- The terms of the agreement.
MASTER-FEEDER STRUCTURE
Vote FOR the establishment of a master-feeder structure.
MERGERS
Vote CASE-BY-CASE on merger proposals, considering the following factors:
- Resulting fee structure;
- Performance of both funds;
- Continuity of management personnel;
- Changes in corporate governance and their impact on shareholder
rights.
SHAREHOLDER PROPOSALS FOR MUTUAL FUNDS
ESTABLISH DIRECTOR OWNERSHIP REQUIREMENT
Generally vote AGAINST shareholder proposals that mandate a specific minimum
amount of stock that directors must own in order to qualify as a director or to
remain on the board.
REIMBURSE SHAREHOLDER FOR EXPENSES INCURRED
Vote CASE-BY-CASE on shareholder proposals to reimburse proxy solicitation
expenses. When supporting the dissidents, vote FOR the reimbursement of the
proxy solicitation expenses.
TERMINATE THE INVESTMENT ADVISOR
Vote CASE-BY-CASE on proposals to terminate the investment advisor, considering
the following factors:
- Performance of the fund's Net Asset Value (NAV);
- The fund's history of shareholder relations;
The performance of other funds under the advisor's management.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES
(a)(1) Portfolio Manager
As of the filing date of this report, the Chartwell Dividend and Income Fund is
managed by Bernard P. Schaffer of Chartwell Investment Partners, LP. Mr.
Schaffer works with three Senior Portfolio Managers, Andrew S. Toburen, Paul A.
Matlack, and Christine F. Williams. These individuals are responsible for the
fixed income securities in the portfolio, while Mr. Schaffer is responsible for
the equity securities in the portfolio, overall portfolio construction, and has
the ability to override any decision made by the other portfolio managers.
Bernard P. Schaffer, a Managing Partner and Senior Portfolio Manager of
Chartwell Investment Partners since 1997, is the Head Portfolio Manager of
Chartwell Dividend and Income Fund. He earned a Bachelor's degree in Economics
from Villanova University and an MBA from the University of Pennsylvania's
Wharton School. He was employed as a Senior Portfolio Manager at Delaware
Investment Advisers from 1990 to 1997, managing institutional accounts in the
value style. Prior to joining Delaware, he was a Senior Vice President at
Prudential Securities. Mr. Schaffer has 38 years of professional experience.
Andrew S. Toburen, a Principal and Senior Portfolio Manager of Chartwell
Investment Partners since 1999, is a member of the Fixed Income team responsible
for managing Chartwell Dividend and Income Fund. He earned a Bachelor's degree
in Economics from Yale University and an MBA from Cornell University's Johnson
School of Management. He holds the Chartered Financial Analyst designation. From
1994 to 1997 he was part of a team managing high yield corporate bond assets for
Nomura Corporate Research and Asset Management, Inc. Mr. Toburen is a member of
the CFA Institute and the CFA Society of Philadelphia, and has 15 years of
professional experience.
Paul A. Matlack, a Principal and Senior Portfolio Manager of Chartwell
Investment Partners since 2003, is a member of the Fixed Income team responsible
for managing Chartwell Dividend and Income Fund. He earned a Bachelor's degree
in International Relations from the University of Pennsylvania and an MBA in
Finance from George Washington University. He holds the Chartered Financial
Analyst designation. Prior to joining Chartwell, Mr. Matlack was a Senior
Portfolio Manager for Turner Investment Partners. Mr. Matlack is a member of the
CFA Institute and the CFA Society of Philadelphia, and has 24 years of
professional experience.
Christine F. Williams, a Partner and Senior Portfolio Manager of Chartwell
Investment Partners since 1997, is a member of the Fixed Income team responsible
for managing Chartwell Dividend and Income Fund. She earned a Bachelor's degree
in Economics from the University of Delaware and an MBA in Finance from St.
Joseph's University. Prior to joining Chartwell, Ms. Williams was an Assistant
Vice President, Fixed Income at Meridian Investment Company from 1990 to 1997
where she was part of the fixed income team. She began her career as a research
analyst with Merrill Lynch. Ms. Williams is a member of the CFA Institute and
the CFA Society of Philadelphia, and has 21 years of professional experience.
(a)(2) Other Accounts Managed
As of the most recently completed fiscal year end (November 30, 2009), the
following table summarizes the other investment activities of each portfolio
manager.
Total Assets
# of Accounts Where
Managed that Advisory Fee
Total Advisory Fee is is Based on
Name of Portfolio # of Based on Performance
Manager or Team Accounts Performance of of the
Member Type of Accounts Managed Total Assets the Account Account
------------------------ --------------------------------- -------- -------------- --------------- ------------
1. Bernard P. Schaffer Registered Investment Companies: 1 $246 million 0 $0
Other Pooled Investment Vehicles: 0 $0 0 $0
Other Accounts: 17 $160 million 0 $0
2. Andrew S. Toburen Registered Investment Companies: 0 $0 0 $0
Other Pooled Investment Vehicles: 1 $91 million 1 $61 million
Other Accounts: 66 $1,168 million 0 $0
3. Paul A. Matlack Registered Investment Companies: 0 $0 0 $0
Other Pooled Investment Vehicles: 1 $91 million 1 $61 million
Other Accounts: 66 $1,168 million 0 $0
4. Christine F. Williams Registered Investment Companies: 0 $0 0 $0
Other Pooled Investment Vehicles: 1 $91 million 1 $61 million
Other Accounts: 66 $1,168 million 0 $0
Chartwell Investment Partners ("Chartwell") acts as an adviser to both
investment companies registered under the Investment Company Act of 1940
("registered funds") and other clients ("investment accounts"). When registered
funds and investment accounts are managed side-by-side, Chartwell personnel are
to strictly follow the policies and procedures outlined in Chartwell's
Compliance Manual and Code of Ethics to ensure that accounts are treated in a
fair and equitable manner, and that no client or account is favored over
another. The policies, procedures, and controls in place are monitored by
Chartwell's Compliance Department to identify any potential conflicts of
interest and to effectively mitigate any such conflicts.
(a)(3) Portfolio Manager Compensation
As of the most recently completed fiscal year end (November 30, 2009), the
compensation paid to Chartwell portfolio managers consists of base salary,
annual bonus, ownership distributions, and an annual profit-sharing contribution
to Chartwell's retirement plan.
A portfolio manager's fixed base salary is determined by Chartwell's
Compensation Committee and is reviewed at least annually. A portfolio manager's
experience, historical performance, and role in firm or product team management
are the primary considerations in determining the base salary.
Annual bonuses are determined by the Compensation Committee based on a number of
factors. The primary factors are investment performance of client portfolios
during the calendar year, product profitability, and firm-wide profitability.
Investment performance is measured based on the gross (pre-tax) composite
performance of all accounts within a particular investment product versus the
appropriate benchmark for both 1 year and 3 year periods. The S&P 500 Index and
Merrill Lynch High Yield Cash Pay Index are used as benchmarks for Chartwell
Dividend and Income Fund. Portfolio construction, sector and security weighting,
and performance are reviewed by the Compliance Committee and Compensation
Committee to prevent a manager from taking undue risks. Additional factors used
to determine the annual bonus include the portfolio manager's contribution as an
analyst, product team management, and contribution to the strategic planning and
development of the investment group as well as the firm.
Ownership distributions are paid to a portfolio manager based on the portfolio
manager's ownership interest, or percentage limited partnership interest in
Chartwell multiplied by total net cash distributions paid during the year.
A profit-sharing contribution is paid to the retirement plan account of all
eligible Chartwell employees based solely on annual profitability of the firm.
(a)(4)Equity Securities in the Registrant
The table below identifies ownership in Chartwell Dividend and Income Fund by
each portfolio manager as of November 30, 2009:
PORTFOLIO MANAGER OWNERSHIP RANGE
----------------- ---------------
Bernard P. Schaffer $10,000-$50,000
Andrew S. Toburen None
Paul A. Matlack None
Christine F. Williams None
(b) Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT COMPANY AND
AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which shareholders may
recommend nominees to the Registrant's Board of Directors since the Registrant
last provided disclosure in response to the requirements of Item 407 (c)(2)(iv)
of Regulation S-K in its proxy statement filed with the Commission on March 19,
2007.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The Registrant's principal executive officer and principal financial officer
have concluded that the Registrant's disclosure controls and procedures (as
defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended,
(the "1940 Act")) are effective as of a date within 90 days of the filing of
this report that includes the disclosure required by this paragraph, based on
their evaluation of these controls and procedures, required by Rule 30a-3(b)
under the 1940 Act and Rules 13a-15(b) or 15d-15(b) under the Securities
Exchange Act of 1934, as amended.
(b) There were no changes in the Registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred during
the second fiscal quarter of the period covered by this
report that has materially affected, or is reasonably likely to materially
affect, the Registrants internal control over financial reporting.
ITEMS 12. EXHIBITS.
(a)(1) Code of Ethics attached hereto.
(a)(2) A separate certification for the principal executive officer and the
principal financial officer of the Registrant as required by Rule 30a-2(a) under
the Investment Company Act of 1940, as amended (17 CFR 270.30a-2(a)), are
attached hereto as EX-99Cert.
(a)(3) Not applicable.
(b) Officer certifications as required by Rule 30a-2(b) under the Investment
Company Act of 1940, as amended (17 CFR 270.30a-2(b)) also accompany this filing
as EX-99.906Cert.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) Chartwell Dividend and Income Fund, Inc.
By (Signature and Title)* /s/ Winthrop S. Jessup
----------------------------------------
Winthrop S. Jessup, President
(Principal Executive Officer)
Date: February 2, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ Winthrop S. Jessup
----------------------------------------
Winthrop S. Jessup, President
(Principal Executive Officer)
Date: February 2, 2010
By (Signature and Title)* /s/ G. Gregory Hagar
----------------------------------------
G. Gregory Hagar, Vice President and CFO
(Principal Financial Officer)
Date: February 2, 2010
* Print the name and title of each signing officer under his or her
signature.