N-CSR 1 g07194nvcsr.txt FORM N-CSR UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number: 811- 21507 Wells Fargo Advantage Utilities & High Income Fund (Exact name of registrant as specified in charter) 525 Market St., San Francisco, CA 94105 (Address of principal executive offices) (Zip code) C. David Messman Wells Fargo Funds Management, LLC 525 Market St., San Francisco, CA 94105 (Name and address of agent for service) Registrant's telephone number, including area code: 800-643-9691 Date of fiscal year end: August 31, 2010 Date of reporting period: August 31, 2010 ITEM 1. REPORT TO SHAREHOLDERS (WELLS FARGO ADVANTAGE FUNDS LOGO) (GRAPHIC) REDUCE CLUTTER. SAVE TREES. Sign up for electronic delivery of prospectuses and shareholder reports at www.wellsfargo.com/advantagedelivery (GRAPHIC) Annual Report August 31, 2010 WELLS FARGO ADVANTAGE UTILITIES AND HIGH INCOME FUND (FORMERLY EVERGREEN UTILITIES AND HIGH INCOME FUND) THIS CLOSED-END FUND IS NO LONGER OFFERED AS AN INITIAL PUBLIC OFFERING AND IS ONLY OFFERED THROUGH BROKER/DEALERS ON THE SECONDARY MARKET. A closed-end fund is not required to buy its shares back from investors upon request. REDUCE CLUTTER. SAVE TREES. Sign up for electronic delivery of shareholder reports at www.wellsfargo.com/advantagedelivery Contents LETTER TO SHAREHOLDERS ................................................... 2 PORTFOLIO OF INVESTMENTS ................................................. 5 FINANCIAL STATEMENTS Statement of Assets and Liabilities ...................................... 16 Statement of Operations .................................................. 17 Statements of Changes in Net Assets ...................................... 18 Statement of Cash Flows .................................................. 19 Financial Highlights ..................................................... 20 NOTES TO FINANCIAL STATEMENTS ............................................ 21 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM .................. 28 OTHER INFORMATION ........................................................ 29 LIST OF ABBREVIATIONS .................................................... 36
The views expressed are as of August 31, 2010. Any reference to a specific security in this report is not a recommendation to purchase or sell any specific security or adopt any investment strategy. The views are subject to change at any time in response to changing circumstances in the market and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or the WELLS FARGO ADVANTAGE UTILITIES AND HIGH INCOME FUND. NOT FDIC INSURED - NO BANK GUARANTEE - MAY LOSE VALUE 2 Wells Fargo Advantage Utilities and High Income Fund Letter to Shareholders (PHOTO OF KARLA M. RABUSCH) KARLA M. RABUSCH, President WELLS FARGO ADVANTAGE FUNDS Dear Valued Shareholder, We are pleased to provide you with this annual report for the WELLS FARGO ADVANTAGE UTILITIES AND HIGH INCOME FUND for the 12-month period that ended August 31, 2010. ECONOMIC GROWTH TURNED POSITIVE AFTER SEVERE CONTRACTION. Economic growth was solid throughout the period as the economy began to recover from the deepest recession since the 1930s. Gross Domestic Product (GDP) became positive in the third quarter of 2009, after contracting for four consecutive quarters--something not seen in at least 60 years. GDP growth was 3.7% and 2.4% in the first and second quarters of 2010, respectively. The consensus among economists was that the recession that began in December 2007 had likely ended during the summer of 2009; however, questions remained over the sustainability of the recovery. Other economic data were mixed during the period, raising some concerns about the potential sustainability of the recovery. Retail sales were strong through April 2010 but then declined in May and June. New and existing home sales also weakened in the final months of the period as the government tax credit ended, renewing concerns about the ongoing fragility of the housing market. On the positive side, industrial production continued to see gains, inflation remained subdued, and interest rates remained at historically low levels. THE FED CONTINUED TO FOCUS ON ECONOMIC STIMULUS. Despite extensive quantitative easing measures by the Federal Reserve, bank lending remained constrained during the period. Throughout the period, the Federal Open Market Committee (FOMC) held the federal funds rate between 0% and 0.25%--which it first targeted in December 2008. The Fed did, however, begin to remove some of its unconventional stimulus measures. After concluding its purchases of longer-term Treasuries in October 2009, it also ended its program to invest in mortgage-backed securities in March 2010. The FOMC's final statement during the period noted a continuation of the economic recovery and gradual improvement in the labor market. It also cited increases in both household and business spending. However, the committee noted that unemployment remained high and credit continued to be tight, reiterating that it was likely to keep the federal funds rate at exceptionally low levels for an extended period because of the continued substantial economic slack. FINANCIAL MARKETS SAW A SHIFT IN SENTIMENT AS VOLATILITY SPIKED. The equity markets saw a significant shift in sentiment during the period. The strong rally that began in March 2009 continued through April 2010, but growing concerns about the strength of global economic growth resulted in a rapid correction and an increase in volatility in May and June. Despite the macroeconomic concerns, strong corporate earnings helped support the equity markets through the first two quarters of 2010. Approximately three-quarters of the companies in the S&P 500 Index exceeded analysts' estimates during both the first and second quarters of 2010. However, investor focus shifted Wells Fargo Advantage Utilities and High Income Fund 3 Letter to Shareholders from improving corporate fundamentals to macroeconomic concerns about sovereign debt, slowing economic growth in China, and fear of a potential double-dip U.S. recession. Within the bond markets, many of the trends that characterized the equity markets applied to bonds. By the end of 2009, investors appeared to be less concerned with the risks of a possible deepening recession and instead were more focused on the potential for increasing interest rates. During the first six months of 2010, however, not only did short-term interest rates not rise, but Treasury yields essentially remained unchanged, or even fell. The result was perhaps the steepest yield curve on record--certainly steeper than at any point during 2009. In addition, demand for bonds that offered additional yield, albeit with more risk, helped drive performance of the securitized and credit markets, especially high yield. However, investor optimism was tempered by global credit fears and signals from the Fed suggesting that short-term interest rates would remain at their current historic lows until 2011. INDIVIDUAL SECURITY SELECTION IS KEY TO MAXIMIZING VALUE AND DRIVING PERFORMANCE. As always, the management team of the WELLS FARGO ADVANTAGE UTILITIES AND HIGH INCOME FUND remained focused on the pursuit of a high level of current income and moderate capital growth for investors. As the period progressed, the team began to selectively reduce more defensive names that were in the Fund earlier in the year, particularly in preferred stock. Within the high-yield sleeve, a modestly defensive posture was maintained within the Fund throughout most of the period, favoring investment-grade and higher-rated non-investment-grade bonds over lower-rated high-yield names. However, the Fund continued to own bank debt in some of the lower-quality names where the team felt the pricing was attractive and downside risk minimized. Regardless of the marketplace--equity or fixed-income--we feel individual security selection will be the primary driver of performance for the foreseeable future. Within the equity sleeve, the management team will focus on utility companies with either above-average dividend yields or the potential to increase dividends. With the bond allocation, higher-quality, fundamentally sound credits will remain the focus, in an attempt to minimize downside risk and maximize upside potential at a good valuation. DON'T LET SHORT-TERM VOLATILITY DERAIL LONG-TERM INVESTMENT GOALS. The period saw renewed volatility within both the equity and fixed-income markets. We believe, however, that the significant rebound that began in March 2009 underscores the importance of maintaining a focus on long-term investment goals through periods of volatility, so as not to miss potential periods of strong recovery. Although periods of volatility can present challenges, experience has taught us that maintaining a long-term investment strategy based on individual goals and risk tolerance can be an effective way to plan for the future. 4 Wells Fargo Advantage Utilities and High Income Fund Letter to Shareholders Thank you for choosing WELLS FARGO ADVANTAGE FUNDS. We appreciate your confidence in us. Through each market cycle, we are committed to helping you meet your financial needs. Please visit us at www.wellsfargo.com/advantagefunds for more information about our funds and other investment products available to you. Thank you for your continued support of WELLS FARGO ADVANTAGE FUNDS. Sincerely, /s/ Karla M. Rabusch Karla M. Rabusch President WELLS FARGO ADVANTAGE FUNDS Wells Fargo Advantage Utilities and High Income Fund 5 Portfolio of Investments--August 31, 2010
INTEREST MATURITY PRINCIPAL SECURITY NAME RATE DATE VALUE ----------- -------------------------------------------------- -------- ---------- ------------- CORPORATE BONDS & NOTES: 31.33% CONSUMER DISCRETIONARY: 5.30% AUTO COMPONENTS: 0.60% $ 215,000 COOPER TIRE & RUBBER COMPANY 7.63% 03/15/2027 $ 194,575 55,000 GOODYEAR TIRE & RUBBER COMPANY 9.00 07/01/2015 57,613 335,000 GOODYEAR TIRE & RUBBER COMPANY 10.50 05/15/2016 371,850 624,038 ------------- AUTOMOBILES: 0.24% 235,000 FORD MOTOR CREDIT COMPANY 9.875 08/10/2011 248,043 ------------- DIVERSIFIED CONSUMER SERVICES: 0.96% 185,000 CARRIAGE SERVICES INCORPORATED 7.875 01/15/2015 181,300 40,000 SERVICE CORPORATION INTERNATIONAL 8.00 11/15/2021 42,200 465,000 SERVICE CORPORATION INTERNATIONAL 7.50 04/01/2027 423,731 325,000 STONEMOR PARTNERS LP++ 10.25 12/01/2017 342,063 989,294 ------------- HOTELS, RESTAURANTS & LEISURE: 0.54% 75,000 AMERISTAR CASINOS INCORPORATED 9.25 06/01/2014 79,500 15,000 BOYD GAMING CORPORATION 7.75 12/15/2012 15,094 125,000 GREEKTOWN SUPERHOLDINGS++ 13.00 07/01/2015 133,750 110,000 INN OF THE MOUNTAIN GODS RESORT & CASINO(i)#### 12.00 11/15/2049 48,125 7,000 POKAGON GAMING AUTHORITY++ 10.375 06/15/2014 7,263 60,000 SCIENTIFIC GAMES CORPORATION 9.25 06/15/2019 63,600 15,000 SENECA GAMING CORPORATION 7.25 05/01/2012 14,588 90,000 SHINGLE SPRINGS TRIBAL GAMING AUTHORITY++ 9.375 06/15/2015 68,625 120,000 SPEEDWAY MOTORSPORTS INCORPORATED 8.75 06/01/2016 126,900 557,445 ------------- HOUSEHOLD DURABLES: 0.01% 5,000 LENNAR CORPORATION 12.25 06/01/2017 5,725 9,000 SEALY CORPORATION++ 10.875 04/15/2016 10,035 15,760 ------------- INTERNET & CATALOG RETAIL: 0.08% 75,000 TICKETMASTER ENTERTAINMENT 10.75 08/01/2016 79,875 ------------- MEDIA: 2.17% 145,000 CABLEVISION SYSTEM CORPORATION++ 8.625 09/15/2017 158,050 880,000 CCH II CAPITAL CORPORATION 13.50 11/30/2016 1,042,800 90,000 CHARTER COMMUNICATIONS, INCORPORATED STEP BOND@@++ 8.00 04/30/2012 94,725 595,000 CHARTER COMMUNICATIONS, INCORPORATED STEP BOND@@++ 10.875 09/15/2014 666,400 115,000 DISH DBS CORPORATION 7.875 09/01/2019 119,888 50,000 LIN TELEVISION CORPORATION++ 8.375 04/15/2018 51,063 100,000 SALEM COMMUNICATIONS CORPORATION 9.625 12/15/2016 104,125 2,237,051 ------------- SPECIALTY RETAIL: 0.35% 365,000 AMERICAN ACHIEVEMENT CORPORATION++ 8.25 04/01/2012 361,806 ------------- TEXTILES, APPAREL & LUXURY GOODS: 0.35% 200,000 OXFORD INDUSTRIES INCORPORATED 11.375 07/15/2015 223,000 135,000 VISANT CORPORATION 7.625 10/01/2012 134,831 357,831 -------------
6 Wells Fargo Advantage Utilities and High Income Fund Portfolio of Investments--August 31, 2010
INTEREST MATURITY PRINCIPAL SECURITY NAME RATE DATE VALUE ----------- -------------------------------------------------- -------- ---------- ------------- CONSUMER STAPLES: 0.32% FOOD PRODUCTS: 0.32% $ 181,000 DOLE FOOD COMPANY INCORPORATED 13.875% 03/15/2014 $ 217,653 115,000 SMITHFIELD FOODS INCORPORATED 7.00 08/01/2011 117,444 335,097 ------------- ENERGY: 4.76% ENERGY EQUIPMENT & SERVICES: 1.45% 110,000 BRISTOW GROUP INCORPORATED 7.50 09/15/2017 110,000 190,000 FORBES ENERGY SERVICES LIMITED 11.00 02/15/2015 173,375 225,000 GULFMARK OFFSHORE INCORPORATED 7.75 07/15/2014 218,250 170,000 HERCULES OFFSHORE INCORPORATED++ 10.50 10/15/2017 154,700 260,000 HORNBECK OFFSHORE SERVICES INCORPORATED SERIES B 6.125 12/01/2014 243,750 230,000 HORNBECK OFFSHORE SERVICES INCORPORATED SERIES B 8.00 09/01/2017 216,200 10,000 OFFSHORE LOGISTICS INCORPORATED 6.125 06/15/2013 10,050 370,000 PHI INCORPORATED 7.125 04/15/2013 356,588 10,000 PRIDE INTERNATIONAL INCORPORATED 8.50 06/15/2019 11,325 1,494,238 ------------- OIL, GAS & CONSUMABLE FUELS: 3.31% 50,000 ALON REFINING KROTZ SPRINGS INCORPORATED 13.50 10/15/2014 49,000 65,000 ATLAS ENERGY RESOURCES LLC 12.125 08/01/2017 74,669 255,000 CHESAPEAKE ENERGY CORPORATION 9.50 02/15/2015 286,875 50,000 COFFEYVILLE RESOURCES++ 10.88 04/01/2017 50,625 20,000 CONNACHER OIL & GAS LIMITED++ 11.75 07/15/2014 21,700 55,000 CONNACHER OIL & GAS LIMITED++ 10.25 12/15/2015 55,000 165,000 CONSOL ENERGY INCORPORATED++ 8.25 04/01/2020 175,106 45,000 EL PASO CORPORATION 12.00 12/12/2013 54,225 50,000 EL PASO CORPORATION 7.80 08/01/2031 50,329 90,000 EL PASO CORPORATION 7.42 02/15/2037 82,141 65,000 FOREST OIL CORPORATION 8.50 02/15/2014 69,063 95,000 FOREST OIL CORPORATION 7.25 06/15/2019 95,119 220,000 HOLLY CORPORATION 9.875 06/15/2017 231,000 55,000 NEWFIELD EXPLORATION COMPANY 6.875 02/01/2020 57,338 60,000 OPTI CANADA INCORPORATED 7.875 12/15/2014 46,200 390,000 PEABODY ENERGY CORPORATION 7.875 11/01/2026 401,213 10,000 PENN VIRGINIA CORPORATION 10.375 06/15/2016 10,875 60,000 PETROHAWK ENERGY CORPORATION 10.50 08/01/2014 67,050 95,000 PETROHAWK ENERGY CORPORATION 7.875 06/01/2015 98,563 145,000 PIONEER NATURAL RESOURCE COMPANY 7.50 01/15/2020 155,785 325,000 PLAINS EXPLORATION & PRODUCTION COMPANY 8.625 10/15/2019 339,625 250,000 SABINE PASS LNG LP 7.25 11/30/2013 235,000 290,000 SANDRIDGE ENERGY INCORPORATED++ 8.75 01/15/2020 275,500 60,000 SOUTHWESTERN ENERGY COMPANY++ 7.50 02/01/2018 67,650 55,000 STALLION OILFIELD HOLDINGS INCORPORATED++ 10.50 02/15/2015 55,825 125,000 TESORO CORPORATION 7.50 07/17/2012 124,279 70,000 TESORO CORPORATION 6.50 06/01/2017 67,375 110,000 TESORO CORPORATION 9.75 06/01/2019 118,525 3,415,655 ------------- FINANCIALS: 6.87% CAPITAL MARKETS: 0.14% 68,000 E*TRADE FINANCIAL CORPORATION 12.50 11/30/2017 75,820 70,000 PENSON WORLDWIDE INCORPORATED++ 12.50 05/15/2017 69,125 144,945 -------------
Wells Fargo Advantage Utilities and High Income Fund 7 Portfolio of Investments--August 31, 2010
INTEREST MATURITY PRINCIPAL SECURITY NAME RATE DATE VALUE ----------- -------------------------------------------------- -------- ---------- ------------- COMMERCIAL BANKS: 0.44% $ 215,000 CAPITALSOURCE INCORPORATED++ 12.75% 07/15/2014 $ 247,250 200,000 PROVIDENT FUNDING ASSOCIATION++ 10.25 04/15/2017 203,500 450,750 ------------- CONSUMER FINANCE: 3.19% 75,000 CALPINE CONSTRUCTION FINANCE CORPORATION++ 8.00 06/01/2016 78,750 125,000 CALPINE CONSTRUCTION FINANCE CORPORATION++ 7.25 10/15/2017 124,688 130,000 CLEARWIRE COMMUNICATIONS FINANCE CORPORATION++ 12.00 12/01/2015 130,000 6,000 GMAC LLC 6.875 09/15/2011 6,105 146,000 GMAC LLC 6.875 08/28/2012 149,285 36,000 GMAC LLC++ 6.75 12/01/2014 35,730 101,000 GMAC LLC 8.00 12/31/2018 97,339 130,000 GMAC LLC++ 8.00 03/15/2020 133,250 310,000 GMAC LLC++ 8.00 11/01/2031 305,350 146,351 HOMER CITY FUNDING LLC 8.725 10/01/2026 126,594 75,000 INTERNATIONAL LEASE FINANCE CORPORATION++ 8.625 09/15/2015 75,469 140,000 INTERNATIONAL LEASE FINANCE CORPORATION 4.75 01/13/2012 136,500 275,000 INTERNATIONAL LEASE FINANCE CORPORATION 5.30 05/01/2012 267,438 50,000 INTERNATIONAL LEASE FINANCE CORPORATION SERIES MTN 5.75 06/15/2011 49,938 420,000 JBS USA FINANCE INCORPORATED 11.625 05/01/2014 481,425 75,000 LBI ESCROW CORPORATION++ 8.00 11/01/2017 80,531 285,000 SPRINT CAPITAL CORPORATION 8.375 03/15/2012 301,388 120,000 SPRINT CAPITAL CORPORATION 6.90 05/01/2019 112,800 725,000 SPRINT CAPITAL CORPORATION 6.875 11/15/2028 605,375 3,297,955 ------------- DIVERSIFIED FINANCIAL SERVICES: 2.24% 825,000 ALLY FINANCIAL INCORPORATED++ 8.30 02/12/2015 858,000 1,025,000 CITIGROUP INCORPORATED 7.00 05/01/2013 1,016,031 90,000 FMG FINANCE PROPERTY LIMITED++ 10.625 09/01/2016 104,288 313,000 LEUCADIA NATIONAL CORPORATION 8.13 09/15/2015 333,345 2,311,664 ------------- REAL ESTATE INVESTMENT TRUSTS: 0.86% 565,000 DUPONT FABROS TECHNOLOGY INCORPORATED 8.50 12/15/2017 597,488 30,000 HOST MARRIOTT CORPORATION 9.00 05/15/2017 33,000 160,000 OMEGA HEALTHCARE INVESTORS INCORPORATED 7.00 04/01/2014 163,200 90,000 VENTAS INCORPORATED 9.00 05/01/2012 95,254 888,942 ------------- HEALTH CARE: 0.99% BIOTECHNOLOGY: 0.06% 55,000 TALECRIS BIOTHERAPEUTICS HOLDINGS CORPORATION 7.75 11/15/2016 59,813 ------------- HEALTH CARE EQUIPMENT & SUPPLIES: 0.06% 60,000 BIOMET INCORPORATED 10.375 10/15/2017 65,250 ------------- HEALTH CARE PROVIDERS & SERVICES: 0.75% 120,000 APRIA HEALTHCARE GROUP++ 11.25 11/01/2014 129,750 400,000 HCA INCORPORATED 9.25 11/15/2016 429,000 129,000 HCA INCORPORATED 9.625 11/15/2016 138,514 75,000 OMNICARE INCORPORATED 6.875 12/15/2015 74,250 771,514 -------------
8 Wells Fargo Advantage Utilities and High Income Fund Portfolio of Investments--August 31, 2010
INTEREST MATURITY PRINCIPAL SECURITY NAME RATE DATE VALUE ----------- -------------------------------------------------- -------- ---------- ------------- LIFE SCIENCES TOOLS & SERVICES: 0.10% $ 95,000 BIO-RAD LABORATORIES INCORPORATED 8.00% 09/15/2016 $ 101,888 ------------- PHARMACEUTICALS: 0.02% 25,000 MYLAN INCORPORATED++ 7.625 07/15/2017 25,813 ------------- INDUSTRIALS: 2.69% AEROSPACE & DEFENSE: 1.20% 225,000 ALLIANT TECHSYSTEMS INCORPORATED 6.75 04/01/2016 226,125 55,000 GEOEYE INCORPORATED++ 9.625 10/01/2015 59,194 160,000 HEXCEL CORPORATION 6.75 02/01/2015 159,200 130,000 KRATOS DEFENSE & SECURITY++ 10.00 06/01/2017 134,225 216,000 L-3 COMMUNICATIONS HOLDINGS INCORPORATED 5.875 01/15/2015 220,050 360,000 L-3 COMMUNICATIONS HOLDINGS INCORPORATED 6.375 10/15/2015 368,550 70,000 WYLE SERVICES CORPORATION++ 10.50 04/01/2018 68,775 1,236,119 ------------- COMMERCIAL SERVICES & SUPPLIES: 0.84% 220,000 CASELLA WASTE SYSTEMS INCORPORATED 11.00 07/15/2014 240,350 60,000 CORRECTIONS CORPORATION OF AMERICA 6.25 03/15/2013 60,600 70,000 CORRECTIONS CORPORATION OF AMERICA 7.75 06/01/2017 74,375 50,000 DIGITALGLOBE INCORPORATED 10.50 05/01/2014 54,625 100,000 GEO GROUP INCORPORATED 7.75 10/15/2017 103,000 5,000 INTERFACE INCORPORATED 11.375 11/01/2013 5,650 155,000 IRON MOUNTAIN INCORPORATED 8.375 08/15/2021 164,688 155,000 SGS INTERNATIONAL INCORPORATED 12.00 12/15/2013 160,425 863,713 ------------- INDUSTRIAL CONGLOMERATES: 0.22% 215,000 OTTER TAIL CORPORATION 9.00 12/15/2016 228,438 ------------- MACHINERY: 0.39% 55,000 CLEAVER-BROOKS INCORPORATED++ 12.25 05/01/2016 56,581 181,050 COMMERCIAL VEHICLE GROUP INCORPORATED++ 13.00 02/15/2013 181,050 150,000 CPM HOLDINGS INCORPORATED++ 10.63 09/01/2014 162,000 399,631 ------------- ROAD & RAIL: 0.05% 50,000 RAILAMERICA INCORPORATED 9.25 07/01/2017 54,250 ------------- INFORMATION TECHNOLOGY: 1.76% COMMUNICATIONS EQUIPMENT: 0.24% 155,000 LUCENT TECHNOLOGIES INCORPORATED 6.45 03/15/2029 104,625 160,000 LUCENT TECHNOLOGIES INCORPORATED SERIES B 2.75 06/15/2025 141,800 246,425 ------------- ELECTRONIC EQUIPMENT & INSTRUMENTS: 1.04% 105,000 INTCOMEX INCORPORATED++ 13.25 12/15/2014 111,038 620,000 JABIL CIRCUIT INCORPORATED 8.25 03/15/2018 674,250 160,000 KEMET CORPORATION++ 10.50 05/01/2018 166,400 115,000 VIASYSTEM GROUP INCORPORATED++ 12.00 01/15/2015 125,063 1,076,751 ------------- INTERNET SOFTWARE & SERVICES: 0.26% 95,000 EQUINIX INCORPORATED 8.125 03/01/2018 99,275 150,000 TERREMARK WORLDWIDE INCORPORATED 12.00 06/15/2017 169,500 268,775 -------------
Wells Fargo Advantage Utilities and High Income Fund 9 Portfolio of Investments--August 31, 2010
INTEREST MATURITY PRINCIPAL SECURITY NAME RATE DATE VALUE ----------- -------------------------------------------------- -------- ---------- ------------- IT SERVICES: 0.22% $ 75,000 SUNGARD DATA SYSTEMS INCORPORATED 10.25% 08/15/2015 $ 78,750 70,000 UNISYS CORPORATION++ 12.75 10/15/2014 81,550 55,000 UNISYS CORPORATION++ 14.25 09/15/2015 64,350 224,650 ------------- MATERIALS: 1.83% CHEMICALS: 0.46% 140,000 HUNTSMAN INTERNATIONAL LLC++ 5.50 06/30/2016 131,775 240,241 LYONDELL CHEMICAL COMPANY 11.00 05/01/2018 260,962 15,000 NOVA CHEMICALS CORPORATION 8.375 11/01/2016 15,338 15,000 NOVA CHEMICALS CORPORATION 8.625 11/01/2019 15,450 50,000 SOLUTIA INCORPORATED 7.875 03/15/2020 52,250 475,775 ------------- CONSTRUCTION MATERIALS: 0.35% 40,000 CPG INTERNATIONAL INCORPORATED 7.50 07/01/2012 38,650 140,000 CPG INTERNATIONAL INCORPORATED 10.50 07/01/2013 139,825 170,000 HEADWATERS INCORPORATED 11.38 11/01/2014 179,350 357,825 ------------- CONTAINERS & PACKAGING: 0.32% 280,000 EXOPACK HOLDING CORPORPATION 11.25 02/01/2014 281,400 50,000 GRAHAM PACKAGING COMPANY INCORPORATED 9.88 10/15/2014 51,125 332,525 ------------- METALS & MINING: 0.42% 105,000 CALIFORNIA STEEL INDUSTRIES INCORPORATED 6.13 03/15/2014 101,850 295,000 FREEPORT-MCMORAN COPPER & GOLD INCORPORATED 8.375 04/01/2017 327,450 429,300 ------------- PAPER & FOREST PRODUCTS: 0.28% 70,000 CLEARWATER PAPER CORPORATION++ 10.625 06/15/2016 78,750 75,000 GEORGIA-PACIFIC CORPORATION++ 7.00 01/15/2015 77,625 125,000 GEORGIA-PACIFIC CORPORATION 8.875 05/15/2031 138,750 295,125 ------------- TELECOMMUNICATION SERVICES: 3.85% DIVERSIFIED TELECOMMUNICATION SERVICES: 2.92% 185,000 CINCINNATI BELL INCORPORATED 8.25 10/15/2017 181,300 475,000 CITIZENS COMMUNICATIONS COMPANY 7.875 01/15/2027 456,000 140,000 FRONTIER COMMUNICATIONS CORPORATION 8.25 05/01/2014 151,200 220,000 FRONTIER COMMUNICATIONS CORPORATION 8.25 04/15/2017 232,650 260,000 FRONTIER COMMUNICATIONS CORPORATION 8.13 10/01/2018 275,600 215,000 FRONTIER COMMUNICATIONS CORPORATION 8.50 04/15/2020 228,169 340,000 FRONTIER COMMUNICATIONS CORPORATION 8.75 04/15/2022 358,700 5,000 GLOBAL CROSSING LIMITED++ 12.00 09/15/2015 5,550 350,000 QWEST CORPORATION 8.875 03/15/2012 385,000 20,000 QWEST CORPORATION 7.63 08/03/2021 19,900 180,000 QWEST CORPORATION 7.50 06/15/2023 183,600 25,000 QWEST CORPORATION 6.875 07/15/2028 23,000 125,000 U.S. WEST COMMUNICATIONS INCORPORATED 7.25 09/15/2025 129,219 120,000 U.S. WEST COMMUNICATIONS INCORPORATED 7.125 11/15/2043 116,400 265,000 WINDSTREAM CORPORATION 7.875 11/01/2017 268,975 3,015,263 -------------
10 Wells Fargo Advantage Utilities and High Income Fund Portfolio of Investments--August 31, 2010
INTEREST MATURITY PRINCIPAL SECURITY NAME RATE DATE VALUE ----------- -------------------------------------------------- -------- ---------- ------------- WIRELESS TELECOMMUNICATION SERVICES: 0.93% $ 70,000 CRICKET COMMUNICATIONS INCORPORATED 9.375% 11/01/2014 $ 70,875 10,000 CROWN CASTLE INTERNATIONAL CORPORATION 7.125 11/01/2019 10,375 165,000 METROPCS COMMUNICATIONS INCORPORATED 9.25 11/01/2014 171,600 475,000 SPRINT NEXTEL CORPORATION SERIES D 7.375 08/01/2015 470,250 240,000 SPRINT NEXTEL CORPORATION SERIES F 5.95 03/15/2014 231,900 955,000 ------------- UTILITIES: 2.96% ELECTRIC UTILITIES: 2.07% 794,000 AQUILA INCORPORATED STEP BOND@@ 11.875 07/01/2012 913,186 110,000 EDISON MISSON ENERGY 7.20 05/15/2019 73,150 44,105 ENERGY FUTURE HOLDINGS CORPORATION 12.00 11/01/2017 21,170 105,000 ENERGY FUTURE HOLDINGS CORPORATION FRN 10.00 12/01/2020 100,903 438,432 MIRANT MID-ATLANTIC LLC SERIES C 10.06 12/30/2028 477,891 260,000 MIRANT NORTH AMERICA LLC 7.375 12/31/2013 265,850 75,000 NRG ENERGY INCORPORATED 7.375 01/15/2017 75,563 185,000 NRG ENERGY INCORPORATED 8.50 06/15/2019 190,088 15,000 PUBLIC SERVICE COMPANY OF NEW MEXICO 7.95 05/15/2018 16,462 2,134,263 ------------- INDEPENDENT POWER PRODUCERS & ENERGY TRADERS: 0.89% 95,000 AES CORPORATION 8.875 02/15/2011 97,256 190,000 DYNEGY HOLDINGS INCORPORATED 7.63 10/15/2026 104,500 120,000 DYNEGY HOLDINGS INCORPORATED 6.875 04/01/2011 120,000 108,798 RELIANT ENERGY INCORPORATED 9.24 07/02/2017 113,150 10,000 RELIANT ENERGY INCORPORATED 9.68 07/02/2026 10,425 50,000 RRI ENERGY INCORPORATED 7.63 06/15/2014 49,125 391,000 RRI ENERGY INCORPORATED 6.75 12/15/2014 394,910 30,000 RRI ENERGY INCORPORATED 7.875 06/15/2017 27,675 917,041 ------------- TOTAL CORPORATE BONDS & NOTES (COST $30,618,896) 32,345,536 ------------- YANKEE OBLIGATIONS - CORPORATE: 1.79% ENERGY: 0.18% OIL GAS & CONSUMABLE FUELS: 0.18% 321,000 GRIFFIN COAL MINING COMPANY LIMITED####++ 9.50 12/01/2016 187,785 ------------- FINANCIALS: 0.22% CONSUMER FINANCE: 0.12% 110,000 WIND ACQUISITION FINANCE SA++ 11.75 07/15/2017 121,000 ------------- DIVERSIFIED FINANCIAL SERVICES: 0.10% 105,000 SHIP FINANCE INTERNATIONAL LIMITED 8.50 12/15/2013 104,738 ------------- INDUSTRIALS: 0.80% ROAD & RAIL: 0.80% 725,000 KANSAS CITY SOUTHERN DE MEXICO 7.375 06/01/2014 744,938 65,000 KANSAS CITY SOUTHERN DE MEXICO 12.50 04/01/2016 77,919 822,857 -------------
Wells Fargo Advantage Utilities and High Income Fund 11 Portfolio of Investments--August 31, 2010
INTEREST MATURITY PRINCIPAL SECURITY NAME RATE DATE VALUE ----------- -------------------------------------------------- -------- ---------- ------------- MATERIALS: 0.20% METALS & MINING: 0.07% $ 55,000 TECK RESOURCES LIMITED 10.75% 05/15/2019 $ 68,338 ------------- PAPER & FOREST PRODUCTS: 0.13% 55,000 SAPPI LIMITED++ 6.75 06/15/2012 55,275 100,000 SAPPI LIMITED++ 7.50 06/15/2032 82,250 137,525 ------------- TELECOMMUNICATION SERVICES: 0.39% WIRELESS TELECOMMUNICATION SERVICES: 0.39% 20,000 DIGICEL GROUP LIMITED++ 12.00 04/01/2014 22,850 375,000 INTELSAT LIMITED 8.50 01/15/2013 379,688 402,538 ------------- TOTAL YANKEE OBLIGATIONS - CORPORATE (COST $1,764,867) 1,844,781 ------------- SHARES ----------- COMMON STOCKS: 71.06% CONSUMER DISCRETIONARY: 0.83% MEDIA: 0.83% 50,000 COMCAST CORPORATION CLASS A 856,000 ------------- ENERGY: 3.92% OIL, GAS & CONSUMABLE FUELS: 3.92% 25,000 EL PASO CORPORATION 284,750 25,000 SOUTHWESTERN ENERGY COMPANY+ 818,000 100,000 SPECTRA ENERGY CORPORATION 2,034,000 50,000 WILLIAMS COMPANIES 906,500 4,043,250 ------------- FINANCIALS: 3.92% CONSUMER FINANCE: 3.92% 10,000 MASTERCARD INCORPORATED 1,983,600 30,000 VISA INCORPORATED CLASS A 2,069,400 4,053,000 ------------- INDUSTRIALS: 0.11% CONSTRUCTION & ENGINEERING: 0.11% 9,000 AMERESCO INCORPORATED CLASS A 109,620 ------------- INFORMATION TECHNOLOGY: 0.15% IT SERVICES: 0.15% 15,000 CONVERGYS CORPORATION 151,950 ------------- MATERIALS: 0.07% CHEMICALS: 0.07% 1,997 LYONDELLBASELL CLASS A+ 40,939 1,829 LYONDELLBASELL CLASS B+ 37,476 78,415 -------------
12 Wells Fargo Advantage Utilities and High Income Fund Portfolio of Investments--August 31, 2010
SHARES SECURITY NAME VALUE ----------- -------------------------------------------------- ------------- TELECOMMUNICATION SERVICES: 8.84% DIVERSIFIED TELECOMMUNICATION SERVICES: 8.44% 16,000 BCE INCORPORATED $ 499,840 215,000 FRANCE TELECOM SA 4,370,240 53,000 SHENANDOAH TELECOMMUNICATIONS COMPANY(i) 895,170 100,034 TELE2 AB SERIES B 1,799,964 100,000 WINDSTREAM CORPORATION 1,153,500 8,718,714 ------------- WIRELESS TELECOMMUNICATION SERVICES: 0.40% 12,000 VIVO PARTICIPACOES SA ADR 288,000 5,000 VODAFONE GROUP PLC ADR 120,900 408,900 ------------- UTILITIES: 53.05% ELECTRIC UTILITIES: 31.51% 600 AMERICAN ELECTRIC POWER COMPANY INCORPORATED 21,246 30,000 CENTERPOINT ENERGY INCORPORATED 443,700 500 CH ENERGY GROUP INCORPORATED 21,070 5,000 CHESAPEAKE MIDSTREAM PARTNER LP 117,750 200 CHESAPEAKE UTILITIES CORPORATION 6,888 10,000 CHINA HYDROELECTRIC COMPANY ADS+ 60,400 75,000 DPL INCORPORATED 1,899,000 500 DUKE ENERGY CORPORATION 8,595 2,000 EDISON INTERNATIONAL 67,500 450,000 ENEL SPA 2,144,188 1,000 ENTERGY CORPORATION 78,840 70,000 EXELON CORPORATION 2,850,400 25,000 FIRSTENERGY CORPORATION 913,250 75,000 FORTUM OYJ 1,726,946 150,000 GREAT PLAINS ENERGY INCORPORATED 2,773,500 100,000 HAWAIIAN ELECTRIC INDUSTRIES INCORPORATED 2,402,000 475,000 HERA SPA 864,993 36,000 ITC HOLDINGS CORPORATION 2,086,560 20,000 NEXTERA ENERGY INCORPORATED 1,074,600 150,000 NORTHEAST UTILITIES 4,345,500 1,000 NSTAR 38,030 100 PEPCO HOLDINGS INCORPORATED 1,795 75,000 PORTLAND GENERAL ELECTRIC COMPANY 1,498,500 400 PROGRESS ENERGY INCORPORATED 17,164 20,000 RED ELECTRICA DE ESPANA 824,220 190,000 SCOTTISH & SOUTHERN ENERGY PLC 3,336,457 200 SOUTH JERSEY INDUSTRIES INCORPORATED 9,398 175,000 TERNA SPA 703,562 60,000 THE SOUTHERN COMPANY 2,201,400 32,537,452 ------------- GAS UTILITIES: 7.76% 16,900 EQT CORPORATION 619,465 500 MDU RESOURCES GROUP INCORPORATED 9,405 50,000 NATIONAL FUEL GAS COMPANY 2,149,000 200 NEW JERSEY RESOURCES 7,442 100,000 NISKA GAS STORAGE PARTNERS+ 1,888,000 48,500 ONEOK INCORPORATED 3,336,800 8,010,112 -------------
Wells Fargo Advantage Utilities and High Income Fund 13 Portfolio of Investments--August 31, 2010
SHARES SECURITY NAME VALUE ----------- -------------------------------------------------- ------------- INDEPENDENT POWER PRODUCERS & ENERGY TRADERS: 2.84% 100,000 CONSTELLATION ENERGY GROUP INCORPORATED $ 2,933,000 ------------- MULTI-UTILITIES: 4.19% 300 DOMINION RESOURCES INCORPORATED 12,828 250,000 NATIONAL GRID PLC 2,104,935 1,000 PG&E CORPORATION 46,760 50,000 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED 1,598,000 30,000 SUEZ ENVIRONNEMENT SA 482,822 1,500 WISCONSIN ENERGY CORPORATION 83,610 4,328,955 ------------- WATER UTILITIES: 6.92% 50,000 AMERICAN WATER WORKS COMPANY 1,129,000 25,000 MIDDLESEX WATER COMPANY 410,250 130,000 PENNICHUCK CORPORATION(i) 2,965,300 300,000 PENNON GROUP PLC 2,636,345 7,140,895 ------------- TOTAL COMMON STOCKS (COST $70,732,111) 73,370,263 ------------- PREFERRED STOCKS: 10.34% UTILITIES: 10.34% YIELD -------- ELECTRIC UTILITIES: 10.34% 50,000 GREAT PLAINS ENERGY INCORPORATED 4.62% 3,100,000 100,000 INTERSTATE POWER & LIGHT COMPANY 3.87 2,895,000 165,000 SCANA CORPORATION 3.21 4,681,050 TOTAL PREFERRED STOCKS (COST $10,183,545) 10,676,050 ------------- EXPIRATION DATE ---------- WARRANTS: 0.00% ELECTRIC UTILITIES: 0.00% 10,000 CHINA HYDROELECTRIC COMPANY ADS+ 01/25/2014 4,500 TOTAL WARRANTS (COST $12,000) 4,500 ------------- CLOSED END MUTUAL FUND SHARES: 0.16% 9,640 DREYFUS HIGH YIELD STRATEGIES FUND INCORPORATED 41,934 1,739 EATON VANCE LIMITED DURATION INCOME TRUST 28,485 1,677 LMP CORPORATE LOAN FUND INCORPORATED 18,665 7,858 NEW AMERICA HIGH INCOME FUND INCORPORATED 78,894 TOTAL CLOSED END MUTUAL FUND SHARES (COST $84,845) 167,978 -------------
INTEREST MATURITY PRINCIPAL RATE DATE ----------- -------- ---------- TERM LOANS: 1.77% CAPITAL MARKETS: 0.15% $ 149,250 BLACKSTONE GROUP LP 7.75 11/02/2014 149,996 ------------- CONSUMER DISCRETIONARY: 0.46% 365,000 NEWSDAY LLC 10.50 08/01/2013 387,356 95,000 SUGARHOUSE HSP GAMING PROPERTIES LP 11.25 09/23/2014 91,319 478,675 -------------
14 Wells Fargo Advantage Utilities and High Income Fund Portfolio of Investments--August 31, 2010
MATURITY PRINCIPAL SECURITY NAME YIELD DATE VALUE ----------- -------------------------------------------------- -------- ---------- ------------- CONSUMER STAPLES: 0.12% $ 135,917 MERISANT COMPANY(i) 7.50% 01/08/2014 $ 125,043 ------------- ENERGY: 0.29% 299,522 SEMGROUP ENERGY PARTNERS 8.25 06/30/2011 296,826 ------------- FINANCIALS: 0.33% 100,000 AMERICAN GENERAL FINANCE CORPORATION 5.40 12/01/2015 76,750 75,000 AMERICAN GENERAL FINANCE CORPORATION 6.90 12/15/2017 58,125 75,000 CAPITAL AUTOMOTIVE REIT< 7.50 12/14/2012 71,188 23,158 REALOGY CORPORATION 3.26 10/10/2013 19,870 135,093 REALOGY CORPORATION 3.30 10/10/2013 116,132 342,065 ------------- INDUSTRIALS: 0.28% 295,008 SWIFT TRANSPORTATION COMPANY INCORPORATED 8.25 05/10/2014 285,727 ------------- UTILITIES: 0.15% 200,000 TXU ENERGY COMPANY LLC< 8.24 10/10/2014 151,116 ------------- TOTAL TERM LOANS (COST $1,795,420) 1,829,448 ------------- SHARES ----------- ESCROW SHARES: 0.00% 5,000,000 MIRANT CORPORATION ESCROW(i)(a)+ 0 TOTAL ESCROW SHARES (COST $0) 0 ------------- SHORT-TERM INVESTMENTS: 6.39% INVESTMENT COMPANIES: 6.39% 6,591,838 WELLS FARGO ADVANTAGE MONEY MARKET TRUST (u)(l)## 0.29 6,591,838 TOTAL SHORT-TERM INVESTMENTS (COST $6,591,838) 6,591,838 ------------- TOTAL INVESTMENTS IN SECURITIES (COST $121,783,522)* 122.84% 126,830,394 OTHER ASSETS AND LIABILITIES, NET (22.84) (23,585,810) ------ ------------- TOTAL NET ASSETS 100.00% $ 103,244,584 ------ -------------
Wells Fargo Advantage Utilities and High Income Fund 15 Portfolio of Investments--August 31, 2010 ++ Securities that may be resold to "qualified institutional buyers" under rule 144A or securities offered pursuant to section 4(2) of the Securities Act of 1933, as amended. (i) Illiquid security, for which the designation as illiquid is unaudited. (u) Rate shown is the 7-day annualized yield at period end. (l) Investment in an affiliate. @@ The rate shown is the stated rate at the current period end. #### This security is currently in default with regards to scheduled interest and/or principal payments. (a) Security fair valued in accordance with the procedures approved by the Board of Trustees. + Non-income earning securities. ## All or a portion of this security has been segregated for when-issued, delayed delivery securities and/or unfunded loans. < All or a portion of the position represents an unfunded loan commitment. * Cost for federal income tax purposes is $122,866,668 and net unrealized appreciation (depreciation) consists of: Gross unrealized appreciation $ 9,112,181 Gross unrealized depreciation (5,148,455) ----------- Net unrealized appreciation $ 3,963,726
The following table shows the percent of total long-term investments by geographic location as of August 31, 2010: United States 79.9% United Kingdom 6.8% France 4.0% Italy 3.1% Sweden 1.5% Finland 1.4% Mexico 0.8% Spain 0.7% Canada 0.6% Bermuda 0.4% Australia 0.2% Brazil 0.2% Cayman Islands 0.1% Luxembourg 0.1% Austria 0.1% Netherlands 0.1% ----- 100.0% -----
The following table shows the percent of total bonds by credit quality based on Moody's and Standard & Poor's ratings as of August 31, 2010 (unaudited): BBB 6.2% BB 38.1% B 48.0% CCC 3.7% CC 0.1% NR 3.9% ----- 100.0% -----
The following table shows the percent of total bonds based on effective maturity as of August 31, 2010 (unaudited): Less than 1 year 3.8% 1 to 3 year(s) 31.2% 3 to 5 years 27.5% 5 to 10 years 23.9% 10 to 20 years 10.5% 20 to 30 years 1.8% Greater than 30 years 1.3% ----- 100.0% -----
The accompanying notes are an integral part of these financial statements. 16 Wells Fargo Advantage Utilities and High Income Fund Statement of Assets and Liabilities--August 31, 2010 ASSETS Investments in unaffiliated securities, at value .................. $ 120,238,556 Investments in affiliated securities, at value .................... 6,591,838 ------------- Total investments, at value (see cost below) ...................... 126,830,394 Receivable for securities sold .................................... 872,068 Dividend and interest receivable .................................. 1,791,083 Other assets ...................................................... 41,874 ------------- Total assets ........................................................ 129,535,419 ------------- LIABILITIES Dividends payable ................................................. 689,550 Payable for securities purchased .................................. 508,398 Payable to custodian (cost $2,722,720) ............................ 2,692,310 Secured borrowing payable ......................................... 22,002,647 Advisory fee payable .............................................. 68,460 Due to other related parties ...................................... 5,705 Accrued expenses and other liabilities ............................ 323,765 ------------- Total liabilities .................................................... 26,290,835 ------------- NET ASSETS ........................................................... $ 103,244,584 ============= NET ASSETS CONSIST OF Paid-in capital ................................................... $ 150,984,046 Overdistributed net investment income ............................. (765,075) Accumulated net realized losses on investments .................... (52,051,026) Net unrealized gains on investments ............................... 5,076,639 ------------- NET ASSETS ........................................................... $ 103,244,584 ============= NET ASSET VALUE PER SHARE Based on $103,244,584 divided by 9,193,994 common shares issued and outstanding (unlimited number of common shares authorized) ...... $ 11.23 Total investments, at cost ........................................... $ 121,783,522
The accompanying notes are an integral part of these financial statements. Wells Fargo Advantage Utilities and High Income Fund 17 Statement of Operations--For the Year Ended August 31, 2010 INVESTMENT INCOME Dividends(1) .......................................... $ 3,798,052 Interest(2) ........................................... 3,130,826 Income from affiliated securities ..................... 8,862 ----------- Total investment income .................................. 6,937,740 ----------- EXPENSES Advisory fee .......................................... 761,779 Administration fee .................................... 63,482 Transfer agent fees ................................... 31,938 Trustees' fees and expenses ........................... 4,285 Shareholder reports expenses .......................... 70,201 Custodian and accounting fees ......................... 80,802 Professional fees ..................................... 91,354 Secured borrowing fees ................................ 1,283,918 Interest expense ...................................... 195,003 Other fees and expenses ............................... 59,233 ----------- Total expenses ........................................... 2,641,995 LESS Waived fees and expense reimbursements ................ (1,051,248) ----------- Net expenses ............................................. 1,590,747 ----------- Net investment income .................................... 5,346,993 ----------- NET REALIZED AND UNREALIZED GAINS OR LOSSES ON INVESTMENTS NET REALIZED GAINS OR LOSSES ON: Unaffiliated securities ............................... 483,307 Foreign currency related transactions ................. 320,742 Credit default swap transactions ...................... (42,139) ----------- Net realized gains on investments ........................ 761,910 ----------- NET CHANGE IN UNREALIZED GAINS OR LOSSES ON: Unaffiliated securities ............................... 2,873,508 Foreign currency related transactions ................. (25,499) Credit default swap transactions ...................... 29,752 ----------- Net change in unrealized gains or losses on investments .. 2,877,761 ----------- Net realized and unrealized gains or losses on investments ........................................... 3,639,671 ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ..... $ 8,986,664 =========== (1.) Net of foreign withholding taxes of ................. $ 106,150 (2.) Net of foreign withholding taxes of ................. $ 1,336
The accompanying notes are an integral part of these financial statements. 18 Wells Fargo Advantage Utilities and High Income Fund Statements of Changes in Net Assets
For the For the Year Ended Year Ended August 31, 2010 August 31, 2009 --------------- --------------- OPERATIONS Net investment income ......................................... $ 5,346,993 $ 8,780,431 Net realized gains or losses on investments ................... 761,910 (46,472,788) Net change in unrealized gains or losses on investments ....... 2,877,761 (901,764) ------------ ------------ Net increase (decrease) in net assets resulting from operations .. 8,986,664 (38,594,121) ------------ ------------ DISTRIBUTIONS TO SHAREHOLDERS FROM Net investment income ......................................... (4,848,035) (8,968,630) Tax basis return of capital ................................... (5,644,957) (7,286,854) ------------ ------------ Total distributions to shareholders .............................. (10,492,992) (16,255,484) ------------ ------------ CAPITAL SHARE TRANSACTIONS Net asset value of shares issued under the Automatic Dividend Reinvestment Plan ....................... 1,064,214 2,152,562 ------------ ------------ Total decrease in net assets applicable to shareholders .......... (442,114) (52,697,043) ------------ ------------ NET ASSETS Beginning of period .............................................. 103,686,698 156,383,741 ------------ ------------ END OF PERIOD .................................................... $103,244,584 $103,686,698 ============ ============ Overdistributed net investment income ............................ $ (765,075) $ (1,656,707)
The accompanying notes are an integral part of these financial statements. Wells Fargo Advantage Utilities and High Income Fund 19 Statement of Cash Flows--August 31, 2010 CASH FLOWS FROM OPERATING ACTIVITIES: Net increase in net assets resulting from operations ... $ 8,986,664 ADJUSTMENTS TO RECONCILE NET INCREASE IN NET ASSETS FROM OPERATIONS TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Purchase of investment securities ...................... (79,695,798) Proceeds from sales of securities ...................... 78,099,528 Paydowns ............................................... 423,738 Amortization ........................................... (282,105) Credit default swap payments made ...................... (42,139) Purchase of short-term investment securities, net ...... (1,002,653) Decrease in dividends and interest receivable .......... 827,442 Decrease in receivable for securities sold ............. 874,675 Decrease in premiums paid on credit default swaps ...... 15,939 Amortization of prepaid structuring fee ................ 456,623 Decrease in receivable from investment advisor ......... 1,200 Increase in prepaid expenses and other assets .......... (41,874) Decrease in payable for securities purchased ........... (3,301,949) Decrease in premiums received on credit default swaps .. (4,699) Increase in advisory fee payable ....................... 68,460 Increase in due to other related parties ............... 5,532 Decrease in accrued expenses and other liabilities ..... (1,597) Increase in payable to custodian bank .................. 2,692,310 Unrealized appreciation on investments ................. (2,877,761) Net realized loss on credit default swaps .............. 42,139 Net realized gain on unaffiliated securities ........... (483,307) ------------ Net cash provided by operating activities ................. 4,760,368 ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Cash distributions paid on common shares ............... (9,741,243) Payment to investment advisor for secured borrowing .... (444,444) Decrease in secured borrowing .......................... (2,322) ------------ Net cash used in financing activities ..................... (10,188,009) ------------ Net decrease in cash ...................................... (5,427,641) ------------ CASH (INCLUDING FOREIGN CURRENCY): Beginning of period ....................................... $ 5,427,641 ------------ End of period ............................................. $ 0 ------------ SUPPLEMENTAL CASH DISCLOSURE: Cash paid for interest .................................... $ 195,003 ------------ SUPPLEMENTAL NON-CASH FINANCING DISCLOSURE: Reinvestment of dividends ................................. $ 1,064,214 Structuring fee waived by investment advisor .............. $ 456,623 ------------
The accompanying notes are an integral part of these financial statements. 20 Wells Fargo Advantage Utilities and High Income Fund Financial Highlights (For a share outstanding throughout each period)
YEAR ENDED AUGUST 31, ---------------------------------------------------------------- 2010 2009 2008 2007 2006 ----------- -------- -------- -------- -------- NET ASSET VALUE, BEGINNING OF PERIOD $ 11.38 $ 17.50 $ 24.05 $ 23.16 $ 25.43 -------- -------- -------- -------- -------- INCOME FROM INVESTMENT OPERATIONS Net investment income(1) 0.59 0.97 2.49 2.81 4.07 Net realized and unrealized gains or losses on investments 0.41 (5.29) (4.18) 2.37 (0.51) Distributions to preferred shareholders from Net investment income 0.00 0.00 (0.33) (0.30) (0.39) Net realized gains 0.00 0.00 0.00 (0.20) (0.02) -------- -------- -------- -------- -------- Total from investment operations 1.00 (4.32) (2.02) 4.68 3.15 -------- -------- -------- -------- -------- DISTRIBUTIONS TO SHAREHOLDERS FROM Net investment income (0.53)(1) (1.00)(1) (2.76) (3.79) (2.76) Net realized gains 0.00 0.00 (1.77) 0.00 (2.67) Tax basis return of capital (0.62)(1) (0.80)(1) 0.00 0.00 0.00 -------- -------- -------- -------- -------- Total distributions to common shareholders (1.15) (1.80) (4.53) (3.79) (5.43) -------- -------- -------- -------- -------- OFFERING COSTS CHARGED TO CAPITAL FOR Preferred shares 0.00 0.00 0.00 0.00 0.01(1, 2) -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 11.23 $ 11.38 $ 17.50 $ 24.05 $ 23.16 -------- -------- -------- -------- -------- MARKET VALUE, END OF PERIOD $ 11.23 $ 12.49 $ 21.02 $ 27.30 $ 23.50 -------- -------- -------- -------- -------- TOTAL RETURN BASED ON MARKET VALUE(3) (1.24)% (30.46)% (7.86)% 34.05% 35.89% -------- -------- -------- -------- -------- RATIOS AND SUPPLEMENTAL DATA Net assets of common shareholders, end of period (thousands) $103,245 $103,687 $156,384 $209,066 $195,955 Liquidation value of preferred shares, end of period (thousands) NA NA NA $ 80,000 $ 80,000 Asset coverage ratio, end of period NA NA NA 360% 341% RATIOS TO AVERAGE NET ASSETS Expenses including waivers/reimbursements and interest expense but excluding expense reductions 1.52% 2.25% 1.89% 1.42% 1.70% Expenses including interest expense but excluding waivers/reimbursements and expense reductions 2.52% 3.44% 1.92% 1.42% 1.70% Expenses including waivers/reimbursements but excluding expense reductions and interest expense 1.33% 1.55% 1.37% 1.20% 1.39% Interest expense 0.19% 0.70% 0.52% 0.22% 0.31% Net investment income 5.19% 8.75% 10.33%(4) 9.41%(4) 16.00%(4) Portfolio turnover rate 59% 137% 153% 117% 122%
---------- (1.) Calculated based on average common shares outstanding during the period. (2.) Amount represents a refund of certain preferred share offering expenses. (3.) Total return is calculated assuming a purchase of common stock on the first day and a sale on the last day of the period reporting. Dividends and distributions are assumed for the purposes of these calculations to be reinvested at prices obtained under the Fund's Automatic Dividend Reinvestment Plan. Total return does not reflect brokerage commissions or sales charges. (4.) The net investment income ratio reflects distributions paid to preferred shareholders. The accompanying notes are an integral part of these financial statements. Wells Fargo Advantage Utilities and High Income Fund 21 Notes to Financial Statements 1. ORGANIZATION Wells Fargo Advantage Utilities and High Income Fund (the "Fund") (formerly Evergreen Utilities and High Income Fund) was organized as a statutory trust under the laws of the state of Delaware on February 4, 2004 and is registered as a non-diversified closed-end management investment company under the Investment Company Act of 1940, as amended. The primary investment objective of the Fund is to seek a high level of current income and moderate capital growth, with an emphasis on providing tax advantaged dividend income. 2. SIGNIFICANT ACCOUNTING POLICIES The following significant accounting policies, which are consistently followed in the preparation of the financial statements of the Fund, are in conformity with U.S. generally accepted accounting principles which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management has considered the circumstances under which the Fund should recognize or make disclosures regarding events or transactions occurring subsequent to the balance sheet date through the date the financial statements are issued. Adjustments or additional disclosures, if any, have been included in these financial statements. SECURITIES VALUATION Investments in securities are valued each business day as of the close of regular trading on the New York Stock Exchange, which is usually 4:00 p.m. (Eastern Time). Securities which are traded on a national or foreign securities exchange are valued at the last reported sales price. Securities listed on The NASDAQ Stock Market, Inc. ("NASDAQ") are valued at the NASDAQ Official Closing Price ("NOCP"), and if no NOCP is available, then at the last reported sales price. If no sales price is shown on the NASDAQ, the bid price will be used. In the absence of any sale of securities listed on the NASDAQ, and in the case of other securities, including U.S. Government obligations, but excluding debt securities maturing in 60 days or less, the price will be deemed "stale" and the valuations will be determined in accordance with the Fund's Fair Valuation Procedures. Securities denominated in foreign currencies are translated into U.S. dollars using the closing rates of exchange in effect on the day of valuation. Many securities markets and exchanges outside the U.S. close prior to the close of the New York Stock Exchange and therefore may not fully reflect trading or events that occur after the close of the principal exchange in which the foreign investments are traded but before the close of the New York Stock Exchange. If such trading or events are expected to materially affect the value of the investments, then those investments are fair valued following procedures approved by the Board of Trustees. These procedures take into account multiple factors including movements in U.S. securities markets after foreign exchanges close. Depending on market activity, such fair valuations may be frequent. Such fair value pricing may result in NAVs that are higher or lower than NAVs based on the closing price or latest quoted bid price. Certain fixed income securities with maturities exceeding 60 days are valued by using a pricing service approved by the Board of Trustees. This service uses market prices as quoted by an independent pricing service or by dealers in these securities when, in the service's judgment, these prices are readily available and are representative of the securities' fair values. For some securities, such prices are not readily available. These securities will generally be fair valued using methods which may include consideration of yields or prices of securities of comparable quality, coupon rate, maturity and type of issue, indications as to values from dealers in securities, trading characteristics and general market conditions. Debt securities of sufficient credit quality with original maturities of 60 days or less generally are valued at amortized cost which approximates fair value. The amortized cost method involves valuing a security at its cost, plus accretion of discount or minus amortization of premium over the period until maturity, which approximates fair value. Investments in open-end mutual funds are valued at net asset value. Investments which are not valued using any of the methods discussed above, are valued at their fair value, as determined by procedures established in good faith and approved by the Board of Trustees. 22 Wells Fargo Advantage Utilities and High Income Fund Notes to Financial Statements The valuation techniques used by the Fund to measure fair value are consistent with the market approach, income approach and/or cost approach, where applicable, for each security type. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. Assets, including investment securities, and liabilities denominated in foreign currency are translated into U.S. dollars at the prevailing rates of exchange at the date of valuation. Purchases and sales of securities, and income and expenses are translated at the prevailing rate of exchange on the respective dates of such transactions. Reported net realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions, and the difference between the amounts of dividends, interest and foreign withholding taxes recorded and the U.S. dollar equivalent of the amounts actually paid or received. Net unrealized foreign exchange gains and losses arise from changes in the fair value of assets and liabilities other than investments in securities, at fiscal period-end, resulting in changes in exchange rates. The changes in net assets arising from changes in exchange rates and the changes in net assets resulting from changes in market prices of securities at fiscal period-end are not separately presented. Such changes are recorded with net realized and unrealized gain from investments. Gains and loses from certain foreign currency transactions are treated as ordinary income for U.S. federal income tax purposes. REVERSE REPURCHASE AGREEMENTS To obtain short-term financing, the Fund may enter into reverse repurchase agreements with banks and other financial institutions, which are deemed by the investment advisor to be creditworthy. At the time the Fund enters into a reverse repurchase agreement, it will establish a segregated account with the custodian containing qualified assets having a value not less than the repurchase price, including accrued interest. If the counterparty to the transaction is rendered insolvent, the Fund may be delayed or limited in the repurchase of the collateral securities. SECURITY LOANS The Fund may lend its securities from time to time in order to earn additional income in the form of fees or interest on securities received as collateral or the investment of any cash received as collateral. The Fund continues to receive interest or dividends on the securities loaned. The Fund receives collateral in the form of cash or securities with a value at least equal to the value of the securities on loan. The value of the loaned securities is determined at the close of each business day and any additional required collateral is delivered to the Fund on the next business day. In the event of default or bankruptcy by the borrower, the Fund could experience delays and costs in recovering the loaned securities or in gaining access to the collateral. In addition, the investment of any cash collateral received may lose all or part of its value. The Fund has the right under the lending agreement to recover the securities from the borrower on demand. Effective July 25, 2010, the Fund may lend its securities through an unaffiliated securities lending agent. Cash collateral received in connection with their securities lending transactions is invested in Wells Fargo Securities Lending Cash Investments, LLC (the "Cash Collateral Fund"). The Cash Collateral Fund is exempt from registration under Section 3(c)(7) of the 1940 Act and is managed by Wells Fargo Funds Management LLC ("Funds Management") and is sub-advised by Wells Capital Management Incorporated ("Wells Capital Management"). Funds Management receives an advisory fee starting at 0.05% and declining to 0.01% as the average daily net assets of the Cash Collateral Fund increase. All of the fees received by Funds Management are paid to Wells Capital Management for its services as sub-advisor. The Cash Collateral Fund seeks to provide a positive return compared to the daily Fed Funds Open rate by investing in high-quality, U.S. dollar-denominated short-term money market instruments. Cash Collateral Fund investments are fair valued based upon the amortized cost valuation technique. Prior to June 30, 2010, the Fund entered into securities lending transactions through Wachovia Global Securities Lending as the securities lending agent. WHEN-ISSUED TRANSACTIONS The Fund may purchase securities on a forward commitment or 'when-issued' basis. A Fund records a when-issued transaction on the trade date and will segregate assets to cover its obligation by confirming the availability of qualifying assets having a value sufficient to make payment for the securities purchased. Securities purchased on a when-issued Wells Fargo Advantage Utilities and High Income Fund 23 Notes to Financial Statements basis are marked-to-market daily and the Fund begins earning interest on the settlement date. Losses may arise due to changes in the market value of the underlying securities or if the counterparty does not perform under the contract. TERM LOANS The Fund may invest in term loans. A Fund records an investment when the borrower withdraws money and records interest as earned. These loans pay interest at rates which are periodically reset by reference to a base lending rate plus a spread. The Fund assumes the credit risk of the borrower. There could be potential loss to the Fund in the event of default by the borrower. OPTIONS The Fund may be subject to equity price risk in the normal course of pursuing its investment objectives. The Fund may write covered put or call options. When a Fund writes an option, an amount equal to the premium received is recorded as a liability and is subsequently adjusted to the current market value of the written option. Premiums received from written options, which expire unexercised, are recognized as realized gains from investments on the expiration date. The difference between the premium received and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is treated as a realized gain or loss. If a call option is exercised, the premium is added to the proceeds from the sale of the underlying security in calculating the realized gain or loss on the sale. If a put option is exercised, the premium reduces the cost of the security purchased. The Fund, as a writer of an option, bears the market risk of an unfavorable change in the price of the security underlying the written option. The Fund may also purchase call or put options. The premium is included in the Statement of Assets and Liabilities as an investment which is subsequently adjusted to the current market value of the option. Premiums paid for purchased options which expire are recognized as realized losses from investments on the expiration date. Premiums paid for purchased options which are exercised or closed are added to the amount paid or offset against the proceeds on the underlying security to determine the realized gain or loss. The risk of loss associated with purchased options is limited to the premium paid. Options traded on an exchange are regulated and terms of the options are standardized. Options traded over the counter expose the Fund to counterparty risk in the event the counterparty does not perform. This risk is mitigated by having a master netting arrangement between the Fund and the counterparty and by having the counterparty post collateral to cover the Fund's exposure to the counterparty. CREDIT DEFAULT SWAPS The Fund may be subject to credit risk in the normal course of pursuing its investment objectives. The Fund may enter into credit default swap contracts for hedging or speculative purposes to provide or receive a measure of protection against default on a referenced entity, obligation or index or for investment gains. Credit default swaps involve an exchange of a stream of payments for protection against the loss in value of an underlying security or index. Under the terms of the swap, one party acts as a guarantor (referred to as the seller of protection) and receives a periodic stream of payments, provided that there is no credit event, from another party (referred to as the buyer of protection) that is a fixed percentage applied to a notional principal amount over the term of the swap. An index credit default swap references all the names in the index, and if a credit event is triggered, the credit event is settled based on that name's weight in the index. A credit event includes bankruptcy, failure to pay, obligation default, obligation acceleration, repudiation/moratorium, and restructuring. The Fund may enter into credit default swaps as either the seller of protection or the buyer of protection. As the seller of protection, the Fund is subject to investment exposure on the notional amount of the swap and has assumed the risk of default of the underlying security or index. As the buyer of protection, the Fund could be exposed to risks if the seller of the protection defaults on its obligation to perform, or if there are unfavorable changes in the fluctuation of interest rates. The maximum potential amount of future payments (undiscounted) that the Fund as the seller of protection could be required to make under the credit default swap contract would be an amount equal to the notional amount of the swap contract. The Fund's maximum risk of loss from counterparty risk, either as the protection seller or as the protection buyer, is the fair value of the contract. This risk is mitigated by having a master netting arrangement between the Fund and the counterparty and by having the counterparty post collateral to cover the Fund's exposure to the counterparty. 24 Wells Fargo Advantage Utilities and High Income Fund Notes to Financial Statements If the Fund is the seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will pay to the buyer of protection the notional amount of the swap and take delivery of the referenced obligation or underlying securities comprising the referenced index. If the Fund is the buyer of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will receive from the seller of protection the notional amount of the swap and deliver the referenced obligation or underlying securities comprising the referenced index. Any premiums paid or received on the transactions are recorded as an asset or liability on the Statement of Assets and Liabilities and amortized. The value of the swap contract is marked-to-market daily based on quotations from an independent pricing service or market makers and any change in value is recorded as an unrealized gain or loss. Periodic payments made or received are recorded as realized gains or losses. In addition, payments received or made as a result of a credit event or termination of the contract are recognized as realized gains or losses. Certain credit default swap contracts entered into by the Fund provide for conditions that result in events of default or termination that enable the counterparty to the agreement to cause an early termination of the transactions under those agreements. Any election by the counterparty to terminate early may impact the amounts reported on the financial statements. SECURITY TRANSACTIONS AND INCOME RECOGNITION Securities transactions are recorded on a trade date basis. Realized gains or losses are reported on the basis of identified cost of securities delivered. Interest income is accrued daily and bond discounts are accreted and premiums are amortized daily based on the effective interest method. To the extent debt obligations are placed on non-accrual status, any related interest income may be reduced by writing off interest receivables when the collection of all or a portion of interest has become doubtful based on consistently applied procedures. If the issuer subsequently resumes interest payments or when the collectability of interest is reasonably assured, the debt obligation is removed from non-accrual status. Dividend income is recognized on the ex-dividend date, except for certain dividends from foreign securities, which are recorded as soon as the Fund is informed of the ex-dividend date. Dividend and interest income from foreign securities is recorded net of foreign taxes withheld where recovery of such taxes is not assured. DISTRIBUTIONS TO SHAREHOLDERS Distributions to shareholders from net investment income and net realized gains, if any, are recorded on the ex-dividend date. Such distributions are determined in conformity with income tax regulations, which may differ from generally accepted accounting principles. The timing and character of distributions made during the period from net investment income or net realized gains may also differ from their ultimate characterization for federal income tax purposes. To the extent that these differences are permanent in nature, such amounts are reclassified within the capital accounts based on their federal tax-basis treatment. Temporary differences do not require reclassifications. At August 31, 2010, as a result of permanent book-to-tax differences, the following reclassification adjustments were made on the Statements of Assets and Liabilities:
Overdistributed Accumulated Net Net Investment Realized Loss Income on Investments --------------- -------------- $392,674 $(392,674)
FEDERAL AND OTHER TAXES The Fund is treated as a separate entity for federal income tax purposes. It is the policy of the Fund to continue to qualify as a regulated investment company by distributing substantially all of its investment company taxable income and any net realized capital gains (after reduction for capital loss carryforwards) sufficient to relieve it from all, or substantially all, federal income taxes. Accordingly, no provision for federal income taxes was required. The Fund's income and federal excise tax returns and all financial records supporting those returns for the prior three fiscal years are subject to examination by the federal and Delaware revenue authorities. Wells Fargo Advantage Utilities and High Income Fund 25 Notes to Financial Statements At August 31, 2010, estimated net capital loss carryforwards, which are available to offset future net realized capital gains, were as follows:
Expiration ------------------------------------ 2016 2017 2018 -------- ----------- ----------- $701,198 $22,831,103 $27,435,579
3. FAIR VALUATION MEASUREMENTS Fair value measurements of investments are determined within a framework that has established a fair value hierarchy based upon the various data inputs utilized in determining the value of the Fund's investments. The three-level hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The Fund's investments are classified within the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement. The inputs are summarized into three broad levels as follows: - Level 1 - quoted prices in active markets for identical securities - Level 2 - other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.) - Level 3 - significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments) The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. As of August 31, 2010, the inputs used in valuing the Fund's assets, which are carried at fair value, were as follows:
Significant Other Significant Quoted Prices Observable Inputs Unobservable Inputs INVESTMENTS IN SECURITIES (Level 1) (Level 2) (Level 3) Total ------------------------- ------------- ----------------- ------------------- ------------ EQUITY SECURITIES COMMON STOCKS $73,370,263 $ 0 $0 $ 73,370,263 PREFERRED STOCKS 10,676,050 0 0 10,676,050 WARRANTS 4,500 0 0 4,500 CLOSED END MUTUAL FUND SHARES 167,978 0 0 167,978 CORPORATE BONDS AND NOTES 0 32,345,536 0 32,345,536 TERM LOANS 0 1,829,448 0 1,829,448 YANKEE OBLIGATIONS-CORPORATE 0 1,844,781 0 1,844,781 SHORT-TERM INVESTMENTS INVESTMENT COMPANIES 6,591,838 0 0 6,591,838 ----------- ----------- -- ------------ $90,810,629 $36,019,765 $0 $126,830,394
Further details on the major security types listed above can be found in the Fund's Portfolio of Investments. The following is a reconciliation of assets in which significant unobservable inputs (Level 3) were used in determining fair value:
Warrants -------- BALANCE AS OF AUGUST 31, 2009 $ 45,615 Realized gains or losses (6,521) Change in unrealized gains or losses 21,521 Net purchases (sales) (60,615) Transfers in and/or out of Level 3 0 BALANCE AS OF AUGUST 31, 2010 $ 0 Change in unrealized gains or losses included in earnings relating to securities still held at August 31, 2010 $ 0
26 Wells Fargo Advantage Utilities and High Income Fund Notes to Financial Statements 4. TRANSACTIONS WITH AFFILIATES AND OTHER EXPENSES ADVISORY FEES Funds Management, a wholly owned subsidiary of Wells Fargo & Company ("Wells Fargo"), is the investment advisor to the Fund and is paid an annual fee of 0.60% of the Fund's average daily total assets. Total assets consist of the net assets of the Fund plus borrowings or other leverage for investment purposes. Prior to July 12, 2010 Evergreen Investment Management Company, LLC ("EIMC"), a subsidiary of Wells Fargo, was the investment advisor to the Fund and was paid an annual fee at the same rate that is currently paid to Funds Management. For the year ended August 31, 2010, the advisory fee was equivalent to an annual rate of 0.73% of the Fund's average daily net assets. Funds Management may retain the services of certain investment sub-advisors to provide daily portfolio management. The fees related to sub-advisory services are borne directly by the advisor and do not increase the overall fees paid by the Fund to the investment advisor. Wells Capital Management, an affiliate of Funds Management and indirect wholly owned subsidiary of Wells Fargo, and Crow Point Partners, LLC are each investment sub-advisors to the Fund and are each paid an annual fee of 0.20% of the Fund's average daily total assets. Prior to July 12, 2010, Tattersall Advisory Group, Inc., an affiliate of EIMC and an indirect, wholly-owned subsidiary of Wells Fargo, was an investment sub-advisor to the predecessor fund and was paid an annual fee of 0.18% of the Fund's average daily total assets by the advisor for its services to the Fund. Funds Management also serves as the administrator to the Fund providing the Fund with facilities, equipment and personnel. Funds Management is paid an annual administrative fee of 0.05% of the Fund's average daily total assets. Prior to August 25, 2010, EIMC was the administrator to the Fund and was paid an annual fee at the same rate that is currently paid to Funds Management. For the year ended August 31, 2010, the administrative fee was equivalent to an annual rate of 0.06% of the Fund's average daily net assets. Funds Management and/or EIMC contractually waived its advisory fee and reimbursed other expenses in the amount of $1,051,248 for the year ended August 31, 2010. 5. CAPITAL SHARE TRANSACTIONS The Fund has authorized an unlimited number of common shares with no par value. For the year ended August 31, 2010 and the year ended August 31, 2009, the Fund issued 84,763 and 170,961 common shares, respectively. 6. BORROWINGS The Fund had secured debt financing in April 2008 from a multi-seller commercial paper conduit administered by a major financial institution (the "Facility") in order to redeem all of its outstanding Preferred Shares. The Facility was refinanced on April 26, 2010 with a new borrowing facility, administered by a different major financial institution, with a commitment amount of $25 million and a 364 day term ("Refinancing Facility"). As of August 31, 2010, the Fund had borrowed $22 million under the Refinancing Facility. The Fund's borrowings under the Refinancing Facility are generally charged interest at a rate determined by the type of loan elected by the Fund. Under the Facility, the Fund had been generally charged interest at a rate based on the rates of the commercial paper notes issued or at LIBOR plus 9.5%. During the year ended August 31, 2010, an effective interest rate of 0.89% was incurred on the borrowings. Interest expense of $195,003, representing 0.19% of the Fund's average daily net assets applicable to common shareholders, was incurred during the year ended August 31, 2010. The Fund has pledged its assets to secure the borrowings and pays a commitment fee at an annual rate equal to (a) 0.30% as of any date upon which the loan balance exceeds 50% of the facility amount and (b) 0.50% as of any other date when the loan balance is less than 50% of the facility amount. Under the Facility, the Fund paid, on a monthly basis, a liquidity fee at an annual rate of 2.75% of the total commitment amount and a program fee at an annual rate of 2.75% on the daily average outstanding principal amount of borrowings. The secured borrowing fees on the Statement of Operations of $1,283,918 represents amortization of structuring fees, liquidity fees and program fees. Of this amount, $456,623 represents prepaid structuring fees relating to the Facility, which were reimbursed to the Fund by the investment advisor. Wells Fargo Advantage Utilities and High Income Fund 27 Notes to Financial Statements 7. INVESTMENT PORTFOLIO TRANSACTIONS Purchases and sales of investments, exclusive of short-term securities (securities with maturities of one year or less at purchase date) were $70,793,891 and $67,773,375, respectively, for the year ended August 31, 2010. As of August 31, 2010, the Fund had unfunded loan commitments of $127,219. 8. DERIVATIVE TRANSACTIONS During the year ended August 31, 2010, the Fund entered into credit default swap contracts for speculative purposes. As of August 31, 2010, the Fund did not have any open credit default swap contacts but had an average notional balance on credit default swaps of $112,863 during the year ended August 31, 2010. The fair value, realized gains or losses and change in unrealized gains or losses on derivative instruments are reflected in the appropriate financial statements. 9. DISTRIBUTIONS TO SHAREHOLDERS The tax character of distributions paid during the years ended August 31, 2010, and August 31, 2009, were as follows:
Year Ended August 31, ----------------------- 2010 2009 ---------- ---------- Ordinary Income $4,848,035 $8,968,630 Return of Capital 5,644,957 7,286,854
As of August 31, 2010, the components of distributable earnings on a tax basis are shown on the table below. The difference between book basis and tax basis appreciation is attributable primarily to the tax deferral of losses on wash sales.
Unrealized Capital Loss Appreciation Carryforward ------------ ------------ $3,993,493 ($50,967,880)
10. CONCENTRATION RISK The Fund may invest a substantial portion of its assets in an industry and, therefore, may be more affected by changes in that industry than would be a comparable fund whose investment are not heavily weighted in any industry. 11. INDEMNIFICATION Under the Fund's organizational documents, the officers and trustees are indemnified against certain liabilities that may arise out of performance of their duties to the Fund. Additionally, in the normal course of business, the Fund may enter into contracts with service providers that contain a variety of indemnification clauses. The Fund's maximum exposure under these arrangements is dependent on future claims that may be made against the Fund and, therefore, cannot be estimated. 12. SUBSEQUENT DISTRIBUTIONS The Fund declared the following distributions to common shareholders:
Net Investment Declaration Date Record Date Payable Date Income ------------------ ------------------ ---------------- -------------- August 20, 2010 September 15, 2010 October 1, 2010 $0.075 September 17, 2010 October 15, 2010 November 1, 2010 $0.075 October 15, 2010 November 15, 2010 December 1, 2010 $0.075
These distributions are not reflected in the accompanying financial statements. 28 Wells Fargo Advantage Utilities and High Income Fund Report of Independent Registered Public Accounting Firm BOARD OF TRUSTEES AND SHAREHOLDERS WELLS FARGO ADVANTAGE UTILITIES AND HIGH INCOME FUND: We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of the Wells Fargo Advantage Utilities and High Income Fund (the "Fund"), as of August 31, 2010 and the related statement of operations for the year then ended, statements of changes in net assets for each of the years in the two-year period then ended, statement of cash flows for the year then ended, and the financial highlights for each of the years in the five-year 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. 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of August 31, 2010 by correspondence with the custodian and brokers, or by other appropriate auditing procedures where replies from brokers were not received. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our 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 the Wells Fargo Advantage Utilities and High Income Fund as of August 31, 2010, the results of its operations, changes in its net assets, its cash flows and financial highlights for each of the years described above, in conformity with U.S. generally accepted accounting principles. (KPMG LLP) Boston, Massachusetts October 29, 2010 Wells Fargo Advantage Utilities and High Income Fund 29 Other Information (Unaudited) PROXY VOTING INFORMATION A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available without charge, upon request, by calling 1-800-222-8222, visiting our Web site at www.wellsfargo.com/advantagefunds, or visiting the SEC Web site at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available without charge on the Fund's Web site at www.wellsfargo.com/advantagefunds or by visiting the SEC Web site at www.sec.gov. SPECIAL MEETING OF SHAREHOLDERS On July 9, 2010, a Special Meeting of Shareholders was held to consider a number of proposals. The results of the proposals are indicated below. PROPOSAL 1 - Election of Trustees: Net Assets Voted "For" Dr. Leroy Keith, Jr. $64,347,808 Net Assets Voted "Withheld" $ 5,207,932 Net Assets Voted "For" Peter G. Gordon $64,355,138 Net Assets Voted "Withheld" $ 5,200,602 Net Assets Voted "For" Isaiah Harris, Jr. $64,303,129 Net Assets Voted "Withheld" $ 5,252,611 Net Assets Voted "For" Judith M. Johnson $64,318,298 Net Assets Voted "Withheld" $ 5,237,442 Net Assets Voted "For" David F. Larcker $64,397,620 Net Assets Voted "Withheld" $ 5,158,120 Net Assets Voted "For" Olivia S. Mitchell $64,340,091 Net Assets Voted "Withheld" $ 5,215,649 Net Assets Voted "For" Timothy J. Penny $64,381,502 Net Assets Voted "Withheld" $ 5,174,238 Net Assets Voted "For" Michael S. Scofield $64,344,209 Net Assets Voted "Withheld" $ 5,211,531 Net Assets Voted "For" Donald C. Willeke $64,261,033 Net Assets Voted "Withheld" $ 5,294,707
PROPOSAL 2A - To approve an investment advisory agreement with Wells Fargo Funds Management, LLC. Net Assets Voted "For" $50,210,911 Net Assets Voted "Against" $ 4,537,948 Net Assets Voted "Abstain" $ 1,302,665
PROPOSAL 2B - To approve a sub-advisory agreement with Crow Point Partners, LLC. Net Assets Voted "For" $50,107,742 Net Assets Voted "Against" $ 4,280,749 Net Assets Voted "Abstain" $ 1,663,032
PROPOSAL 2C - To approve a sub-advisory agreement with Wells Capital Management Incorporated. Net Assets Voted "For" $50,000,003 Net Assets Voted "Against" $ 4,547,089 Net Assets Voted "Abstain" $ 1,504,432
30 Wells Fargo Advantage Utilities and High Income Fund Additional Information (Unaudited) FEDERAL TAX DISTRIBUTIONS For corporate shareholders, 46.72% of ordinary income dividends paid during the fiscal year ended August 31, 2010 qualified for the dividends received deduction. With respect to dividends paid from investment company taxable income during the fiscal year ended August 31, 2010, the Fund designates 67.31% of ordinary income and any short-term capital gain distributions as Qualified Dividend Income in accordance with the Internal Revenue Code. Complete 2010 year-end tax information will be reported on your 2010 Form 1099-DIV, which shall be provided to you in early 2011. The Fund paid total distributions of $10,492,992 during the year ended August 31, 2010 of which 46.20% was from ordinary taxable income and 53.80% was from a non-taxable return of capital. Shareholders of the Fund will receive in early 2011 a Form 1099-DIV that will inform them of the tax character of their distributions as made by the Fund in calendar year 2010. Wells Fargo Advantage Utilities and High Income Fund 31 Additional Information (Unaudited) AUTOMATIC DIVIDEND REINVESTMENT PLAN All common shareholders are eligible to participate in the Automatic Dividend Reinvestment Plan ("the Plan"). Pursuant to the Plan, unless a common shareholder is ineligible or elects otherwise, all cash dividends and capital gains distributions are automatically reinvested by Computershare Trust Company, N.A., as agent for shareholders in administering the Plan ("Plan Agent"), in additional common shares of the Fund. Whenever the Fund declares an ordinary income dividend or a capital gain dividend (collectively referred to as "dividends") payable either in shares or in cash, nonparticipants in the Plan will receive cash, and participants in the Plan will receive the equivalent in shares of common shares. The shares are 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 common shares from the Fund ("newly issued common shares") or (ii) by purchase of outstanding common shares on the open-market (open-market purchases) on the NYSE Amex or elsewhere. If, on the payment date for any dividend or distribution, the net asset value per share of the common shares is equal to or less than the market price per common share plus estimated brokerage commissions ("market premium"), the Plan Agent will invest the amount of such dividend or distribution in newly issued shares on behalf of the participant. The number of newly issued common shares 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 or market premium ("market discount"), the Plan Agent will invest the dividend amount in shares acquired on behalf of the participant in open-market purchases. There will be no brokerage charges with respect to shares issued directly by the Fund as a result of dividends or capital gains 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 the 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. All correspondence concerning the Plan should be directed to the Plan Agent at P.O. Box 43010, Providence, Rhode Island 02940-3010 or by calling 1-800-730-6001. 32 Wells Fargo Advantage Utilities and High Income Fund Other Information (Unaudited) PORTFOLIO HOLDINGS INFORMATION The complete portfolio holdings for the Fund is publicly available on the Fund's Web site (www.wellsfargo.com/advantagefunds) on a monthly, 30-day or more delayed basis. The Fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q, which is available without charge by visiting the SEC Web site at www.sec.gov. In addition, the Fund's Form N-Q may be reviewed and copied at the SEC's Public Reference Room in Washington, DC, and at regional offices in New York City, at 233 Broadway, and in Chicago, at 175 West Jackson Boulevard, Suite 900. Information about the Public Reference Room may be obtained by calling 1-800-SEC-0330. BOARD OF TRUSTEES The following table provides basic information about the Board of Trustees (the "Trustees") and Officers of the Fund. Each of the Trustees and Officers listed below acts in identical capacities for the Wells Fargo Advantage family of funds, which consists of 155 funds comprising the Wells Fargo Funds Trust, Wells Fargo Variable Trust, Wells Fargo Master Trust, and four closed-end funds, including the Fund (collectively the "Fund Complex"). All of the Trustees are also Members of the Audit and Governance Committees of each Trust in the Fund Complex. The mailing address of each Trustee and Officer is 525 Market Street, 12th Floor, San Francisco, CA 94105. The Board of Trustees is classified into three classes of which one is elected annually. Each Trustee serves a three-year term concurrent with the class from which the Trustee is elected. Each Officer serves an indefinite term. INDEPENDENT TRUSTEES
Position Held and Name and Age Length of Service Principal Occupations During Past Five Years Other Directorships ------------ ------------------- -------------------------------------------- ------------------- Peter G. Gordon(1) Trustee, since Co-Founder, Chairman, President and CEO of None 67 2010; Chairman, Crystal Geyser Water Company. since 2010 Isaiah Harris, Jr.(1) Trustee, since 2010 Retired. Prior thereto, President and CEO of CIGNA 57 BellSouth Advertising and Publishing Corp Corporation; from 2005 to 2007, President and CEO of Deluxe Corporation BellSouth Enterprises from 2004 to 2005 and President of BellSouth Consumer Services from 2000 to 2003. Currently a member of the Iowa State University Foundation Board of Governors and a member of the Advisory Board of Iowa State University School of Business. Judith M. Johnson(1) Trustee, since 2010 Retired. Prior thereto, Chief Executive None 61 Officer and Chief Investment Officer of Minneapolis Employees Retirement Fund from 1996 to 2008. Ms. Johnson is an attorney, certified public accountant and a certified managerial accountant. Leroy Keith, Jr. Trustee, since 2004 Chairman, Bloc Global Services (development Trustee, Phoenix 71 and construction). Trustee of the Evergreen Fund Complex Funds from 1983 to2010. Former Managing (consisting Director, Almanac Capital Management of 46 portfolios as (commodities firm), former Partner, of 12/31/09); Stonington Partners, Inc. (private equity Director, fund), former Director, Obagi Medical Diversapack Co. Products Co. and former Director, Lincoln (packaging Educational Services. company) David F. Larcker(1) Trustee, since 2010 James Irvin Miller Professor of Accounting None 59 at the Graduate School of Business, Stanford University, Director of Corporate Governance Research Program and Co-Director of The Rock Center for Corporate Governance since 2006. From 2005 to 2008, Professor of Accounting at the Graduate School of Business, Stanford University. Prior thereto, Ernst & Young Professor of Accounting at The Wharton School, University of Pennsylvania from 1985 to 2005. Olivia S. Mitchell(1) Trustee, since 2010 International Foundation of Employee Benefit None 57 Plans Professor and Chair of the Department of Insurance and Risk Management, Wharton School of the University of Pennsylvania. Director of Wharton's Pension Research Council and Boettner Center on Pensions & Retirement Research, and Research Associate at the National Bureau of Economic Research. Previously, Cornell University Professor from 1978 to 1993.
Wells Fargo Advantage Utilities and High Income Fund 33 Other Information (Unaudited)
Position Held and Name and Age Length of Service Principal Occupations During Past Five Years Other Directorships ------------ ------------------- -------------------------------------------- ------------------- Timothy J. Penny(1) Trustee, since 2010 President and CEO of Southern Minnesota None 58 Initiative Foundation, a non-profit organization, since 2007 and Senior Fellow at the Humphrey Institute Policy Forum at the University of Minnesota since 1995. Member of the Board of Trustees of NorthStar Education Finance, Inc., a non-profit organization, since 2007. Michael S. Scofield Trustee, since 2004 Currently serves on the Investment Company None 67 Institute's Board of Governors and Executive Committee. Former Chairman of the Independent Directors Counsel. Trustee of the Evergreen Funds from 1984 to 2010. Retired Attorney, Law Offices of Michael S. Scofield and former Director and Chairman, Branded Media Corporation (multi-media branding company). Donald C. Willeke(1) Trustee, since 2010 Principal of the law firm of Willeke & None 70 Daniels. General Counsel of the Minneapolis Employees Retirement Fund from 1984 until its consolidation into the Minnesota Public Employees Retirement Association on June 30, 2010.
OFFICERS
Position Held and Name and Age Length of Service Principal Occupations During Past Five Years Other Directorships ------------ ------------------- -------------------------------------------- ------------------- Karla M. Rabusch President, since Executive Vice President of Wells Fargo None 51 2010 Bank, N.A. and President of Wells Fargo Funds Management, LLC since 2003. Senior Vice President and Chief Administrative Officer of Wells Fargo Funds Management, LLC from 2001 to 2003. C. David Messman Secretary, since Senior Vice President and Secretary of Wells None 49 2010; Chief Legal Fargo Funds Management, LLC since 2001. Vice Counsel, since 2010 President and Managing Counsel of Wells Fargo Bank, N.A. since 1996. Kasey Phillips Treasurer, since Senior Vice President of Wells Fargo Funds None 39 2005 Management, LLC since 2009. Senior Vice President of Evergreen Investment Management Company, LLC from 2006 to 2010. Treasurer of the Evergreen Funds from 2005 to 2010. Vice President and Assistant Vice President of Evergreen Investment Services, Inc. from 1999 to 2006. David Berardi(2) Assistant Treasurer, Vice President of Wells Fargo Funds None 34 since 2009 Management, LLC since 2009. Vice President of Evergreen Investment Management Company, LLC from 2008 to 2010. Assistant Vice President of Evergreen Investment Services, Inc. from 2004 to 2008. Manager of Fund Reporting and Control for Evergreen Investment Management Company, LLC from 2004 to 2010. Jeremy DePalma Assistant Treasurer, Senior Vice President of Wells Fargo Funds None 36 since 2005 Management, LLC since 2009. Senior Vice President of Evergreen Investment Management Company, LLC from 2008 to 2010. Vice President, Evergreen Investment Services, Inc. from 2004 to 2007. Assistant Vice President, Evergreen Investment Services, Inc. from 2000 to 2004 and the head of the Fund Reporting and Control Team within Fund Administration form 2005 to 2010. Debra Ann Early Chief Compliance Chief Compliance Officer of Wells Fargo None 45 Officer, Funds Management, LLC since 2007. Chief since 2010 Compliance Officer of Parnassus Investments from 2005 to 2007. Chief Financial Officer of Parnassus Investments from 2004 to 2007 and Senior Audit Manager of PricewaterhouseCoopers LLP from 1998 to 2004.
---------- (1.) Effective July 9, 2010. (2.) Effective November 1, 2009. 34 Wells Fargo Advantage Utilities and High Income Fund Other Information (Unaudited) BOARD CONSIDERATION OF INVESTMENT ADVISORY AND SUB-ADVISORY AGREEMENTS: At their telephonic meeting on May 11, 2010, the Trustees of the Fund, including each Trustee who is not an "interested person" of the Fund (the "Independent Trustees"), as such term is defined by the Investment Company Act of 1940, as amended (the "1940 Act"), approved an advisory agreement for the Fund with Wells Fargo Funds Management, LLC ("Funds Management") as well as sub-advisory agreements with Crow Point Partners, LLC ("Crow Point") and Wells Capital Management Incorporated ("Wells Capital"). Because the 1940 Act requires trustee approval of definitive advisory agreements to occur at an in-person meeting, the Trustees, including the Independent Trustees, considered and approved each of these agreements again at their in-person meeting held on June 9-10, 2010 (together with the May 11, 2010 telephonic meeting, the "Meetings"). In considering at the Meetings whether to approve the advisory agreement with Funds Management and the sub-advisory agreements with Crow Point and Wells Capital, the Trustees took into account that they had most recently approved the annual continuation of the Fund's prior investment advisory agreement with Evergreen Investment Management Company, LLC ("EIMC") and sub-advisory agreements with Crow Point and Tattersall Advisory Group, Inc. ("TAG") in September 2009. That approval followed a lengthy process during which the Trustees considered a variety of factors, including, for example, the nature and quality of services that the Fund receives, the fees that the Fund pays under the agreements, and the Fund's investment performance, as well as a wide range of other matters that the Trustees considered to have a bearing upon the agreements. The Trustees also considered that the advisory agreement with Funds Management and the sub-advisory agreements with Crow Point and Wells Capital were proposed in the context of the combination of the Evergreen and Wells Fargo mutual fund families. After the December 31, 2008 merger of the Wells Fargo and Wachovia organizations, representatives of the combined Wells Fargo asset management organization approached the Trustees of the Evergreen funds with a proposal to combine the Evergreen and Wells Fargo Advantage Fund families. Funds Management's representatives cited a number of important considerations favoring an eventual combination of the fund families, including, among others, the integration of the Evergreen and Wells Fargo investment management organizations; possible economies of scale through the increased size of the combined fund family; contractual savings from service providers to the combined funds; the ability to select the best funds from each family to continue as part of the combined fund family; and more seamless integration of the Evergreen funds into the combined Wells Fargo investment and shareholder servicing platforms and programs. Over the course of 2009 and early 2010, the Board of Trustees of the Evergreen funds met repeatedly with the management teams of Funds Management and EIMC and worked to refine the proposed combination of the fund families. For the closed-end Evergreen funds, the proposed combination involved the approval of new investment advisory and sub-advisory agreements with Funds Management and affiliated (and un-affiliated) entities, name changes, and the election of new trustees. Throughout their consideration of the proposed combination of the fund families, the Trustees requested additional information from representatives of EIMC and Funds Management as they considered appropriate. The Trustees retained an independent industry consultant to assist them in evaluating the combination of the fund families and related information. They also met separately on numerous occasions with independent legal counsel to the Independent Trustees. The Trustees' determinations to approve the advisory agreement with Funds Management and the sub-advisory agreements with Crow Point and Wells Capital were based on a comprehensive evaluation of the information provided to them. During their review, the Trustees did not identify any particular information or consideration that was all-important or controlling, and each Trustee attributed different weights to various factors. In their discussions, the Board made clear that, although the Fund's new agreements were proposed as part of a combination of the fund families that may well benefit the shareholders of the Evergreen funds as a whole, the Board would consider carefully the impact of the proposed combination on each Evergreen fund and its shareholders individually, and would thus evaluate the proposed advisory agreement with Funds Management and sub-advisory agreements with Crow Point and Wells Capital for the Fund independently. Wells Fargo Advantage Utilities and High Income Fund 35 Other Information (Unaudited) The Trustees reviewed differences in the terms of the prior advisory agreement with EIMC and the proposed advisory agreement with Funds Management, and between the prior sub-advisory agreements with Crow Point and TAG and the proposed sub-advisory agreements with Crow Point and Wells Capital. The Trustees considered whether any change to the nature and quality of the comprehensive investment management services provided to the Fund would reasonably be expected as a result of adopting the proposed advisory agreement with Funds Management and sub-advisory agreements with Crow Point and Wells Capital. In this regard, they noted that the same investment management personnel presently responsible for providing investment advisory and sub-advisory services to the Fund would continue to do so under the new agreements, with the exception that portfolio managers at Wells Capital would take over providing sub-advisory services for the Fund's portfolio from TAG. The Trustees considered the research and other capabilities and resources available to the proposed portfolio managers, as well as the investment performance record of these portfolio managers in managing the Fund or, in the case of the proposed Wells Capital portfolio managers, portfolios similar to the Fund's. The Trustees observed that the proposed fee rate under the advisory agreement with Funds Management was identical to the fee rate under the prior advisory agreement with EIMC. They noted that there were certain changes proposed to the fee rates under the sub-advisory agreements with Crow Point and Wells Capital, which would have no impact on the aggregate fees paid by the Fund for advisory services. Funds Management asserted, and the Trustees took into account, that these changes were not expected to have any impact on the quality of services provided to the Funds or on the profitability of the advisory and sub-advisory arrangements to Funds Management and its affiliates (which includes Wells Capital). The Trustees reviewed information prepared by an independent data provider regarding the Fund's management fee and other expenses relative to the fees and expenses of other peer funds. They noted that the Fund's management fees were lower than the fees of its peer funds, and determined on the basis of the information presented that the Fund's fees did not appear excessive. During the course of their consideration of fees, the Trustees noted that in certain cases, Funds Management and/or its affiliates provide to other clients (including principally other existing Evergreen funds) advisory services that are comparable in some degree to the advisory services that they would provide to the Fund, and considered comparative fee information, as well as information regarding similarities and differences in the services provided, in this regard. In light, in part, of the fact that there were material differences between the Fund's investment program and the investment programs of these other clients, the Trustees did not consider the comparative fee information to be particularly useful in their consideration of the Fund's proposed agreements. The Trustees considered that, although the Fund was not making a continuous offering of its shares so that the likelihood of achieving economies of scale following the Fund's initial offering was relatively low, the Fund may potentially benefit to the extent that contractual arrangements with service providers to the combined fund family could be negotiated on a more favorable basis as a result of the increased scale of the combined fund family. They also considered information provided to them regarding the profitability of the advisory fees paid under the prior advisory agreement to EIMC, and regarding the anticipated profitability of such fees to Funds Management under the proposed advisory agreement, and determined that the profitability of these arrangements was not so high as to prevent their approving the new agreements. 36 Wells Fargo Advantage Utilities and High Income Fund List of Abbreviations THE FOLLOWING IS A LIST OF COMMON ABBREVIATIONS FOR TERMS AND ENTITIES WHICH MAY HAVE APPEARED IN THIS REPORT. ABAG -- Association of Bay Area Governments ADR -- American Depositary Receipt ADS -- American Depository Shares AMBAC -- American Municipal Bond Assurance Corporation AMT -- Alternative Minimum Tax ARM -- Adjustable Rate Mortgages BART -- Bay Area Rapid Transit CDA -- Community Development Authority CDO -- Collateralized Debt Obligation CDSC -- Contingent Deferred Sales Charge CGIC -- Capital Guaranty Insurance Company CGY -- Capital Guaranty Corporation CIFG -- CDC (Caisse des Depots et Consignations) IXIS Financial Guarantee COP -- Certificate of Participation CP -- Commercial Paper CTF -- Common Trust Fund DW&P -- Department of Water & Power DWR -- Department of Water Resources ECFA -- Educational & Cultural Facilities Authority EDFA -- Economic Development Finance Authority ETET -- Eagle Tax-Exempt Trust ETF -- Exchange-Traded Fund FFCB -- Federal Farm Credit Bank FGIC -- Financial Guaranty Insurance Corporation FHA -- Federal Housing Authority FHAG -- Federal Housing Agency FHLB -- Federal Home Loan Bank FHLMC -- Federal Home Loan Mortgage Corporation FNMA -- Federal National Mortgage Association FSA -- Farm Service Agency GDR -- Global Depositary Receipt GNMA -- Government National Mortgage Association GO -- General Obligation HCFR -- Healthcare Facilities Revenue HEFA -- Health & Educational Facilities Authority HEFAR -- Higher Education Facilities Authority Revenue HFA -- Housing Finance AuthoritY HFFA -- Health Facilities Financing Authority HUD -- Housing & Urban Development IDA -- Industrial Development Authority IDAG -- Industrial Development Agency IDR -- Industrial Development Revenue LIBOR -- London Interbank Offered Rate LLC -- Limited Liability Company LOC -- Letter of Credit LP -- Limited Partnership MBIA -- Municipal Bond Insurance Association MFHR -- Multi-Family Housing Revenue MFMR -- Multi-Family Mortgage Revenue MMD -- Municipal Market Data MTN -- Medium Term Note MUD -- Municipal Utility District NATL-RE -- National Public Finance Guarantee Corporation PCFA -- Pollution Control Finance Authority PCR -- Pollution Control Revenue PFA -- Public Finance Authority PFFA -- Public Facilities Financing Authority plc -- Public Limited Company PSFG -- Public School Fund Guaranty R&D -- Research & Development RDA -- Redevelopment Authority RDFA -- Redevelopment Finance Authority REIT -- Real Estate Investment Trust SFHR -- Single Family Housing Revenue SFMR -- Single Family Mortgage Revenue SLMA -- Student Loan Marketing Association SPDR -- Standard & Poor's Depositary Receipts STIT -- Short-Term Investment Trust TBA -- To Be Announced TRAN -- Tax Revenue Anticipation Notes USD -- Unified School District XLCA -- XL Capital Assurance (LOGO) Reduce clutter. Save trees. (WELLS FARGO ADVANTAGE FUNDS LOGO) Transfer Agent, Registrar, Shareholder Servicing Agent & Dividend Disbursing Agent: Computershare Trust Company, N.A. P.O. Box 43010 Providence, RI 02940-3010 1-800-730-6001 Wells Fargo Funds Management, LLC, is a subsidiary of Wells Fargo & Company and is an affiliate of Wells Fargo & Company's broker/dealer subsidiaries. (GRAPHIC) Printed on Recycled paper NOT FDIC INSURED - NO BANK GUARANTEE - MAY LOSE VALUE (C) 2010 Wells Fargo Funds Management, LLC. All rights reserved. www.wellsfargo.com/advantagefunds 125778 10-10 AUHIF/AR134 08-10 ITEM 2. CODE OF ETHICS As of the end of the period, August 31, 2010, Wells Fargo Advantage Utilities & High Income Fund has adopted a code of ethics, as defined in Item 2 of Form N-CSR, that applies to its President and Treasurer. A copy of the code of ethics is filed as an exhibit to this Form N-CSR. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT The Board of Trustees of Wells Fargo Advantage Utilities & High Income Fund has determined that Judith Johnson is an audit committee financial expert, as defined in Item 3 of Form N-CSR. Mrs. Johnson is independent for purposes of Item 3 of Form N-CSR. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES (a) AUDIT FEES - Provided below are the aggregate fees billed for the fiscal years ended August 31, 2009 and August 31, 2010 for professional services rendered by the principal accountant for the audit of the Registrant's annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements. For the fiscal years ended August 31, 2009 and August 31, 2010, the Audit Fees were $60,400 and $44,500, respectively. (b) AUDIT-RELATED FEES - There were no audit-related fees incurred for the fiscal years ended August 31, 2009 and August 31, 2010 for assurance and related services by the principal accountant for the Registrant. (c) TAX FEES - Provided below are the aggregate fees billed for the fiscal years ended August 31, 2009 and August 31, 2010 for professional services rendered by the principal accountant for the Registrant for tax compliance, tax advice, and tax planning. For the fiscal years ended August 31, 2009 and August 31, 2010, the Tax Fees were $0 and $189,320, respectively. The incurred Tax Fees are comprised of excise tax review services. For the fiscal years ended August 31, 2009 and August 31, 2010, the Tax Fees were $0 and $236,650, respectively. The incurred Tax Fees are comprised of tax preparation and consulting services. (d) ALL OTHER FEES - There were no other fees incurred for the fiscal years ended August 31, 2009 and August 31, 2010. (e)(1) The Chairman of the Audit Committees is authorized to pre-approve: (1) audit services to the mutual funds of Wells Fargo Advantage Utilities & High Income Fund, Wells Fargo Variable Trust and Wells Fargo Master Trust (the "Funds"); (2) non-audit tax or compliance consulting or training services provided to the Funds by the independent auditors ("Auditors") if the fees for any particular engagement are not anticipated to exceed $50,000; and (3) non-audit tax or compliance consulting or training services provided by the Auditors to a Fund's investment adviser and its controlling entities (where pre-approval is required because the engagement relates directly to the operations and financial reporting of the Fund) if the fee to the Auditors for any particular engagement is not anticipated to exceed $50,000. For any such pre-approval sought from the Chairman, Management shall prepare a brief description of the proposed services. If the Chairman approves of such service, he or she shall sign the statement prepared by Management. Such written statement shall be presented to the full Committees at their next regularly scheduled meetings. (e)(2) Not Applicable. (f) Not Applicable. (g) Provided below are the aggregate non-audit fees billed for the fiscal years ended August 31, 2009 and August 31, 2010, by the principal accountant for services rendered to the Registrant, and rendered to the Registrant's investment adviser, and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the Registrant. For the fiscal year ended August 31, 2010, the Registrant incurred non-audit fees in the amount of $103,000. The non-audit fees consist of SAS70 control reviews of Wells Fargo Bank, N.A. For the fiscal year ended August 31, 2010, the Registrant's investment adviser incurred non-audit fees in the amount of $45,000. The non-audit fees for the year-ended August 31, 2010 relates to examination of securities pursuant to rule 206 (4)-2 under the Investment Advisors Act of 1940. For the fiscal year ended August 31, 2010, the Registrant's investment adviser incurred non-audit fees in the amount of $135,000. The non-audit fees for the year ended August 31, 2010 consist of procedure reviews for pending mergers associated with fund reorganizations. For the fiscal year ended and August 31, 2010, the Registrant's investment adviser incurred non-audit fees in the amount of $572,300. The non-audit fees for the year ended August 31, 2010 relates to mergers and review of registration statements. For the fiscal year ended August 31, 2009, the Registrant's investment adviser incurred non-audit fees in the amount of $570,000. The non-audit fees for the year ended August 31, 2009 consisted of the aggregate fees for non-audit services rendered to the Fund and the investment advisor. (h) The Registrant's audit committee of the board of directors has determined that non-audit services rendered to the registrant's investment adviser, that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of the Regulation S-X, does not compromise the independence of the principal accountant. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS Not applicable. ITEMS 6. SCHEDULE OF INVESTMENTS The Schedule of Investments is included as part of the report to shareholders filed under Item 1 of this Form. ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES PROXY VOTING POLICIES AND PROCEDURES REVISED AS OF AUGUST 25, 2010 1. Scope of Policies and Procedures. These Policies and Procedures ("Procedures") are used to determine how to vote proxies relating to portfolio securities held by the series of Wells Fargo Funds Trust, Wells Fargo Master Trust, Wells Fargo Variable Trust, Asset Allocation Trust, Wells Fargo Advantage Global Dividend Opportunity Fund, Wells Fargo Advantage Income Opportunities Fund, Wells Fargo Advantage Multi-Sector Income Fund, and Wells Fargo Advantage Utilities & High Income Fund (the "Trusts") except for those series that exclusively hold non-voting securities (hereafter, all such series, and all such Trusts not having separate series, holding voting securities are referred to as the "Funds"). 2. Voting Philosophy. The Funds and Wells Fargo Funds Management, LLC ("Funds Management") have adopted these Procedures to ensure that proxies are voted in the best interests of Fund shareholders, without regard to any relationship that any affiliated person of the Fund (or an affiliated person of such affiliated person) may have with the issuer. Funds Management exercises its voting responsibility, as a fiduciary, with the goal of maximizing value to shareholders consistent with governing laws and the investment policies of each Fund. While securities are not purchased to exercise control or to seek to effect corporate change through share ownership, the Funds support sound corporate governance practices within companies in which they invest. 3. Responsibilities (a) Board of Trustees. The Board of Trustees of each Trust (the "Board") has delegated the responsibility for voting proxies relating to the Funds' portfolio securities to Funds Management. The Board retains the authority to make or ratify any voting decisions or approve any changes to these Procedures as the Board deems appropriate. Funds Management will provide reports to the Board regarding voting matters when and as reasonably requested by the Board. The Board shall review these Procedures as often as it deems appropriate to consider whether any revisions are warranted. On an annual basis, the Board shall receive and review a report from Funds Management on the proxy voting process. (b) Funds Management Proxy Committee (i) Responsibilities. The Funds Management Proxy Voting Committee (the "Proxy Committee") shall be responsible for overseeing the proxy voting process to ensure its implementation in conformance with these Procedures. The Proxy Committee shall monitor Risk Metrics Group ("Risk Metrics"), the proxy voting agent for Funds Management, to determine that Risk Metrics is accurately applying the Procedures as set forth herein. The Proxy Committee shall review the continuing appropriateness of the Procedures set forth herein, recommend revisions to the Board as necessary and provide an annual update to the Board on the proxy voting process. (ii) Voting Guidelines. Appendix A hereto sets forth guidelines regarding how proxies will be voted on the issues specified. Risk Metrics will vote proxies for or against as directed by the guidelines. Where the guidelines specify a "case by case" determination for a particular issue, Risk Metrics will forward the proxy to the Proxy Committee for a vote determination by the Proxy Committee. Finally, with respect to issues for which a vote for or against is specified by the Procedures, the Proxy Committee shall have the authority to direct Risk Metrics to forward the proxy to the Proxy Committee for a discretionary vote by the Proxy Committee if the Proxy Committee determines that a case-by-case review of such matter is warranted. The Proxy Committee may also consult Fund sub-advisers on certain proxy voting issues on a case-by-case basis as the Proxy Committee deems appropriate or to the extent that a sub-adviser of a Fund makes a recommendation regarding a proxy voting issue. As a general matter, however, proxies are voted consistently on the same matter when securities of an issuer are held by multiple Funds. (iii) Proxy Committee. In all cases, the Proxy Committee will exercise its voting discretion in accordance with the voting philosophy of the Funds. In cases where a proxy is forwarded by Risk Metrics to the Proxy Committee, the Proxy Committee may be assisted in its voting decision through receipt of: (i) independent research and voting recommendations provided by Risk Metrics or other independent sources; (ii) input from the investment sub-adviser responsible for purchasing the security; and (iii) information provided by company management and shareholder groups. Voting decisions made by the Proxy Committee will be reported to Risk Metrics to ensure that the vote is registered in a timely manner and included in Form N-PX reporting. (iv) Securities on Loan. As a general matter, securities on loan will not be recalled to facilitate proxy voting (in which case the borrower of the security shall be entitled to vote the proxy). However, if the Proxy Committee is aware of an item in time to recall the security and has determined in good faith that the importance of the matter to be voted upon outweighs the loss in lending revenue that would result from recalling the security (i.e., if there is a controversial upcoming merger or acquisition, or some other significant matter), the security will be recalled for voting. (v) Practical Limitations to Proxy Voting. While Funds Management uses its best efforts to vote proxies, in certain circumstances it may be impractical or impossible for Funds Management to vote proxies (e.g., limited value or unjustifiable costs). For example, in accordance with local law or business practices, many foreign companies prevent the sales of shares that have been voted for a certain period beginning prior to the shareholder meeting and ending on the day following the meeting ("share blocking"). Due to these restrictions, Funds Management must balance the benefits to its clients of voting proxies against the potentially serious portfolio management consequences of a reduced flexibility to sell the underlying shares at the most advantageous time. As a result, Funds Management will generally not vote those proxies in the absence of an unusual, significant vote or compelling economic importance. Additionally, Funds Management may not be able to vote proxies for certain foreign securities if Funds Management does not receive the proxy statement in time to vote the proxies due to custodial processing delays. (vi) Conflicts of Interest. Funds Management may have a conflict of interest regarding a proxy to be voted upon if, for example, Funds Management or its affiliates have other relationships with the issuer of the proxy. In most instances, conflicts of interest are avoided through a strict and objective application of the voting guidelines attached hereto. However, when the Proxy Committee is aware of a material conflict of interest regarding a matter that would otherwise require a vote by the Proxy Committee, the Proxy Committee shall address the material conflict by using any of the following methods: (1) instructing Risk Metrics to vote in accordance with the recommendation Risk Metrics makes to its clients; (2) disclosing the conflict to the Board and obtaining their consent before voting; (3) submitting the matter to the Board to exercise its authority to vote on such matter; (4) engaging an independent fiduciary who will direct the Proxy Committee on voting instructions for the proxy; (5) consulting with outside legal counsel for guidance on resolution of the conflict of interest; (6) erecting information barriers around the person or persons making voting decisions; (7) voting in proportion to other shareholders ("mirror voting"); or (8) voting in other ways that are consistent with each Fund's obligation to vote in the best interests of its shareholders. Additionally, the Proxy Committee will not permit its votes to be influenced by any conflict of interest that exists for any other affiliated person of the Fund (such as a sub-adviser or principal underwriter) or any affiliated persons of such affiliated persons and the Proxy Committee will vote all such matters without regard to the conflict. (vii) Meetings. The Proxy Committee shall convene as needed and when discretionary voting determinations need to be considered, and shall have the authority to act by vote of a majority of the Proxy Committee members available at that time. The Proxy Committee shall also meet at least semi-annually to review the Procedures and the performance of Risk Metrics in exercising its proxy voting responsibilities. (viii) Membership. The voting members of the Proxy Committee shall be Tom Biwer, Travis Keshemberg, Patrick McGuinnis and Erik Sens. Andrew Owen shall be a non-voting member and serve in an advisory capacity on the Proxy Committee. Changes to the membership of the Proxy Committee will be made only with Board approval. Upon departure from Funds Management, a member's position on the Proxy Committee will automatically terminate. 4. Disclosure of Policies and Procedures. Each Fund shall disclose in its statement of additional information a description of the policies and procedures it uses to determine how to vote proxies relating to securities held in its portfolio. In addition, each Fund shall disclose in its semi- and annual reports that a description of its proxy voting policies and procedures is available without charge, upon request, by calling 1-800-222-8222, on the Fund's web site at www.wellsfargo.com/advantagefunds and on the Securities and Exchange Commission's website at http://www.sec.gov. 5. Disclosure of Proxy Voting Record. Each Trust shall file with the Commission an annual report on Form N-PX not later than August 31 of each year (beginning August 31, 2004), containing the Trust's proxy voting record for the most recent twelve-month period ended June 30. Each Fund shall disclose in its statement of additional information and semi- and annual reports that information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available without charge on the Funds' web site at www.wellsfargo.com/advantagefunds or by accessing the Commission's web site at www.sec.gov. Each Fund shall disclose the following information on Form N-PX for each matter relating to a portfolio security considered at any shareholder meeting held during the period covered by the report and with respect to which the Fund was entitled to vote: - The name of the issuer of the portfolio security; - The exchange ticker symbol of the portfolio security; - The Council of Uniform Securities Identification Procedures ("CUSIP") number for the portfolio security (unless the CUSIP is not available through reasonably practicable means, in which case it will be omitted); - The shareholder meeting date; - A brief identification of the matter voted on; - Whether the matter was proposed by the issuer or by a security holder; - Whether the Fund cast its vote on the matter; - How the Fund cast its vote (e.g. for or against a proposal, or abstain; for or withhold regarding election of directors); and - Whether the Fund cast its vote for or against management. Form N-PX shall be made available to Fund shareholders through the SEC web site. APPENDIX A TO PROXY VOTING POLICIES AND PROCEDURES Funds Management will vote proxies relating to portfolio securities held by the Trusts in accordance with the following proxy voting guidelines. To the extent the specific guidelines below do not address a proxy voting proposal, Funds Management will vote pursuant to Risk Metrics' current U.S. and International proxy voting guidelines. Proxies for securities held by the Wells Fargo Advantage Social Awareness Fund related to social and environmental proposals will be voted pursuant to Risk Metrics' current SRI Proxy Voting Guidelines. In addition, proxies related to issues not addressed by the specific guidelines below or by Risk Metrics' current U.S. and International proxy voting guidelines will be forwarded to the Proxy Committee for a vote determination by the Proxy Committee. UNCONTESTED ELECTION OF DIRECTORS OR TRUSTEES THE FUNDS will generally vote for all uncontested director FOR or trustee nominees. The Nominating Committee is in the best position to select nominees who are available and capable of working well together to oversee management of the company. THE FUNDS will not require a performance test for directors. THE FUNDS will generally vote for reasonably crafted FOR shareholder proposals calling for directors to be elected with an affirmative majority of votes cast and/or the elimination of the plurality standard for electing directors, unless the company has adopted formal corporate governance principles that present a meaningful alternative to the majority voting standard. THE FUNDS will withhold votes for a director if the nominee WITHHOLD fails to attend at least 75% of the board and committee meetings without a valid excuse. THE FUNDS will vote against routine election of directors if AGAINST any of the following apply: company fails to disclose adequate information in a timely manner, serious issues with the finances, questionable transactions, conflicts of interest, record of abuses against minority shareholder interests, bundling of director elections, and/or egregious governance practices. THE FUNDS will withhold votes from the entire board (except WITHHOLD for new nominees) where the director(s) receive more than 50% withhold votes out of those cast and the issue that was the underlying cause of the high level of withhold votes has not been addressed. THE FUNDS will withhold votes from members of the Audit WITHHOLD 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. THE FUNDS will withhold votes from members of the Audit WITHHOLD Committee if the company receives an adverse opinion on the company's financial statements from its auditor. THE FUNDS will withhold votes from members of the Audit WITHHOLD Committee if 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. RATIFICATION OF AUDITORS THE FUNDS will vote against auditors and withhold votes from AGAINST/ WITHHOLD audit committee members if non-audit fees are greater than audit fees, audit-related fees, and permitted tax fees, combined. THE FUNDS will follow the disclosure categories being proposed by the SEC in applying the above formula. With the above exception, THE FUNDS will generally vote for FOR proposals to ratify auditors unless: - an auditor has a financial interest in or association AGAINST with the company, and is therefore not independent, or - there is reason to believe that the independent auditor AGAINST has rendered an opinion that is neither accurate nor indicative of the company's financial position. THE FUNDS will vote against proposals that require auditors AGAINST to attend annual meetings as auditors are regularly reviewed by the board audit committee, and such attendance is unnecessary. THE FUNDS will consider shareholder proposals requiring CASE-BY-CASE companies to prohibit their auditors from engaging in non-audit services on a case-by-case basis (or cap level of non-audit services). THE FUNDS will vote for shareholder proposals requesting a FOR shareholder vote for audit firm ratification. THE FUNDS will vote against shareholder proposals asking for AGAINST audit firm rotation. This practice is viewed as too disruptive and too costly to implement for the benefit achieved. COMPANY NAME CHANGE/PURPOSE THE FUNDS will vote for proposals to change the company name FOR as management and the board is best suited to determine if such change in company name is necessary. However, where the name change is requested in connection CASE-BY-CASE with a reorganization of the company, the vote will be based on the merits of the reorganization. In addition, THE FUNDS will generally vote for proposals to FOR amend the purpose of the company. Management is in the best position to know whether the description of what the company does is accurate, or whether it needs to be updated by deleting, adding or revising language. EMPLOYEE STOCK PURCHASE PLANS/401(K) EMPLOYEE BENEFIT PLANS THE FUNDS will vote for proposals to adopt, amend or FOR increase authorized shares for employee stock purchase plans and 401(k) plans for employees as properly structured plans enable employees to purchase common stock at a slight discount and thus own a beneficial interest in the company, provided that the total cost of the company's plan is not above the allowable cap for the company. Similarly, THE FUNDS will generally vote for proposals to FOR adopt or amend thrift and savings plans, retirement plans, pension plans and profit plans. APPROVE OTHER BUSINESS THE FUNDS will generally vote for proposals to approve other FOR business. This transfer of authority allows the corporation to take certain ministerial steps that may arise at the annual or special meeting. However, THE FUNDS retains the discretion to vote against AGAINST such proposals if adequate information is not provided in the proxy statement, or the measures are significant and no further approval from shareholders is sought. INDEPENDENT BOARD OF DIRECTORS/BOARD COMMITTEES THE FUNDS will vote for proposals requiring that two-thirds FOR of the board be independent directors. An independent board faces fewer conflicts and is best prepared to protect stockholders' interests. THE FUNDS will withhold votes from insiders and affiliated WITHHOLD outsiders on boards that are not at least majority independent. THE FUNDS will withhold votes from compensation committee WITHHOLD members where there is a pay-for-performance disconnect (for Russell 3000 companies). THE FUNDS will vote for proposals requesting that the board FOR audit, compensation and/or nominating committees be composed of independent directors, only. Committees should be composed entirely of independent directors in order to avoid conflicts of interest. THE FUNDS will withhold votes from any insiders or WITHHOLD affiliated outsiders on audit, compensation or nominating committees. THE FUNDS will withhold votes from any insiders or affiliated outsiders on the board if any of these key committees has not been established. THE FUNDS will vote against proposals from shareholders AGAINST requesting an independent compensation consultant. MINIMUM STOCK REQUIREMENTS BY DIRECTORS THE FUNDS will vote against proposals requiring directors to AGAINST own a minimum number of shares of company stock in order to qualify as a director, or to remain on the board. Minimum stock ownership requirements can impose an across-the-board requirement that could prevent qualified individuals from serving as directors. INDEMNIFICATION AND LIABILITY PROVISIONS FOR DIRECTORS AND OFFICERS THE FUNDS will vote for proposals to allow indemnification FOR of directors and officers, when the actions taken were on behalf of the company and no criminal violations occurred. THE FUNDS will also vote in favor of proposals to purchase liability insurance covering liability in connection with those actions. Not allowing companies to indemnify directors and officers to the degree possible under the law would limit the ability of the company to attract qualified individuals. Alternatively, THE FUNDS will vote against indemnity AGAINST proposals that are overly broad. For example, THE FUNDS will oppose proposals to indemnify directors for acts going beyond mere carelessness, such as gross negligence, acts taken in bad faith, acts not otherwise allowed by state law or more serious violations of fiduciary obligations. NOMINEE STATEMENT IN THE PROXY THE FUNDS will vote against proposals that require board AGAINST nominees to have a statement of candidacy in the proxy, since the proxy statement already provides adequate information pertaining to the election of directors. LIMITATION ON NUMBER OF BOARDS A DIRECTOR MAY SIT ON THE FUNDS will withhold votes from directors who sit on more WITHHOLD than six boards. THE FUNDS will withhold votes from CEO directors who sit on WITHHOLD more than two outside boards besides their own. DIRECTOR TENURE/RETIREMENT AGE THE FUNDS will vote against proposals to limit the tenure of AGAINST directors as such limitations based on an arbitrary number could prevent qualified individuals from serving as directors. However, THE FUNDS is in favor of inserting cautionary language when the average director tenure on the board exceeds 15 years for the entire board. The Funds will vote for proposals to establish a mandatory FOR retirement age for directors provided that such retirement age is not less than 65. BOARD POWERS/PROCEDURES/QUALIFICATIONS THE FUNDS will consider on a case-by-case basis proposals to CASE-BY-CASE amend the corporation's By-laws so that the Board of Directors shall have the power, without the assent or vote of the shareholders, to make, alter, amend, or rescind the By-laws, fix the amount to be reserved as working capital, and fix the number of directors and what number shall constitute a quorum of the Board. In determining these issues, THE FUNDS will rely on the proxy voting Guidelines. LOANS TO OFFICERS THE FUNDS will consider on a case-by-case basis proposals to CASE-BY-CASE authorize the corporation to make loans or to guarantee the obligations of officers of the corporation or any of its affiliates. ADJOURN MEETING TO SOLICIT ADDITIONAL VOTES THE FUNDS will examine proposals to adjourn the meeting to CASE-BY-CASE solicit additional votes on a case-by-case basis. As additional solicitation may be costly and could result in coercive pressure on shareholders, THE FUNDS will consider the nature of the proposal and its vote recommendations for the scheduled meeting. THE FUNDS will vote for this item when: THE FUNDS is supportive of the underlying merger proposal; FOR the company provides a sufficient, compelling reason to support the adjournment proposal; and the authority is limited to adjournment proposals requesting the authority to adjourn solely to solicit proxies to approve a transaction THE FUNDS supports. CONTESTED ELECTION OF DIRECTORS OR TRUSTEES REIMBURSEMENT OF SOLICITATION EXPENSES THE FUNDS will consider contested elections on a CASE-BY-CASE case-by-case basis, considering the following factors: long-term financial performance of the target company relative to its industry; management's track record; background of the proxy contest; qualifications of director or trustee nominees (both slates); evaluation of what each side is offering shareholders as well as the likelihood that the proposed objectives and goals can be met; and stock ownership positions. In addition, decisions to provide reimbursement for CASE-BY-CASE dissidents waging a proxy contest are made on a case-by-case basis as proxy contests are governed by a mix of federal regulation, state law, and corporate charter and bylaw provisions. BOARD STRUCTURE: STAGGERED VS. ANNUAL ELECTIONS THE FUNDS will consider the issue of classified boards on a CASE-BY-CASE case-by-case basis. In some cases, the division of the board into classes, elected for staggered terms, can entrench the incumbent management and make them less responsive to shareholder concerns. On the other hand, in some cases, staggered elections may provide for the continuity of experienced directors on the Board. REMOVAL OF DIRECTORS THE FUNDS will consider on a case-by-case basis proposals to CASE-BY-CASE eliminate shareholders' rights to remove directors with or without cause or only with approval of two-thirds or more of the shares entitled to vote. However, a requirement that a 75% or greater vote be AGAINST obtained for removal of directors is abusive and will warrant a vote against the proposal. BOARD VACANCIES THE FUNDS will vote against proposals that allow the board AGAINST to fill vacancies without shareholder approval as these authorizations run contrary to basic shareholders' rights. Alternatively, THE FUNDS will vote for proposals that permit FOR shareholders to elect directors to fill board vacancies. CUMULATIVE VOTING THE FUNDS will vote on proposals to permit or eliminate CASE-BY-CASE cumulative voting on a case-by-case basis based upon the existence of a counter balancing governance structure and company performance, in accordance with its proxy voting guideline philosophy. However, if the board is elected annually we will NOT support cumulative voting. SHAREHOLDERS' RIGHT TO CALL A SPECIAL MEETING SHAREHOLDER ABILITY TO ACT BY WRITTEN CONSENT Proposals providing that stockholder action may be taken CASE-BY-CASE only at an annual or special meeting of stockholder and not by written consent, or increasing the shareholder vote necessary to call a special meeting, will be voted on a case by case basis in accordance with the proxy voting guidelines. BOARD SIZE THE FUNDS will vote for proposals that seek to fix the size FOR of the board, as the ability for management to increase or decrease the size of the board in the face of a proxy contest may be used as a takeover defense. However, if the company has cumulative voting, downsizing the board may decrease a minority shareholder's chances of electing a director. By increasing the size of the board, management can make it more difficult for dissidents to gain control of the board. Fixing the size of the board also prevents a reduction in the board size as a means to oust independent directors or those who cause friction within an otherwise homogenous board. SHAREHOLDER RIGHTS PLAN (POISON PILLS) THE FUNDS will generally vote for proposals that request a FOR company to submit its poison pill for shareholder ratification. THE FUNDS will withhold votes from all directors (except for WITHHOLD new nominees) if the company has adopted or renewed a poison pill without shareholder approval since the company's last annual meeting, does not put the pill to a vote at the current annual meeting, and does not have a requirement or does not commit to put the pill to shareholder vote within 12 months. In addition, THE FUNDS will withhold votes on all directors at any company that responds to the majority of the shareholders voting by putting the poison pill to a shareholder vote with a recommendation other than to eliminate the pill. Alternatively, THE FUNDS will analyze proposals to redeem a CASE-BY-CASE company's poison pill, or requesting the ratification of a poison pill on a case-by-case basis. Poison pills are one of the most potent anti-takeover measures and are generally adopted by boards without shareholder approval. These plans harm shareholder value and entrench management by deterring stock acquisition offers that are not favored by the board. FAIR PRICE PROVISIONS THE FUNDS will consider fair price provisions on a CASE-BY-CASE case-by-case basis, evaluating factors such as the vote required to approve the proposed mechanism, 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. THE FUNDS will vote against fair price provisions with AGAINST shareholder vote requirements of 75% or more of disinterested shares. GREENMAIL THE FUNDS will generally vote in favor of proposals limiting FOR the corporation's authority to purchase shares of common stock (or other outstanding securities) from a holder of a stated interest (5% or more) at a premium unless the same offer is made to all shareholders. These are known as "anti-greenmail" provisions. Greenmail discriminates against rank-and-file shareholders and may have an adverse effect on corporate image. If the proposal is bundled with other charter or bylaw CASE-BY-CASE amendments, THE FUNDS will analyze such proposals on a case-by-case basis. In addition, THE FUNDS will analyze restructurings that involve the payment of pale greenmail on a case-by-case basis. VOTING RIGHTS THE FUNDS will vote for proposals that seek to maintain or FOR convert to a one-share, one-vote capital structure as such a principle ensures that management is accountable to all the company's owners. Alternatively, THE FUNDS will vote against any proposals to AGAINST cap the number of votes a shareholder is entitled to. Any measure that places a ceiling on voting may entrench management and lessen its interest in maximizing shareholder value. DUAL CLASS/MULTIPLE-VOTING STOCK THE FUNDS will vote against proposals that authorize, amend AGAINST or increase dual class or multiple-voting stock which may be used in exchanges or recapitalizations. Dual class or multiple-voting stock carry unequal voting rights, which differ from those of the broadly traded class of common stock. Alternatively, THE FUNDS will vote for the elimination of FOR dual class or multiple-voting stock, which carry different rights than the common stock. SUPERMAJORITY VOTE PROVISIONS THE FUNDS will generally consider on a case-by-case basis CASE-BY-CASE proposals to increase the shareholder vote necessary to approve mergers, acquisitions, sales of assets etc. and to amend the corporation's charter or by-laws. The factors considered are those specified in the proxy guidelines. However, a supermajority requirement of 75% or more is AGAINST abusive and THE FUNDS will vote against proposals that provide for them. Supermajority vote provisions require voting approval in excess of a simple majority of the outstanding shares for a proposal. Companies may include supermajority lock-in provisions, which occur when changes are made to a corporation's governing documents, and once approved, a supermajority vote is required to amend or repeal the changes. CONFIDENTIAL VOTING THE FUNDS will vote for proposals to adopt confidential FOR voting. VOTE TABULATIONS THE FUNDS will vote against proposals asking corporations to AGAINST refrain from counting abstentions and broker non-votes in their vote tabulations and to eliminate the company's discretion to vote unmarked proxy ballots. Vote counting procedures are determined by a number of different standards, including state law, the federal proxy rules, internal corporate policies, and mandates of the various stock exchanges. EQUAL ACCESS TO THE PROXY THE FUNDS will evaluate Shareholder proposals requiring CASE-BY-CASE companies to give shareholders access to the proxy ballot for the purpose of nominating board members, on a case-by-case basis taking into account the ownership threshold proposed in the resolution and the proponent's rationale for the proposal at the targeted company in terms of board and director conduct. DISCLOSURE OF INFORMATION THE FUNDS will vote against shareholder proposals requesting AGAINST fuller disclosure of company policies, plans, or business practices. Such proposals rarely enhance shareholder return and in many cases would require disclosure of confidential business information. ANNUAL MEETINGS THE FUNDS will vote for proposals to amend procedures or FOR change date or location of the annual meeting. Decisions as to procedures, dates or locations of meetings are best placed with management. Alternatively, THE FUNDS will vote against proposals from AGAINST shareholders calling for a change in the location or date of annual meetings as no date or location proposed will be acceptable to all shareholders. THE FUNDS will generally vote in favor of proposals to FOR reduce the quorum necessary for shareholders' meetings, subject to a minimum of a simple majority of the company's outstanding voting shares. SHAREHOLDER ADVISORY COMMITTEES/INDEPENDENT INSPECTORS THE FUNDS will vote against proposals seeking to establish AGAINST shareholder advisory committees or independent inspectors. The existence of such bodies dilutes the responsibility of the board for managing the affairs of the corporation. TECHNICAL AMENDMENTS TO THE CHARTER OF BYLAWS THE FUNDS will generally vote in favor of charter and bylaw FOR amendments proposed solely to conform to modern business practices, for simplification, or to comply with what management's counsel interprets as applicable law. However, amendments that have a material effect on CASE-BY-CASE shareholder's rights will be considered on a case-by-case basis. BUNDLED PROPOSALS THE FUNDS will vote for bundled or "conditional" proxy CASE-BY-CASE proposals on a case-by-case basis, as THE FUNDS will examine the benefits and costs of the packaged items, and determine if the effect of the conditioned items are in the best interests of shareholders. COMMON STOCK AUTHORIZATIONS/REVERSE STOCK SPLITS/FORWARD STOCK SPLITS THE FUNDS will follow the Risk Metrics capital structure CASE-BY-CASE model in evaluating requested increases in authorized common stock. In addition, even if capital requests of less than or equal to 300% of outstanding shares fail the calculated allowable cap, THE FUNDS will evaluate the request on a case-by-case basis, potentially voting for the proposal based on the company's performance and whether the company's ongoing use of shares has shown prudence. Further, the company should identify what the stock increases are to be used for, i.e. a proposed stock split, issuance of shares for acquisitions, or for general business purposes. Also to be considered is whether the purpose of the proposed AGAINST increase is to strengthen takeover defenses, in which case THE FUNDS will vote against the proposal. Such increases give management too much power and are beyond what a company would normally need during the course of a year. They may also allow management to freely place the shares with an allied institution or set the terms and prices of the new shares. For reverse stock splits, THE FUNDS will generally vote for FOR proposals to implement the split provided the number of authorized common shares is reduced to a level that does not represent an unreasonably large increase in authorized but unissued shares. The failure to reduce authorized shares proportionally to any reverse split has potential adverse anti-takeover consequences. However, such circumstances may be warranted if delisting of the company's stock is imminent and would result in greater harm to shareholders than the excessive share authorization. THE FUNDS will evaluate "Going Dark" transactions, which CASE-BY-CASE allow listed companies to de-list and terminate the registration of their common stock on a case-by-case basis, determining whether the transaction enhances shareholder value. THE FUNDS will generally vote in favor of forward stock FOR splits. DIVIDENDS THE FUNDS will vote for proposals to allocate income and set FOR dividends. THE FUNDS will also vote for proposals that authorize a FOR dividend reinvestment program as it allows investors to receive additional stock in lieu of a cash dividend. However, if a proposal for a special bonus dividend is made AGAINST that specifically rewards a certain class of shareholders over another, THE FUNDS will vote against the proposal. THE FUNDS will also vote against proposals from shareholders AGAINST requesting management to redistribute profits or restructure investments. Management is best placed to determine how to allocate corporate earnings or set dividends. In addition, THE FUNDS will vote for proposals to set FOR director fees. REDUCE THE PAR VALUE OF THE COMMON STOCK THE FUNDS will vote for proposals to reduce the par value of FOR common stock. PREFERRED STOCK AUTHORIZATION THE FUNDS will generally vote for proposals to create FOR preferred stock in cases where the company expressly states that the stock will not be used as a takeover defense or carry superior voting rights, or where the stock may be used to consummate beneficial acquisitions, combinations or financings. Alternatively, THE FUNDS will vote against proposals to AGAINST authorize or issue preferred stock if the board has asked for the unlimited right to set the terms and conditions for the stock and may issue it for anti-takeover purposes without shareholder approval (blank check preferred stock). In addition, THE FUNDS will vote against proposals to issue AGAINST preferred stock if the shares to be used have voting rights greater than those available to other shareholders. THE FUNDS will vote for proposals to require shareholder FOR approval of blank check preferred stock issues for other than general corporate purposes (white squire placements). Finally, THE FUNDS will consider on a case-by-case basis CASE-BY-CASE proposals to modify the rights of preferred shareholders and to increase or decrease the dividend rate of preferred stock. RECLASSIFICATION OF SHARES THE FUNDS will consider proposals to reclassify a specified CASE-BY-CASE class or series of shares on a case-by-case basis. PREEMPTIVE RIGHTS THE FUNDS will generally vote for proposals to eliminate FOR preemptive rights. Preemptive rights are unnecessary to protect shareholder interests due to the size of most modern companies, the number of investors and the liquidity of trading. SHARE REPURCHASE PLANS THE FUNDS will vote for share repurchase plans, unless: FOR - there is clear evidence of past abuse of the authority; AGAINST or - the plan contains no safeguards against selective AGAINST buy-backs. Corporate stock repurchases are a legitimate use of corporate funds and can add to long-term shareholder returns. EXECUTIVE AND DIRECTOR COMPENSATION PLANS THE FUNDS will analyze on a case-by-case basis proposals on CASE-BY-CASE executive or director compensation plans, with the view that viable compensation programs reward the creation of stockholder wealth by having high payout sensitivity to increases in shareholder value. Such proposals may seek shareholder approval to adopt a new plan, or to increase shares reserved for an existing plan. THE FUNDS will review the potential cost and dilutive effect FOR of the plan. After determining how much the plan will cost, Risk Metrics evaluates whether the cost is reasonable by comparing the cost to an allowable cap. The allowable cap is industry-specific, market cap-base, and pegged to the average amount paid by companies performing in the top quartile of their peer groups. If the proposed cost is below the allowable cap, THE FUNDS will vote for the plan. Risk Metrics will also apply a pay for performance overlay in assessing equity-based compensation plans for Russell 3000 companies. If the proposed cost is above the allowable cap, THE FUNDS AGAINST will vote against the plan. Among the plan features that may result in a vote against AGAINST the plan are: - plan administrators are given the authority to reprice or replace underwater options; repricing guidelines will conform to changes in the NYSE and NASDAQ listing rules. THE FUNDS will vote against equity plans that have high AGAINST average three-year burn rate. (The burn rate is calculated as the total number of stock awards and stock options granted any given year divided by the number of common shares outstanding.) THE FUNDS will define a high average three-year burn rate as the following: The company's most recent three-year burn rate exceeds one standard deviation of its four-digit GICS peer group segmented by Russell 3000 index and non-Russell 3000 index; and the company's most recent three-year burn rate exceeds 2% of common shares outstanding. For companies that grant both full value awards and stock options to their employees, THE FUNDS shall apply a premium on full value awards for the past three fiscal years. Even if the equity plan fails the above burn rate, THE FUNDS FOR will vote for the plan if 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. If the company fails to fulfill its burn rate commitment, THE FUNDS will consider withholding from the members of the compensation committee. THE FUNDS will calculate a higher award value for awards CASE-BY-CASE that have Dividend Equivalent Rights (DER's) associated with them. THE FUNDS will generally vote for shareholder proposals FOR requiring performance-based stock options unless the proposal is overly restrictive or the company demonstrates that it is using a substantial portion of performance-based awards for its top executives. THE FUNDS will vote for shareholder proposals asking the FOR company to expense stock options, as a result of the FASB final rule on expensing stock options. THE FUNDS will generally vote for shareholder proposals to FOR exclude pension fund income in the calculation of earnings used in determining executive bonuses/compensation. THE FUNDS will withhold votes from compensation committee WITHHOLD members if they fail to submit one-time transferable stock options (TSO's) to shareholders for approval. THE FUNDS will generally vote for TSO awards within a new FOR equity plan if the total cost of the equity plan is less than the company's allowable cap. THE FUNDS will generally vote against shareholder proposals AGAINST to ban future stock option grants to executives. This may be supportable in extreme cases where a company is a serial repricer, has a huge overhang, or has highly dilutive, broad-based (non-approved) plans and is not acting to correct the situation. THE FUNDS will evaluate shareholder proposals asking CASE-BY-CASE companies to adopt holding periods for their executives on a case-by-case basis taking into consideration the company's current holding period or officer share ownership requirements, as well as actual officer stock ownership in the company. For certain OBRA-related proposals, THE FUNDS will vote for FOR plan provisions that (a) place a cap on annual grants or amend administrative features, and (b) add performance criteria to existing compensation plans to comply with the provisions of Section 162(m) of the Internal Revenue Code. In addition, director compensation plans may also include CASE-BY-CASE stock plans that provide directors with the option of taking all or a portion of their cash compensation in the form of stock. THE FUNDS will consider these plans based on their voting power dilution. THE FUNDS will generally vote for retirement plans for FOR directors. THE FUNDS will evaluate compensation proposals (Tax Havens) CASE-BY-CASE requesting share option schemes or amending an existing share option scheme on a case-by-case basis. Stock options align management interests with those of shareholders by motivating executives to maintain stock price appreciation. Stock options, however, may harm shareholders by diluting each owner's interest. In addition, exercising options can shift the balance of voting power by increasing executive ownership. BONUS PLANS THE FUNDS will vote for proposals to adopt annual or CASE-BY-CASE long-term cash or cash-and-stock bonus plans on a case-by-case basis. These plans enable companies qualify for a tax deduction under the provisions of Section 162(m) of the IRC. Payouts under these plans may either be in cash or stock and are usually tied to the attainment of certain financial or other performance goals. THE FUNDS will consider whether the plan is comparable to plans adopted by companies of similar size in the company's industry and whether it is justified by the company's performance. DEFERRED COMPENSATION PLANS THE FUNDS will generally vote for proposals to adopt or FOR amend deferred compensation plans as they allow the compensation committee to tailor the plan to the needs of the executives or board of directors, unless - the proposal is embedded in an executive or director AGAINST compensation plan that is contrary to guidelines DISCLOSURE ON EXECUTIVE OR DIRECTOR COMPENSATION CAP OR RESTRICT EXECUTIVE OR DIRECTOR COMPENSATION THE FUNDS will generally vote for shareholder proposals FOR requiring companies to report on their executive retirement benefits (deferred compensation, split-dollar life insurance, SERPs, and pension benefits. THE FUNDS will generally vote for shareholder proposals requesting to put extraordinary benefits contained in FOR 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. THE FUNDS will generally vote against proposals that seek to AGAINST limit executive and director pay. GOLDEN AND TIN PARACHUTES THE FUNDS will vote for proposals that seek shareholder FOR ratification of golden or tin parachutes as shareholders should have the opportunity to approve or disapprove of these severance agreements. Alternatively, THE FUNDS will examine on a case-by-case CASE-BY-CASE basis proposals that seek to ratify or cancel golden or tin parachutes. Effective parachutes may encourage management to consider takeover bids more fully and may also enhance employee morale and productivity. Among the arrangements that will be considered on their merits are: - arrangements guaranteeing key employees continuation of base salary for more than three years or lump sum payment of more than three times base salary plus retirement benefits; - guarantees of benefits if a key employee voluntarily terminates; - guarantees of benefits to employees lower than very senior management; and - indemnification of liability for excise taxes. By contrast, THE FUNDS will vote against proposals that AGAINST would guarantee benefits in a management-led buyout. REINCORPORATION THE FUNDS will evaluate a change in a company's state of CASE-BY-CASE incorporation on a case-by-case basis. THE FUNDS will analyze the valid reasons for the proposed move, including restructuring efforts, merger agreements, and tax or incorporation fee savings. THE FUNDS will also analyze proposed changes to the company charter and differences between the states' corporate governance laws. States have adopted various statutes intended to encourage CASE-BY-CASE companies to incorporate in the state. These may include state takeover statutes, control share acquisition statutes, control share cash-out statutes, freezeout provisions, fair price provisions, and disgorgement provisions. THE FUNDS will examine reincorporations on a case-by-case in light of these statutes and in light of the corporate governance features the company has adopted to determine whether the reincorporation is in shareholders' best interests. In addition, THE FUNDS will also examine poison pill CASE-BY-CASE endorsements, severance pay and labor contract provisions, and anti-greenmail provisions in the context of a state's corporate governance laws on a case-by-case basis. THE FUNDS will evaluate shareholder proposals requiring CASE-BY-CASE offshore companies to reincorporate into the United States on a case-by-case basis. Reincorporation proposals may have considerable implications for shareholders, affecting the company's takeover defenses and possibly its corporate structure and rules of governance. STAKEHOLDER LAWS THE FUNDS will vote against resolutions that would allow the AGAINST Board to consider stakeholder interests (local communities, employees, suppliers, creditors, etc.) when faced with a takeover offer. Similarly, THE FUNDS will vote for proposals to opt out of FOR stakeholder laws, which permit directors, when taking action, to weight the interests of constituencies other than shareholders in the process of corporate decision-making. Such laws allow directors to consider nearly any factor they deem relevant in discharging their duties. MERGERS/ACQUISITIONS AND CORPORATE RESTRUCTURINGS THE FUNDS will consider proposals on mergers and CASE-BY-CASE acquisitions on a case-by-case basis. THE FUNDS will determine if the transaction is in the best economic interests of the shareholders. THE FUNDS will take into account the following factors: - anticipated financial and operating benefits; - offer price (cost versus premium); - prospects for the combined companies; - how the deal was negotiated; - changes in corporate governance and their impact on shareholder rights. In addition, THE FUNDS will also consider whether current CASE-BY-CASE shareholders would control a minority of the combined company's outstanding voting power, and whether a reputable financial advisor was retained in order to ensure the protection of shareholders' interests. On all other business transactions, i.e. corporate CASE-BY-CASE restructuring, spin-offs, asset sales, liquidations, and restructurings, THE FUNDS will analyze such proposals on a case-by-case basis and utilize the majority of the above factors in determining what is in the best interests of shareholders. Specifically, for liquidations, the cost versus premium factor may not be applicable, but THE FUNDS may also review the compensation plan for executives managing the liquidation, APPRAISAL RIGHTS THE FUNDS will vote for proposals to restore, or provide FOR shareholders with rights of appraisal. Rights of appraisal provide shareholders who are not satisfied with the terms of certain corporate transactions (such as mergers) the right to demand a judicial review in order to determine the fair value of their shares. MUTUAL FUND PROXIES THE FUNDS will vote mutual fund proxies on a case-by-case CASE-BY-CASE basis. Proposals may include, and are not limited to, the following issues: - eliminating the need for annual meetings of mutual fund shareholders; - entering into or extending investment advisory agreements and management contracts; - permitting securities lending and participation in repurchase agreements; - changing fees and expenses; and - changing investment policies. An investment advisory agreement is an agreement between a mutual fund and its financial advisor under which the financial advisor provides investment advice to the fund in return for a fee based on the fund's net asset size. Most agreements require that the particular fund pay the advisor a fee constituting a small percentage of the fund's average net daily assets. In exchange for this consideration, the investment advisor manages the fund's account, furnishes investment advice, and provides office space and facilities to the fund. A new investment advisory agreement may be necessitated by the merger of the advisor or the advisor's corporate parent. Fundamental investment restrictions are limitations within a fund's articles of incorporation that limit the investment practices of the particular fund. As fundamental, such restrictions may only be amended or eliminated with shareholder approval. Non-fundamental investment restrictions may be altered by action of the board of trustees. Distribution agreements are agreements authorized by guidelines established under the Investment Company Act of 1940 and, in particular, Rule 12b-1 thereunder, between a fund and its distributor, which provide that the distributor is paid a monthly fee to promote the sale of the fund's shares. Reorganizations of funds may include the issuance of shares for an acquisition of a fund, or the merger of one fund into another for purposes of consolidation. The mutual fund industry is one of the most highly regulated industries, as it is subject to: individual state law under which the company is formed; the federal Securities Act of 1933; the federal Securities Exchange Act of 1934; and the federal Investment Company Act of 1940. ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES PORTFOLIO MANAGERS TIMOTHY O'BRIEN, CFA is a co-founder and principal at Crow Point Partners, LLC ("Crow Point") since 2006. Prior to founding Crow Point, he was a Senior Portfolio Manager and Managing Director at EIMC. PHIL SUSSER has been a portfolio manager of Wells Fargo Advantage Utilities and High Income since 2010. Mr. Susser is a Senior Portfolio Manager at Wells Capital Management and has been with Wells Capital Management or an affiliate since 2001. Education: B.A., Economics, University of Pennsylvania; J.D. University of Michigan NIKLAS NORDENFELT, CFA has been a portfolio manager of Wells Fargo Advantage Utilities and High Income since 2010. Mr. Nordenfelt is a Senior Portfolio Manager at Wells Capital Management and has been with Wells Capital Management or an affiliate since 2003. Education: B.A., Economics, University of California, Berkeley OTHER FUNDS AND ACCOUNTS MANAGED The following table provides information about the registered investment companies and other pooled investment vehicles and accounts managed by the portfolio manager of the Fund as of the Fund's most recent period ended August 31, 2009. NOTE: Wells Fargo Advantage Utilities and High Income Fund is not included in the numbers below except to list it at the top.
Other Accounts # $ mil 8/31/2010 ----------------------------------- ---- ----- --------- Wells Fargo Advantage Utilities and 1 $37.3 High Income Fund - High Income
NIKLAS NORDENFELT
I manage the following types of Other Registered Other Pooled Investment accounts: Investment Companies Vehicles Other Accounts ----------------------------------- -------------------- ----------------------- -------------- Number of above accounts 6 4 18 Total assets of above accounts $2,849.2 $498.0 $1,377.3 (millions)
performance based fee accounts:
I manage the following types of Other Registered Other Pooled Investment accounts: Investment Companies Vehicles Other Accounts ----------------------------------- -------------------- ----------------------- -------------- Number of above accounts 0 1 0 Total assets of above accounts $0.0 $278.2 $0.0 (millions)
PHIL SUSSER
I manage the following types of Other Registered Other Pooled Investment accounts: Investment Companies Vehicles Other Accounts ----------------------------------- -------------------- ----------------------- -------------- Number of above accounts 6 4 21 Total assets of above accounts $2,849.2 $498.0 $1,377.3 (millions)
performance based fee accounts:
I manage the following types of Other Registered Other Pooled Investment accounts: Investment Companies Vehicles Other Accounts ----------------------------------- -------------------- ----------------------- -------------- Number of above accounts 0 1 0 Total assets of above accounts $0.0 $278.2 $0.0 (millions)
MATERIAL CONFLICTS OF INTEREST The Portfolio Managers face inherent conflicts of interest in their day-to-day management of the Funds and other accounts because the Funds may have different investment objectives, strategies and risk profiles than the other accounts managed by the Portfolio Managers. For instance, to the extent that the Portfolio Managers manage accounts with different investment strategies than the Funds, they may from time to time be inclined to purchase securities, including initial public offerings, for one account but not for a Fund. Additionally, some of the accounts managed by the Portfolio Managers may have different fee structures, including performance fees, which are or have the potential to be higher or lower, in some cases significantly higher or lower, than the fees paid by the Funds. The differences in fee structures may provide an incentive to the Portfolio Managers to allocate more favorable trades to the higher-paying accounts. To minimize the effects of these inherent conflicts of interest, the Sub-Adviser has adopted and implemented policies and procedures, including brokerage and trade allocation policies and procedures, that it believes address the potential conflicts associated with managing portfolios for multiple clients and ensure that all clients are treated fairly and equitably. Additionally, the Sub-Adviser minimizes inherent conflicts of interest by assigning the Portfolio Managers to accounts having similar objectives. Accordingly, security block purchases are allocated to all accounts with similar objectives in proportionate weightings. Furthermore, the Sub-Adviser has adopted a Code of Ethics under Rule 17j-1 of the 1940 Act and Rule 204A-1 under the Investment Advisers Act of 1940 (the "Advisers Act") to address potential conflicts associated with managing the Funds and any personal accounts the Portfolio Managers may maintain. WELLS CAPITAL MANAGEMENT Wells Capital Management's Portfolio Managers often provide investment management for separate accounts advised in the same or similar investment style as that provided to mutual funds. While management of multiple accounts could potentially lead to conflicts of interest over various issues such as trade allocation, fee disparities and research acquisition, Wells Capital Management has implemented policies and procedures for the express purpose of ensuring that clients are treated fairly and that potential conflicts of interest are minimized. CROW POINT. Crow Point manages other investment vehicles, including some that may have investment objectives and strategies similar to the Fund's. The management of multiple funds and other accounts may require the portfolio manager to devote less than all of his or her time to the Fund, particularly if the other funds and accounts have different objectives, benchmarks and time horizons. The portfolio manager may also be required to allocate his or her investment ideas across multiple funds and accounts. In addition, if a portfolio manager identifies a limited investment opportunity, such as an initial public offering, that may be suitable for more than one fund or other account, the Fund may not be able to take full advantage of that opportunity due to, for example, an allocation of that investment across all eligible funds and accounts. Further, security purchase and sale orders for multiple accounts often are aggregated for purpose of execution. Although such aggregation generally benefits clients, it may cause the price or brokerage costs to be less favorable to a particular client than if similar transactions were not being executed concurrently for other accounts. It may also happen that the Fund's advisor or subadvisor will determine that it would be in the best interest, and consistent with the investment policies, of another account to sell a security (including by means of a short sale) that the Fund holds long, potentially resulting in a decrease in the market value of the security held by the Fund. The structure of a portfolio manager's or an investment advisor's compensation may create an incentive for the portfolio manager or investment advisor to favor accounts whose performance has a greater impact on such compensation. The portfolio manager may, for example, have an incentive to allocate favorable or limited opportunity investments or structure the timing of investments to favor such accounts. Similarly, if a portfolio manager holds a larger personal investment in one fund than he or she does in another, the portfolio manager may have an incentive to favor the fund in which he or she holds a larger stake. In general, Crow Point has policies and procedures that attempt to address the various potential conflicts of interest described above. However, there is no guarantee that such procedures will detect or address each and every situation where a conflict arises. All employees of Crow Point are bound by the company's Code of Ethics and compliance policies and procedures. Crow Point's chief compliance officer monitors and reviews compliance regularly. Crow Point's Code of Ethics and compliance procedures have been reviewed and accepted by EIMC. In addition, side-by-side trading rules have been agreed between EIMC and Crow Point as part of existing sub-advisory arrangements which are intended to ensure that shareholders of the sub-advised Evergreen funds are treated equitably by Crow Point with respect to investments, trading and allocations. COMPENSATION The Portfolio Managers were compensated by their employing sub-adviser from the fees the Adviser paid the Sub-Adviser using the following compensation structure: WELLS CAPITAL MANAGEMENT COMPENSATION. The compensation structure for Wells Capital Management's Portfolio Managers includes a competitive fixed base salary plus variable incentives (Wells Capital Management utilizes investment management compensation surveys as confirmation). Incentive bonuses are typically tied to pretax relative investment performance of all accounts under his or her management within acceptable risk parameters. Relative investment performance is generally evaluated for 1, 3, and 5 year performance results, with a predominant weighting on the 3- and 5- year time periods, versus the relevant benchmarks and/or peer groups consistent with the investment style. This evaluation takes into account relative performance of the accounts to each account's individual benchmark and/or the relative composite performance of all accounts to one or more relevant benchmarks consistent with the overall investment style. In the case of each Fund, the benchmark(s) against which the performance of the Fund's portfolio may be compared for these purposes generally are indicated in the Performance" sections of the Prospectuses. CROW POINT. Portfolio managers at Crow Point are paid a fixed salary and participate in the profits of the firm in proportion to their equity ownership in the firm. BENEFICIAL OWNERSHIP OF THE FUND The following table shows for each Portfolio Manager the dollar value of the Fund beneficially owned by the Portfolio Manager as of August 31, 2010: WELLS FARGO ADVANTAGE UTILITIES AND HIGH INCOME FUND Timothy O'Brien $10,001-$50,000 Phil Susser none Niklas Nordenfelt none
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASES Not applicable. ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Governance Committee (the "Committee") of the Board of Trustees of the registrant (the "Trust") has adopted procedures by which a shareholder of any series of the Trust may submit properly a nominee recommendation for the Committee's consideration. The shareholder must submit any such recommendation (a "Shareholder Recommendation") in writing to the Trust, to the attention of the Trust's Secretary, at the address of the principal executive offices of the Trust. The Shareholder Recommendation must be delivered to, or mailed and received at, the principal executive offices of the Trust not less than forty-five (45) calendar days nor more than seventy-five (75) calendar days prior to the date of the Committee meeting at which the nominee would be considered. The Shareholder Recommendation must include: (i) a statement in writing setting forth (A) the name, age, date of birth, business address, residence address and nationality of the person recommended by the shareholder (the "candidate"); (B) the series (and, if applicable, class) and number of all shares of the Trust owned of record or beneficially by the candidate, as reported to such shareholder by the candidate; (C) any other information regarding the candidate called for with respect to director nominees by paragraphs (a), (d), (e) and (f) of Item 401 of Regulation S-K or paragraph (b) of Item 22 of Rule 14a-101 (Schedule 14A) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), adopted by the Securities and Exchange Commission (or the corresponding provisions of any regulation or rule subsequently adopted by the Securities and Exchange Commission or any successor agency applicable to the Trust); (D) any other information regarding the candidate that would be required to be disclosed if the candidate were a nominee in a proxy statement or other filing required to be made in connection with solicitation of proxies for election of directors pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder; and (E) whether the recommending shareholder believes that the candidate is or will be an "interested person" of the Trust (as defined in the Investment Company Act of 1940, as amended) and, if not an "interested person," information regarding the candidate that will be sufficient for the Trust to make such determination; (ii) the written and signed consent of the candidate to be named as a nominee and to serve as a Trustee if elected; (iii) the recommending shareholder's name as it appears on the Trust's books; (iv) the series (and, if applicable, class) and number of all shares of the Trust owned beneficially and of record by the recommending shareholder; and (v) a description of all arrangements or understandings between the recommending shareholder and the candidate and any other person or persons (including their names) pursuant to which the recommendation is being made by the recommending shareholder. In addition, the Committee may require the candidate to interview in person and furnish such other information as it may reasonably require or deem necessary to determine the eligibility of such candidate to serve as a Trustee of the Trust. ITEM 11. CONTROLS AND PROCEDURES (a) The President and Treasurer have concluded that the Wells Fargo Advantage Utilities & High Income Fund (the "Trust") disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) provide reasonable assurances that material information relating to the Trust is made known to them by the appropriate persons based on their evaluation of these controls and procedures as of a date within 90 days of the filing of this report. (b) There were no significant changes in the Trust's internal controls over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) that occurred during the second quarter of the period covered by this report that materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. ITEM 12. EXHIBITS (a)(1) Code of Ethics pursuant to Item 2 of Form N-CSR is filed and attached hereto as Exhibit 10a. (a)(2) Certification pursuant to Rule 30a-2(a) under the Investment Company Act of 1940 (17 CFR 270.30a-2(a)) is filed and attached hereto as Exhibit 99.CERT. (a)(3) Not applicable. (b) Certification pursuant to Rule 30a-2(b) under the Investment Company Act of 1940 (17 CFR 270.30a-2(b)) is filed and attached hereto as Exhibit 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. Wells Fargo Advantage Utilities & High Income Fund By: /s/ Karla M. Rabusch Karla M. Rabusch President Date: October 29, 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 date indicated. By: /s/ Karla M. Rabusch Karla M. Rabusch President Date: October 29, 2010 By: /s/ Kasey L. Phillips Kasey L. Phillips Treasurer Date: October 29, 2010