<PAGE> 1
AS FILED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 26, 1999
SECURITIES ACT FILE NO. 333-84993
INVESTMENT COMPANY ACT FILE NO. 811-09537
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
(Check appropriate box or boxes)
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. 3 [X]
-----------
Post-Effective Amendment No. [ ]
-----------
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 3 [X]
---------------
COLONIAL CALIFORNIA INSURED MUNICIPAL FUND
(Exact Name of Registrant as Specified in Charter)
ONE FINANCIAL CENTER, BOSTON, MA 02111
(Address of Principal Executive Offices)
(617) 426-3750
(Registrant's Telephone Number, including Area Code)
<TABLE>
<CAPTION>
Name and Address of
Agent for Service Copies to
<S> <C> <C>
William J. Ballou, Esq. John M. Loder, Esq. Gary Schpero, Esq.
Colonial Management Associates, Inc. Ropes & Gray Simpson Thacher & Bartlett
One Financial Center One International Place 425 Lexington Avenue
Boston, Massachusetts 02111-2621 Boston, Massachusetts 02110-2624 New York, New York 10017-3954
</TABLE>
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box. [ ]
It is proposed that this filing will become effective (check appropriate box):
[ ] when declared effective pursuant to Section 8(c)
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
BEING REGISTERED REGISTERED (1) UNIT (1) PRICE (1) REGISTRATION FEE (2)
- ---------------------- -------------------- --------------------- --------------------- --------------------
<S> <C> <C> <C> <C>
Common Shares, 3,500,000 $15.00 $52,500,000 $14,595
No Par Value
Per Share
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
(2) $278 of the fee previously paid.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE> 2
COLONIAL CALIFORNIA INSURED MUNICIPAL FUND
CROSS REFERENCE SHEET
ITEMS REQUIRED BY FORM N-2
<TABLE>
<CAPTION>
PART A
ITEM NO. ITEM CAPTION PROSPECTUS CAPTION
<S> <C> <C>
1................. Outside Front Cover Front Cover Page
2................. Inside Front and Outside Back Cover Page Front and Back Cover Page
3................. Fee Table and Synopsis Prospectus Summary; Summary of Fund
Expenses
4................. Financial Highlights Not Applicable
5................. Plan of Distribution Front Cover Page; Prospectus Summary;
Underwriting
6................. Selling Shareholders Not Applicable
7................. Use of Proceeds Use of Proceeds; Investment Objective and
Policies
8................. General Description of the Registrant Prospectus Summary; The Fund; Investment
Objective and Policies; Use of
Leverage and Related Risks; Additional
Risk Considerations; How the Fund Manages
Risk; Management of the Fund; Description
of Shares; Certain Provisions in the
Declaration of Trust
9................. Management Management of the Fund; Custodian,
Transfer Agent, Dividend Disbursing Agent
and Registrar
10 ............... Capital Stock, Long-Term Debt, Net Asset Value; Distributions; Dividend
and Other Securities Reinvestment Plan; Description of
Shares; Repurchase of Common
Shares; Conversion to Open-End Fund;
Tax Matters
11 ............... Defaults and Arrears on Senior Securities Not Applicable
12 ............... Legal Proceedings Not Applicable
13 ............... Table of Contents of the Table of Contents for the
Statement of Additional Information Statement of Additional Information
PART B STATEMENT OF ADDITIONAL
ITEM NO. ITEM CAPTION INFORMATION CAPTION
14 ............... Cover Page Cover Page
15................ Table of Contents Table of Contents
16 ............... General Information and History Not Applicable
17 ............... Investment Objective and Policies Investment Objectives and Policies;
Miscellaneous Investment Practices
18 ............... Management Management of the Fund
19 ............... Control Persons and Principal Management of the Fund
Holders of Securities
20 ............... Investment Advisory and Other Services Fund Charges and Expenses; Management
of the Fund; Custodian; Independent
Accountants
21 ............... Brokerage Allocation and Other Practices Fund Charges and Expenses; Portfolio
Transactions
22 ............... Tax Status Tax Matters
23 ............... Financial Statements Financial Statements
</TABLE>
<PAGE> 3
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED OCTOBER 26, 1999
PROSPECTUS
1,000,000 SHARES
COLONIAL CALIFORNIA INSURED MUNICIPAL FUND
COMMON SHARES
$15.00 PER SHARE
-------------------------
Investment Objective. The Fund is a newly organized, closed-end,
nondiversified management investment company. The Fund's investment objective is
to provide current income generally exempt from regular federal income tax and
California state personal income tax.
Portfolio Contents. The Fund will invest its assets in a nondiversified
portfolio of bonds and notes that generally are issued by or on behalf of
California state and local governmental units whose interest is, in the opinion
of issuer's counsel (or on the basis of other reliable authority), exempt from
regular federal income tax and California state personal income tax ("California
Municipal Obligations"). At least 80% of the Fund's total assets will normally
be invested in California Municipal Obligations rated at least investment grade
at the time of investment (which are those rated Baa or higher by Moody's or BBB
or higher by Standard & Poor's or comparably rated by any other nationally
recognized credit rating agency), or bonds that are unrated but judged to be of
comparable quality by the Fund's investment advisor. At least 65% of the Fund's
total assets will normally be invested in California Municipal Obligations that
are covered by insurance guaranteeing the timely payment of principal at
maturity and interest. The Fund may invest up to 20% of its total assets in
California Municipal Obligations that, at the time of investment, are rated Ba
or B by Moody's or BB or B by Standard & Poor's or comparably rated by any other
nationally recognized statistical rating agency, or, if not rated, deemed by the
Fund's investment advisor to be of comparable quality. Bonds rated Ba/BB and
below are regarded as having predominantly
(continued on following page)
THESE SECURITIES INVOLVE RISKS. SEE "ADDITIONAL RISK CONSIDERATIONS"
BEGINNING ON PAGE 30.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
<TABLE>
<CAPTION>
TOTAL ASSUMING TOTAL ASSUMING
NO EXERCISE OF FULL EXERCISE OF
PER SHARE OVERALLOTMENT OPTION OVERALLOTMENT OPTION
--------- -------------------- --------------------
<S> <C> <C> <C>
Public Offering Price $15.000 $ $
Sales Load $ 0.675 $ $
Proceeds to the Fund $14.325 $ $
</TABLE>
The underwriters are offering the common shares subject to various
conditions. The underwriters may purchase up to an additional common
shares at the initial public offering price, less the sales load, within 45 days
from the date of this prospectus to cover overallotments. The underwriters
expect to deliver the common shares to purchasers on or about , 1999.
-------------------------
SALOMON SMITH BARNEY
A.G. EDWARDS & SONS, INC.
PAINEWEBBER INCORPORATED
SUTRO & CO. INCORPORATED
WEDBUSH MORGAN SECURITIES
, 1999
<PAGE> 4
(continued from previous page)
speculative characteristics with respect to capacity to pay interest and repay
principal, and are commonly referred to as junk bonds. See "Investment Objective
and Policies." The Fund's investments in these lower-quality bonds and notes
involve special risks. The Fund's net asset value and distribution rate will
vary and may be affected by several factors, including changes in interest rates
and the credit quality of California municipal issuers. Fluctuations in net
asset value may be magnified as a result of the Fund's use of leverage, which
may be considered a speculative investment technique. An investment in the Fund
is not appropriate for all investors. The Fund is designed for individual
investors who are residents of California for tax purposes. The Fund cannot
assure you that it will achieve its investment objective. See "Investment
Objective and Policies." A substantial portion of the Fund's income may be
subject to the federal alternative minimum tax. In addition, distributions of
net capital gain and taxable income will be subject to tax. See "Tax Matters."
No Prior History. Because the Fund is newly organized, its common shares
have no history of public trading. Shares of closed-end investment companies
frequently trade at a discount from their net asset value. This risk may be
greater for investors expecting to sell their shares in a relatively short
period after completion of this initial public offering. We have applied for
listing of the common shares on the American Stock Exchange, subject to notice
of issuance, under the trading or "ticker" symbol "CCA".
Municipal Preferred Shares. In a separate offering, the Fund intends to
offer preferred shares, called "Municipal Preferred Shares," for which potential
investors in that offering will receive a different prospectus. The Municipal
Preferred Shares are not being offered in this prospectus. The Fund expects that
the Municipal Preferred Shares will represent about 38% of the Fund's capital.
The issuance of Municipal Preferred Shares will leverage your common shares,
meaning that the issuance of the Municipal Preferred Shares may cause you to
receive a larger return or loss on your common shares than you would have
received without the issuance of the Municipal Preferred Shares. Leverage
involves special risks, but also affords an opportunity for greater return.
There is no assurance that the Fund's leveraging strategy will succeed. See "Use
of Leverage and Related Risks" and "Description of Shares."
The underwriters named in this prospectus may purchase up to
additional common shares from the Fund under certain circumstances.
Colonial Management Associates, Inc., the Fund's investment advisor, has
agreed to pay (i) all organizational expenses and (ii) offering costs (other
than sales loads) that exceed $0.03 per common share.
This prospectus contains important information about the Fund. You should
read this prospectus before deciding whether to invest and you should retain it
for future reference. A Statement of Additional Information, dated ,
1999, containing additional information about the Fund, has been filed with the
Securities and Exchange Commission and is hereby incorporated by reference in
its entirety into this prospectus. You can review the table of contents of the
Statement of Additional Information on page 50 of this prospectus. You may
request a free copy of the Statement of Additional Information by calling
1-800-426-3750. You may also obtain the Statement of Additional Information on
the Securities and Exchange Commission web site (http://www.sec.gov).
The Fund's common shares do not represent a deposit or obligation of, and
are not guaranteed or endorsed by, any bank or other insured depository
institution, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other government agency.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS.
NEITHER THE FUND NOR THE UNDERWRITERS HAVE AUTHORIZED ANY OTHER PERSON TO
PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE PROVIDES YOU WITH DIFFERENT OR
INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON IT. NEITHER THE FUND NOR THE
UNDERWRITERS ARE MAKING AN OFFER TO SELL THESE SECURITIES IN ANY JURISDICTION
WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU SHOULD ASSUME THAT THE INFORMATION
APPEARING IN THIS PROSPECTUS IS ACCURATE AS OF THE DATE ON THE FRONT COVER ONLY.
2
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 4
Summary of Fund Expenses.................................... 13
The Fund.................................................... 14
Use of Proceeds............................................. 14
Investment Objective and Policies........................... 14
Use of Leverage and Related Risks........................... 27
Additional Risk Considerations.............................. 30
How the Fund Manages Risk................................... 35
Management of the Fund...................................... 37
Net Asset Value............................................. 38
Distributions............................................... 39
Dividend Reinvestment Plan.................................. 39
Description of Shares....................................... 41
Certain Provisions in the Declaration of Trust.............. 43
Repurchase of Common Shares; Conversion to Open-End Fund.... 43
Tax Matters................................................. 44
Underwriting................................................ 47
Custodian, Dividend Disbursing Agent, Transfer Agent and
Registrar................................................. 49
Legal Opinions.............................................. 49
Table of Contents for the Statement of Additional
Information............................................... 50
</TABLE>
------------------------
Until , 1999 (25 days after the date of this prospectus), all
dealers that buy, sell or trade the common shares, whether or not participating
in this offering, may be required to deliver a prospectus. This is in addition
to the dealers' obligation to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
3
<PAGE> 6
PROSPECTUS SUMMARY
This is only a summary. You should review the more detailed information
contained in this prospectus and in the Statement of Additional Information.
THE FUND....................... Colonial California Insured Municipal Fund is
a newly organized, closed-end, nondiversified
management investment company. Throughout this
prospectus, we refer to Colonial California
Insured Municipal Fund simply as the "Fund" or
as "we," "us" or "our." See "The Fund."
THE OFFERING................... The Fund is offering common shares of
beneficial interest at $15.00 per share
through a group of underwriters (the
"Underwriters") led by Salomon Smith Barney
Inc. The common shares of beneficial interest
are called "Common Shares" in the rest of this
prospectus. You must purchase at least 100
Common Shares. The Fund has given the
Underwriters an option to purchase up to
additional Common Shares to
cover orders in excess of
Common Shares. See "Underwriting."
INVESTMENT OBJECTIVE........... The Fund's investment objective is to provide
current income generally exempt from regular
federal income tax and California state
personal income tax. The Fund will invest its
assets in a nondiversified portfolio of
municipal bonds issued by or on behalf of the
State of California or its political
subdivisions, agencies, authorities or
instrumentalities. Under normal circumstances,
the Fund will invest substantially all (at
least 80%) of its total assets in debt
securities, the interest on which is, in the
opinion of issuer's counsel (or on the basis
of other reliable authority), exempt from
regular federal income tax and California
state personal income tax ("California
Municipal Obligations"). The term "Municipal
Obligations" is used throughout this
prospectus to describe debt securities the
interest on which is, in the opinion of
issuer's counsel (or other reliable
authority), exempt from regular federal income
tax. At least 65% of the Fund's total assets
will normally be invested in California
Municipal Obligations that are covered by
insurance guaranteeing the timely payment of
principal at maturity and interest. Each
insured California Municipal Obligation in the
Fund's portfolio will be covered by specific
insurance (either original issue insurance or
secondary market insurance) or portfolio
insurance purchased by the Fund.
At least 80% of the Fund's total assets will
normally be invested in California Municipal
Obligations rated at least investment grade at
the time of investment (which are those rated
Baa or higher by Moody's Investors Service,
Inc. ("Moody's") or BBB or higher by Standard
& Poor's Ratings Services ("Standard &
Poor's") or comparably rated by any other
nationally recognized
4
<PAGE> 7
credit rating agency ("Rating Agency")), or,
if unrated, determined by the Fund's
investment advisor to be of at least
investment grade quality. The Fund may invest
up to 20% of its total assets in California
Municipal Obligations rated Ba or B by Moody's
or BB or B by Standard & Poor's or comparably
rated by another Rating Agency and unrated
municipal bonds considered to be of comparable
quality by the Advisor. The Fund may not
invest in bonds rated below B by Moody's or
Standard & Poor's or comparably rated by
another Rating Agency. Bonds rated Ba/BB and
below are regarded as having predominantly
speculative characteristics with respect to
capacity to pay interest and repay principal,
and are commonly referred to as "junk bonds."
These lower-rated securities involve special
risks, including greater sensitivity to a
general economic downturn and less secondary
market trading. Under normal conditions, the
Fund will invest primarily in long-term
California Municipal Obligations (i.e., over
10 years). The Fund may, however, invest in
California Municipal Obligations without
regard to maturity or duration. The Fund may
also purchase and sell financial futures and
tax-exempt bond index futures contracts
("index futures") to hedge against changes
caused by changing interest rates or changes
in the market value of Municipal Obligations
that are in its portfolio or that it intends
to acquire. The Fund may also attempt to hedge
by purchasing and writing put and call options
on financial futures, tax-exempt bond indices
and index futures. See "Investment Objective
and Policies -- Hedging Activities." Some of
the securities in which the Fund invests may
include "zero-coupon" bonds, whose values are
subject to greater fluctuation in response to
changes in market interest rates than bonds
that pay interest currently. Until the Fund is
fully invested (approximately two to three
months after the completion of the offering),
the Fund may invest up to 20% of its total
assets in inverse floating rate municipal
bonds ("inverse floaters"). An investment in
the Fund is not appropriate for all investors.
The Fund cannot assure you that it will attain
its investment objective. See "Investment
Objective and Policies."
SPECIAL CONSIDERATIONS......... The Fund expects that a portion of its
investments will pay interest that is taxable
under the federal alternative minimum tax. If
you are, or as a result of investment in the
Fund would become, subject to the federal
alternative minimum tax, the Fund may not be a
suitable investment for you. In addition,
distributions of capital gain and taxable
income will be subject to tax. See "Tax
Matters."
PROPOSED OFFERING OF MUNICIPAL
PREFERRED SHARES............. Subject to market conditions, approximately
one to three months after completion of this
offering, the Fund intends to offer preferred
shares of beneficial interest ("Municipal Pre-
5
<PAGE> 8
ferred Shares") representing approximately 38%
of the Fund's capital after their issuance.
The issuance of Municipal Preferred Shares
will leverage your investment in the Common
Shares. Leverage involves special risks. There
is no assurance that the Fund's leveraging
strategy will be successful. The money the
Fund obtains by selling the Municipal
Preferred Shares will be invested in long-term
municipal bonds which will generally pay fixed
rates of interest over the life of the bond.
The Municipal Preferred Shares will pay
dividends based on shorter-term rates, which
will be reset frequently. So long as the rate
of return, net of applicable Fund expenses, on
the long-term bonds purchased by the Fund
exceeds Municipal Preferred Share dividend
rates as reset periodically, the investment of
the proceeds of the Municipal Preferred Shares
will generate more income than will be needed
to pay dividends on the Municipal Preferred
Shares. If so, the excess will be used to pay
higher dividends to holders of Common Shares
("Common Shareholders"). However, the Fund
cannot assure you that the issuance of
Municipal Preferred Shares will result in a
higher yield on your Common Shares. Once
Municipal Preferred Shares are issued, the net
asset value and market price of the Common
Shares and the yield to Common Shareholders
will be more volatile. See "Use of Leverage
and Related Risks" and "Description of
Shares -- Municipal Preferred Shares."
INVESTMENT ADVISOR............. Colonial Management Associates, Inc. (the
"Advisor") is the Fund's investment advisor.
The Advisor will receive an annual fee,
payable monthly, in a maximum amount equal to
0.65% of the Fund's average weekly total net
assets (including assets attributable to any
Municipal Preferred Shares that may be
outstanding). The Advisor has agreed to waive
the Fund's fees and expenses in the amount of
0.30% of the Fund's average weekly total net
assets for the first five years of the Fund's
operations (through November 30, 2004), and in
a declining amount for an additional five
years (through November 30, 2009). The Advisor
is a wholly-owned subsidiary of Liberty Funds
Group LLC, which is an indirect majority-owned
subsidiary of Liberty Mutual Insurance
Company. See "Management of the Fund."
DISTRIBUTIONS.................. The Fund's policy will be to make monthly
distributions to Common Shareholders.
Distributions to Common Shareholders cannot be
assured, and the amount of each monthly
distribution will vary. The initial
distribution to Common Shareholders is
expected to be paid approximately 60 days
after the completion of this offering. See
"Distributions," "Dividend Reinvestment Plan"
and "Use of Proceeds."
6
<PAGE> 9
DIVIDEND REINVESTMENT PLAN..... The Fund has established a Dividend
Reinvestment Plan (the "Plan"). Under the
Plan, all distributions will be automatically
reinvested in additional Common Shares, unless
the Common Shareholder elects to receive cash.
Common Shares issued under the Plan will
either be purchased in the open market or, if
the Common Shares are trading at or above
their net asset value, newly issued by the
Fund. Common Shareholders who intend to hold
their Common Shares through a broker or
nominee should contact their broker or nominee
to determine whether or how they may
participate in the Plan. See "Dividend
Reinvestment Plan."
LISTING........................ We have applied for listing of the Common
Shares on the American Stock Exchange under
the trading or "ticker" symbol of "CCA". See
"Description of Shares -- Common Shares."
CUSTODIAN, DIVIDEND DISBURSING
AGENT, TRANSFER AGENT AND
REGISTRAR.................... The Chase Manhattan Bank will serve as
custodian of the Fund's assets. EquiServe,
servicing agent for BankBoston, N.A., will
serve as the Fund's dividend disbursing agent,
transfer agent and registrar. See "Custodian,
Dividend Disbursing Agent, Transfer Agent and
Registrar."
MARKET PRICE OF SHARES......... Shares of closed-end investment companies
frequently trade at prices lower than their
net asset value. Shares of closed-end
investment companies like the Fund that invest
predominantly in municipal bonds sometimes
have traded at prices higher than net asset
value and at other times have traded at prices
lower than net asset value. The Fund cannot
assure you that the Common Shares will trade
at a price higher than net asset value in the
future. Net asset value will be reduced
immediately following the offering by the
sales load and the amount of the organization,
if any, and offering expenses paid by the
Fund. See "Use of Proceeds." In addition to
net asset value, market price may be affected
by such factors as dividend levels (which are
in turn affected by expenses), call
protection, dividend stability, portfolio
credit quality and liquidity, and market
supply and demand. See "Use of Leverage and
Related Risks," "Additional Risk
Considerations," "Description of Shares,"
"Repurchase of Fund Shares; Conversion to
Open-End Fund" and the Statement of Additional
Information under "Repurchase of Fund Shares;
Conversion to Open-End Fund." The Common
Shares are designed primarily for long-term
investors, and you should not view the Fund as
a vehicle for trading purposes.
SPECIAL RISK CONSIDERATIONS.... NO OPERATING HISTORY. The Fund is a newly
organized closed-end investment company with
no history of operations.
INTEREST RATE AND MARKET RISK. When market
interest rates fall, bond prices generally
rise, and vice versa. Interest rate risk is
the
7
<PAGE> 10
risk that the municipal bonds in the Fund's
portfolio will decline in value because of
increases in market interest rates. The prices
of longer-term bonds fluctuate more than
prices of shorter-term bonds as interest rates
change. Conversely, the values of lower-rated
and comparable unrated securities are less
likely than those of investment grade or
comparable unrated debt securities to
fluctuate inversely with changes in interest
rates. Because the Fund will invest primarily
in long-term bonds (i.e., over 10 years), the
Common Share net asset value and market price
per share will fluctuate more in response to
changes in market interest rates than if the
Fund invested primarily in shorter-term bonds.
Market risk is often greater among certain
types of debt securities, such as zero-coupon
bonds, which do not make regular interest
payments. As interest rates change, these
bonds often fluctuate in price more than bonds
that make regular interest payments. Because
the Fund may invest in these types of debt
securities, it may be subject to greater
market risk than a fund that invests only in
current interest-paying securities. The Fund's
use of leverage, as described below, will tend
to increase Common Share interest rate risk.
Although insurance on the Municipal
Obligations will reduce the credit risk to
which the Fund is subject by guaranteeing the
timely payment of principal at maturity and
interest, it will not protect against
fluctuations in the value of the Municipal
Obligations held by the Fund or the value of
the Fund's shares caused by changes in
interest rates or other factors.
LOWER-RATED SECURITIES. The Fund may invest
in municipal bonds rated Ba or B by Moody's or
BB or B by Standard & Poor's or comparably
rated by another Rating Agency or unrated but
judged by the Advisor to be of comparable
quality. These bonds generally involve greater
risk of nonpayment of principal and interest
than securities in higher rating categories.
The possibility of defaults by or bankruptcies
of issuers of these securities causes, in
part, this principal and interest risk and may
result in nonpayment of principal or interest
or restructuring of the debt obligation and,
possibly, a reduction in the Fund's net asset
value. Municipal bonds rated Ba/BB or below
are regarded as predominantly speculative in
character. While such securities may have some
quality and protective characteristics, large
uncertainties or major risk exposures to
adverse conditions are expected to outweigh
such characteristics. With respect to
lower-rated or unrated tax-exempt securities,
the Fund may rely more on the judgment,
analysis and experience of the Advisor than it
will with respect to investment grade
securities.
8
<PAGE> 11
In evaluating the creditworthiness of a
security, whether rated or unrated, the
Advisor may consider, among other things, the
following factors:
- the issuer's financial resources;
- the issuer's sensitivity to economic
conditions and trends;
- any operating history of and the
community support for the facility, if
any, financed by the issue;
- the ability of the issuer's management;
and
- regulatory matters.
INCOME RISK. The income investors receive
from the Fund is based primarily on the
interest it earns from its investments, which
can vary widely over the short and long term.
If interest rates drop, investors' income from
the Fund could drop over time as well if the
Fund purchases securities paying lower rates
of interest. This risk is magnified when
prevailing short-term interest rates increase
or when the Fund holds residual interest
municipal bonds.
CALL RISK. If interest rates fall, it is
possible that issuers of callable bonds with
high interest coupons will "call" (or prepay)
their bonds before their maturity date. If a
call were exercised by the issuer during a
period of declining interest rates, the Fund
would be likely to replace the called security
with a lower-yielding security. If that were
to happen, it would decrease the Fund's
dividends.
CREDIT RISK. Credit risk is the risk that one
or more municipal bonds in the Fund's
portfolio will decline in price, or fail to
pay interest or principal when due, because
the issuer of the bond experiences a decline
in its financial status. The Fund expects to
invest in lower-rated or unrated municipal
bonds. The prices of these lower-rated bonds
are more sensitive to negative developments,
such as a decline in the issuer's revenues or
a general economic downturn, than are the
prices of higher-rated securities.
LIQUIDITY RISK. The Fund may invest in
securities for which there is no readily
available trading market or which are
otherwise illiquid. The Fund may not be able
to readily dispose of such securities at
prices that approximate those at which the
Fund could sell them if they were more widely
traded and, as a result of such illiquidity,
the Fund may have to sell other investments or
engage in borrowing transactions if necessary
to raise cash to meet its obligations. In
addition, this limited liquidity could affect
the market price of the securities, thereby
9
<PAGE> 12
adversely affecting the Fund's net asset value
and ability to make dividend distributions.
LEVERAGE RISK. The proposed use of leverage
through a future issuance of preferred shares
by the Fund could create an opportunity for
increased net income, but could also create
special risks. The Fund intends to use
leverage to provide the holders of Common
Shares with a potentially higher return, but
its leveraging strategy may not be successful.
Leverage creates risks for holders of Common
Shares, including the likelihood of greater
volatility of the net asset value and market
price of the Common Shares.
The use of leverage also entails the risk that
fluctuations in dividend rates on any
preferred shares may affect the return to
Common Shareholders. The Fund anticipates that
preferred share dividends will be based on the
yields of short-term Municipal Obligations,
while the proceeds of any preferred share
offering will be invested in longer-term
Municipal Obligations, which typically have
higher yields. If the income derived from the
purchased securities exceeds the cost of
leverage (i.e., the interest paid on the
Municipal Preferred Shares), the Fund's return
would be greater than if leverage had not been
used. Conversely, if the income from the
purchased securities is not sufficient to
cover the cost of leverage, the return to the
Fund would be less than if leverage had not
been used. A decrease in the Fund's returns
would reduce the amounts available for
distribution to Common Shareholders as
dividends and other distributions. The Advisor
in its best judgment may determine to maintain
the Fund's leveraged position, even if the
Fund's distributions to Common Shareholders
are reduced, if it deems such action to be
appropriate under the circumstances.
The Fund is required to allocate a portion of
any capital gains or other taxable income to
holders of preferred shares. The Fund intends
to pay to any preferred shareholders
additional dividends intended to compensate
them for federal income taxes payable on any
capital gains or other taxable income
allocated to the preferred shares. The Fund
may also pay such preferred shareholders
additional dividends intended to compensate
them for state taxes payable on such capital
gains or other taxable income. These
additional dividends will reduce the amount
available for distribution to the Common
Shareholders. Also, as discussed under
"Management of the Fund," the fee paid to the
Advisor will be calculated on the basis of the
Fund's average daily net assets, including
proceeds from the issuance of preferred
shares. Therefore, these fees will be higher
when leverage is utilized. See "Use of
Leverage and Related Risks."
10
<PAGE> 13
The Fund currently intends to seek an
investment grade rating on any preferred
shares it may issue from one or more Rating
Agencies. The Fund may be subject to
investment restrictions of one or more Rating
Agencies as a result. These restrictions may
impose asset coverage or portfolio composition
requirements that are more stringent than
those imposed on the Fund by the Investment
Company Act of 1940 (the "Investment Company
Act" or "1940 Act"). The Advisor does not
anticipate that these covenants or guidelines
will impede it in managing the Fund's
portfolio in accordance with the Fund's
investment objective and policies. See
"Description of Shares -- Municipal Preferred
Shares."
HEDGING AND OTHER INVESTMENTS. The Fund may
attempt to hedge against changes in interest
rates by engaging in transactions involving
interest rate futures contracts, or "financial
futures," index futures and options on
financial futures, tax-exempt indices and
index futures. The costs of and possible
losses incurred from these transactions may
reduce the Fund's current return. There can be
no assurance that the Fund will engage in
hedging transactions or that suitable hedging
transactions will be available or, if
available, effective. See "Investment
Objective and Policies -- Hedging Activities."
The Fund's use of residual interest municipal
bonds, or "inverse floaters," exposes the Fund
to special risks and may amplify the effects
of leverage. For example, during periods of
rising short-term interest rates, the Fund's
investment in inverse floaters may decrease
the Fund's income and distributions to Common
Shareholders. In addition, such transactions
may result in the Fund earning taxable income
or gains. The Fund does not, however, expect
to invest in inverse floaters once the Fund is
fully invested (approximately two to three
months after completion of the offering). See
"Investment Objective and Policies."
MUNICIPAL BOND MARKET RISK. The amount of
public information available about the
municipal bonds in the Fund's portfolio is
generally less than that for corporate
equities or bonds, and the investment
performance of the Fund may therefore be more
dependent on the analytical abilities of the
Advisor than would be a stock fund or taxable
bond fund. The secondary market for municipal
bonds, particularly the below investment grade
bonds in which the Fund may invest, also tends
to be less well-developed or liquid than many
other securities markets, which may adversely
affect the Fund's ability to sell its bonds at
attractive prices.
PORTFOLIO INSURANCE RESTRICTIONS. The Fund
may be subject to certain restrictions on
investments imposed by guidelines of one or
more insurance companies which may issue
portfolio insur-
11
<PAGE> 14
ance to the Fund. It is not anticipated that
these guidelines will impede the Advisor from
managing the Fund's portfolio in accordance
with the Fund's investment objective and
policies.
CONCENTRATION IN CALIFORNIA ISSUERS. The
Fund's policy of investing primarily in
California Municipal Obligations makes the
Fund more susceptible to adverse economic,
political or regulatory occurrences affecting
such issuers. See "Additional Risk
Considerations -- Certain Risks Associated
with Investments in California Municipal
Obligations" in this prospectus and "Appendix
B -- Special Considerations Relating to
California" in the Statement of Additional
Information.
NONDIVERSIFICATION. The Fund has registered
as a "nondiversified" investment company under
the 1940 Act. This means that, as limited by
federal income tax considerations, the Fund,
with respect to up to 50% of its total assets,
will be able to invest more than 5% (but not
more than 25%) of the value of its total
assets in the obligations of any single
issuer. To the extent the Fund invests a
relatively high percentage of its assets in
obligations of a limited number of issuers,
the Fund may be more susceptible than a more
widely diversified investment company to any
single economic, political or regulatory
occurrence.
ALTERNATIVE MINIMUM TAX AND OTHER TAX
CONSIDERATIONS. Interest on certain "private
activity" municipal obligations is treated as
a tax preference item for purposes of the
federal alternative minimum tax ("AMT"). In
addition, for corporations, interest on all
tax-exempt obligations is taken into account
in the computation of income subject to the
federal AMT. There is no specific limitation
on the amount of the Fund's assets that may be
invested in Municipal Obligations that pay
interest that is treated as a tax preference
item. Accordingly, an investment in the Fund
may not be appropriate for investors who are
already subject to the federal AMT or who
would become subject thereto as a result of
owning Common Shares. Moreover, distributions
of any taxable net investment income and net
short-term capital gain are taxable as
ordinary income and capital gain distributions
will be taxable as long-term capital gain. See
"Distributions" and "Tax Matters."
ANTI-TAKEOVER PROVISIONS. The Agreement and
Declaration of Trust of the Fund (the
"Declaration of Trust") includes provisions
that could limit the ability of other entities
or persons to acquire control of the Fund or
convert the Fund to open-end status. These
provisions of the Declaration of Trust could
have the effect of depriving the Common
Shareholders of opportunities to sell their
Common Shares at a premium over their then
current market price.
12
<PAGE> 15
SUMMARY OF FUND EXPENSES
The following table assumes the issuance of Municipal Preferred Shares in
an amount equal to 38% of the Fund's capital (after their issuance), and shows
Fund expenses both as a percentage of net assets attributable to Common Shares
and as a percentage of total net assets.
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL
NET ASSETS
----------
<S> <C>
Shareholder Transaction Expenses
Sales Load (as a percentage of offering price)............ 4.50%
Dividend Reinvestment Plan Fees............................. None
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE
NET ASSETS ATTRIBUTABLE OF TOTAL
TO COMMON SHARES NET ASSETS
----------------------- ----------
<S> <C> <C>
Annual Expenses
Management Fees........................................... 1.05% 0.65%
Fee and Expense Waiver (Years 1-5)........................ (0.48)%* (0.30)%*
----- ----
Net Management Fees......................................... 0.57% 0.35%*
Other Expenses.............................................. 0.86%* 0.47%
Expense Reimbursement..................................... (0.54)%* (0.27)%*
===== ====
Total Net Annual Expenses................................... 0.89%* 0.55%*
===== ====
</TABLE>
- ---------------
* The Advisor has agreed to waive the Fund's management fees in the following
amounts, expressed as a percentage of average weekly total net assets: 0.30%
for the first 5 years of the Fund's operations, 0.25% in year 6, 0.20% in year
7, 0.15% in year 8, 0.10% in year 9 and 0.05% in year 10. In addition, the
Advisor has contractually agreed at least through October 31, 2000 to
reimburse any of the Fund's Other Expenses in excess of 0.20% per annum.
Without the waiver and reimbursement, "Total Net Annual Expenses" would be
estimated to be 1.12% of average weekly total net assets and 1.91% of average
weekly net assets attributable to Common Shares. The Advisor has agreed to pay
(i) all organizational expenses and (ii) offering costs (other than sales
loads) that exceed $0.03 per Common Share (0.2% of offering price).
The purpose of the table above is to help you understand all fees and
expenses that you, as a Common Shareholder, would bear directly or indirectly.
The expenses shown in the table are based on estimated amounts for the Fund's
first year of operations and assume that the Fund issues 3,333,333 Common
Shares. See "Management of the Fund" and "Dividend Reinvestment Plan."
The following example illustrates the expenses (including the sales load of
$45) that you would pay on a $1,000 investment in Common Shares, assuming (1)
total net annual expenses of 0.55% of total net assets and 0.89% of net assets
attributable to Common Shares in years 1 through 5, increasing to 0.85% and
1.37%, respectively, in year 10 and (2) a 5% annual return: (l)
Expenses Based on a Percentage Of
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS(2)
------ ------- ------- -----------
<S> <C> <C> <C> <C>
Total Net Assets....................................... $51 $65 $ 80 $132
Net Assets Attributable to Common Shares............... $61 $94 $129 $229
</TABLE>
- ---------------
(1) The example should not be considered a representation of future expenses.
The example assumes that the estimated Other Expenses set forth in the
Annual Expenses table are accurate, that the waiver of fees and expenses
decrease as described in note 2 below and that all dividends and
distributions are reinvested at net asset value. Actual expenses may be
greater or less than those assumed. Moreover, the Fund's actual rate of
return may be greater or less than the hypothetical 5% return shown in the
example.
(2) Assumes waiver of management fees and expenses of 0.25% of average weekly
net assets in year 6, 0.20% in year 7, 0.15% in year 8, 0.10% in year 9 and
0.05% in year 10 and a reimbursement of 0.27% per annum of other expenses
during these periods. The Advisor has not agreed to waive any portion of the
Fund's fees and expenses beyond November 30, 2009 and has not agreed to
reimburse any portion of the Fund's expenses beyond October 31, 2000.
13
<PAGE> 16
THE FUND
The Fund is a recently organized, closed-end, nondiversified management
investment company registered under the 1940 Act. The Fund was organized as a
Massachusetts business trust on August 10, 1999, pursuant to a Declaration of
Trust governed by the laws of the Commonwealth of Massachusetts. As a newly
organized entity, the Fund has no operating history. The Fund's principal office
is located at One Financial Center, Boston, MA 02111, and its telephone number
is (617) 426-3750.
USE OF PROCEEDS
The net proceeds of the offering of Common Shares will be approximately
$ ($ if the Underwriters exercise the overallotment option in
full) after payment of the estimated organization and offering costs. The
Advisor has agreed to pay (i) all organizational expenses and (ii) offering
costs (other than sales loads) that exceed $0.03 per Common Share. The Fund will
invest the net proceeds of the offering in accordance with the Fund's investment
objective and policies as stated below. It is presently anticipated that the
Fund will be able to invest substantially all of the net proceeds in municipal
bonds that meet its investment objective and policies within three months after
the completion of the offering. Pending such investment, it is anticipated that
the proceeds will be invested in short-term, tax-exempt securities.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide current income exempt from
regular federal income tax and California state personal income tax. This income
will be earned by investing primarily in investment grade municipal obligations
issued by or on behalf of the State of California or its political subdivisions,
agencies, authorities and instrumentalities. Securities will be purchased and
sold in an effort to maintain a competitive yield and to enhance return based
upon the relative value of the securities available in the marketplace.
Investments are based on the Advisor's research and ongoing credit analysis, the
underlying materials for which are generally not available to individual
investors. The Fund is designed for investors who are residents of California
for tax purposes.
During normal market conditions, substantially all of the Fund's total
assets (at least 80%) will be invested in debt obligations, the interest on
which is, in the opinion of issuer's counsel (or on the basis of other reliable
authority), exempt from regular federal income tax and California state personal
income tax ("California Municipal Obligations"). At least 80% of the Fund's
total assets will normally be invested in California Municipal Obligations rated
at least investment grade at the time of investment (which are those rated Baa
or higher by Moody's Investors Service, Inc. ("Moody's") or BBB or higher by
Standard & Poor's Ratings Services ("Standard & Poor's")) or comparably rated by
any other nationally recognized credit rating agency ("Rating Agency")) or, if
unrated, determined by the Advisor to be of at least investment grade quality.
At least 65% of the Fund's total assets will normally be invested in California
Municipal Obligations that are covered by insurance guaranteeing the timely
payment of principal at maturity and interest. Each insured California Municipal
Obligation in the Fund's portfolio will be covered by specific insurance (either
original issue insurance or secondary market insurance) or portfolio insurance
purchased by the Fund. From time to time, the Fund may hold a significant amount
of Municipal Obligations not rated by a Rating Agency. Under normal conditions,
the Fund will invest primarily in long-term California Municipal Obligations
(i.e., over 10 years). The Fund may, however, invest in California Municipal
Obligations without regard to maturity or duration.
14
<PAGE> 17
The Fund may invest up to 20% of its total assets in California Municipal
Obligations rated Ba or B by Moody's or BB or B by Standard & Poor's and unrated
California Municipal Obligations considered to be of comparable quality by the
Advisor. The Fund may not invest in bonds rated below B or unrated bonds deemed
by the Advisor to be of comparable quality. Investment in California Municipal
Obligations of below investment grade quality involves special risks as compared
with investment in higher-grade Municipal Obligations. These risks include
greater sensitivity to a general economic downturn and less secondary market
trading. Securities rated below investment grade are commonly known as "junk
bonds." Such securities are regarded, on balance, as predominantly speculative
with respect to the issuer's ability to pay interest and repay principal owed.
When the Fund invests in lower-rated or unrated California Municipal
Obligations, it may be more dependent on the Advisor's research capabilities
than when it invests in investment grade California Municipal Obligations. See
"Additional Risk Considerations." For a description of municipal bond ratings,
see Appendix A to the Statement of Additional Information.
In assessing the quality of Municipal Obligations (as defined below) with
respect to the foregoing requirements, the Advisor will consider the portfolio
insurance purchased by the Fund or the specific insurance, letters of credit or
similar credit enhancements covering particular Municipal Obligations and the
creditworthiness of the financial institution providing such insurance or credit
enhancements. For example, if Municipal Obligations are covered by insurance
policies issued by insurers whose claims-paying ability is rated Aaa by Moody's
or AAA by Standard & Poor's, or comparably rated by any other Rating Agency, the
Advisor may consider such Municipal Obligations to be equivalent to Aaa or AAA
rated securities, as the case may be, even though such Municipal Obligations
would generally be assigned a lower rating if the rating were based primarily
upon the credit characteristics of the issuers without regard to the insurance
feature. When assessing the quality of Municipal Obligations, the Advisor will
also consider the standards applied by insurance companies when determining
eligibility for portfolio insurance.
The foregoing credit quality policies apply only at the time a security is
purchased, and the Fund is not required to dispose of a security in the event
that a Rating Agency downgrades its assessment of the credit characteristics of
a particular issue. In determining whether to retain or sell such a security,
the Advisor may consider such factors as the Advisor's assessment of the credit
quality of the issuer of such security, the price at which such security could
be sold and the rating, if any, assigned to such security by other Rating
Agencies.
If current market conditions persist, the Fund expects that approximately
85% of its initial portfolio will consist of investment grade California
Municipal Obligations rated as such at the time of investment by Moody's,
Standard & Poor's or another Rating Agency (approximately 65% in Aaa/AAA; 10% in
A; and 10% in Baa/BBB). Subject to market availability, the Fund would likely
seek to invest approximately 5% of its initial portfolio in California Municipal
Obligations that are, at the time of investment, rated Ba by Moody's, BB by
Standard & Poor's or comparably rated by another Rating Agency and 10% in
California Municipal Obligations that are not rated by any Rating Agency.
Municipal Obligations, including California Municipal Obligations, include
bonds, notes and commercial paper issued by municipalities for a wide variety of
both public and private purposes, the interest on which is, in the opinion of
issuer's counsel (or on the basis of other reliable authority), exempt from
regular federal income tax. Public purpose municipal bonds include general
obligation and revenue bonds. General obligation bonds are backed by the taxing
power of the issuing municipality. Revenue bonds are backed by the revenues of a
project or facility or from the proceeds of a specific revenue source. Some
revenue bonds are payable solely or partly from funds which are subject to
annual appropriations by a state's legislature. Municipal notes include bond
anticipation, tax anticipation and revenue anticipation notes. Bond, tax and
15
<PAGE> 18
revenue anticipation notes are short-term obligations that will be retired with
the proceeds from an anticipated bond issue, tax revenue or facility revenue,
respectively.
Some of the securities in which the Fund invests may include so-called
"zero-coupon" bonds, whose values are subject to greater fluctuation in response
to changes in market interest rates than bonds that pay interest currently.
Zero-coupon bonds are issued at a significant discount from face value and pay
interest only at maturity, rather than at intervals during the life of the
security. The Fund is required to take into account income from zero-coupon
bonds on a current basis, even though it does not receive that income currently
in cash, and the Fund is required to distribute substantially all of its income
for each taxable year. Thus, the Fund may have to sell other investments to
obtain cash needed to make income distributions.
Until such time as the Fund is fully invested (approximately two to three
months after the completion of this offering), the Fund may invest up to 20% of
its total assets in inverse floating rate municipal bonds (which are bonds whose
interest rates bear an inverse relationship to the interest rate on another
security or the value of an index) ("inverse floaters"). An investment in
inverse floaters may involve greater risk than an investment in a fixed-rate
bond. Because changes in the interest rate on the other security or index
inversely affect the residual interest paid on the inverse floater, the value of
an inverse floater is generally more volatile than that of a fixed-rate bond.
Inverse floaters have interest rate adjustment formulas which generally reduce
or, in the extreme, eliminate the interest paid to the Fund when short-term
interest rates rise, and increase the interest paid to the Fund when short-term
interest rates fall. Inverse floaters have varying degrees of liquidity, and the
prices of these securities may be volatile. These securities tend to
underperform the market for fixed-rate bonds in a rising interest rate
environment, but tend to outperform the market for fixed-rate bonds when
interest rates decline. Although volatile, inverse floaters typically offer the
potential for yields exceeding the yields available on fixed-rate bonds with
comparable credit quality, coupon, call provisions and maturity. These
securities usually permit the investor to convert the floating rate to a fixed
rate (normally adjusted downward), and this optional conversion feature may
provide a partial hedge against rising rates if exercised at an opportune time.
Investment in inverse floaters may amplify the effects of the Fund's use of
leverage. Should short-term interest rates rise, the combination of the Fund's
investment in inverse floaters and its use of leverage likely will adversely
affect the Fund's income and distributions to shareholders. The Fund does not
intend to invest in inverse floaters once it becomes fully invested.
It is a fundamental policy of the Fund, which may not be changed without
approval of holders of a majority of the Fund's outstanding voting securities
(as defined in the Statement of Additional Information under "Investment
Objective and Policies -- Fundamental Investment Policies"), to invest, under
normal circumstances, at least 80% of its total assets in California Municipal
Obligations. Except for this policy and the other fundamental investment
policies listed in the Statement of Additional Information under "Investment
Objective and Policies -- Fundamental Investment Policies," the Fund's
investment policies and its investment objective may be changed without
shareholder approval.
In addition to investing in Municipal Obligations, the Fund may attempt to
hedge against changes in interest rates by engaging in transactions involving
interest rate futures contracts ("financial futures"), index futures and options
on financial futures, tax-exempt indices and index futures, as a hedge against
changes in interest rates. See "Investment Objective and Policies -- Hedging
Activities." The costs of and possible losses incurred from such transactions
may reduce the Fund's current return.
The Fund may also purchase securities on a "when-issued" basis, enter into
repurchase agreements and invest in other taxable instruments, subject to
certain limitations. See "Investment Objective and Policies -- Forward
Commitments," "Investment Objective and Policies -- Repurchase Agreements" and
"Investment Objective and Policies -- Temporary and Defensive Investments."
16
<PAGE> 19
The Advisor utilizes a top-down investment strategy that seeks to strike a
balance between investment performance potential and avoiding undue credit risk.
The Advisor first analyzes the various factors that can influence the direction
of interest rates, including economic growth and inflation. It then structures
the Fund based on its view of the appropriate sector and geographic
diversification. Investments are based on the Advisor's fundamental research and
ongoing credit analysis. The Advisor's research analysts examine credit
histories, revenue sources, capital structures and other data. The Advisor
employs a total of 20 municipal investment professionals. These professionals
work in a team-based environment in which every investment team holds a vested
interest in a portfolio's performance.
DESCRIPTION OF MUNICIPAL OBLIGATIONS
As used in this prospectus, the term "Municipal Obligations" refers to debt
obligations the interest on which was at the time of issuance, in the opinion of
issuer's counsel (or on the basis of other reliable authority), exempt from
federal income tax (other than the possible incidence of any AMT). (For a
description of the federal AMT, see "Tax Matters -- Federal Income Tax
Matters.") The term "California Municipal Obligations" refers to Municipal
Obligations the interest on which is also exempt from California state personal
income tax. California Municipal Obligations include debt obligations issued by
the State of California or any political subdivision thereof, or any other
municipal debt obligations the interest on which is exempt from federal income
tax and California state personal income tax, to obtain funds for various public
purposes, including the construction of a wide range of public facilities such
as airports, bridges, highways, housing, mass transportation, roads, schools and
water and sewer works or for other public purposes. Interest on industrial
development bonds used to fund the construction, equipment, repair or
improvement of privately operated industrial or commercial facilities may also
be exempt from federal income and/or California state personal income taxes, but
the size of such issues is limited under current federal tax law. The Fund may
not be a desirable investment for "substantial users" of facilities financed by
industrial development bonds or other private activity bonds or for "related
persons" of substantial users. See "Tax Matters" in the Statement of Additional
Information. The Fund has no present intention of investing in Municipal
Obligations the interest on which is not exempt from federal income tax (other
than the possible incidence of any AMT). The Advisor will not, in any event,
conduct any independent investigation as to the tax status of any securities in
which the Fund invests or of the issuers of such securities.
The two principal classifications of Municipal Obligations are general
obligation bonds and revenue bonds. General obligation bonds are obligations
involving the credit of an issuer possessing taxing power and are payable from
the issuer's general unrestricted revenues and not from any particular fund or
source. The characteristics and method of enforcement of general obligation
bonds vary according to the law applicable to the particular issuer, and payment
may be dependent upon appropriation by the issuer's legislative body. Revenue
bonds are payable only from the revenues derived from a particular facility or
class of facilities or, in some cases, from the proceeds of a special excise or
other specific revenue source. Tax-exempt industrial development bonds and other
private activity bonds also generally are revenue bonds and thus not payable
from the unrestricted revenues of the issuer. The credit quality of industrial
development bonds and other private activity bonds is usually directly related
to the credit of the corporate user of the facilities. Payment of principal of
and interest on industrial development bonds and other private activity bonds is
the responsibility of the corporate user (and any guarantor).
Prices and yields on Municipal Obligations are dependent on a variety of
factors, including general market conditions, the financial condition of the
issuer, general conditions in the tax-exempt bond market, the size of a
particular offering, the maturity of the obligation and the ratings of
particular issues, and are subject to change from time to time. Information
about the financial condition of an issuer of Municipal
17
<PAGE> 20
Obligations may not be as extensive as that which is made available by
corporations whose securities are publicly traded.
The ratings of Moody's, Standard & Poor's and other Rating Agencies
represent their opinions and are not absolute standards of quality. Municipal
Obligations with the same maturity, interest rate and rating may have different
yields while Municipal Obligations of the same maturity and interest rate with
different ratings may have the same yield.
Obligations of issuers of Municipal Obligations are subject to the
provisions of bankruptcy, insolvency and other laws, such as the Federal
Bankruptcy Reform Act of 1978, affecting the rights and remedies of creditors.
Congress or state legislatures may seek to extend the time for payment of
principal or interest, or both, or to impose other constraints upon enforcement
of such obligations. There is also the possibility that, as a result of
litigation or other conditions, the power or ability of issuers to meet their
obligations to pay interest on and principal of their Municipal Obligations may
be materially impaired or their obligations may be found to be invalid or
unenforceable. Such litigation or conditions may from time to time have the
effect of introducing uncertainties in the market for Municipal Obligations or
certain segments thereof, or materially affecting the credit risk with respect
to particular bonds. Adverse economic, business, legal or political developments
might affect all or a substantial portion of the Fund's Municipal Obligations in
the same manner.
Interest income from certain types of Municipal Obligations may be a tax
preference item for purposes of the federal AMT for individual investors.
Distributions to corporate investors of exempt interest income may also be
indirectly subject to the AMT. The Fund may not be suitable for investors
currently or who may become subject to the AMT.
MUNICIPAL OBLIGATION INSURANCE
At least 65% of the Fund's total assets will normally be invested in
California Municipal Obligations that are covered by insurance guaranteeing the
timely payment of principal at maturity and interest. Each insured Municipal
Obligation in the Fund's portfolio will be covered by specific insurance (either
original issue insurance or secondary market insurance) or portfolio insurance
purchased by the Fund. It is anticipated that initially a majority of the
insured Municipal Obligations held by the Fund will be insured under insurance
obtained by parties other than the Fund.
When purchasing insured Municipal Obligations, the Fund will generally seek
to purchase those Municipal Obligations covered by insurance that is issued by
insurers whose claims-paying ability is rated "Aaa" by Moody's or "AAA" by
Standard & Poor's, or comparably rated by another Rating Agency. Similarly, the
Fund will generally obtain portfolio insurance issued by insurers whose
claims-paying ability is rated "Aaa" by Moody's or "AAA" by Standard & Poor's,
or comparably rated by another Rating Agency. However, the Fund may also
purchase Municipal Obligations insured by, and obtain portfolio insurance from,
insurers with a lower rating. The Fund may obtain Municipal Obligation insurance
from Ambac Assurance Corporation, Financial Security Assurance Inc., MBIA
Insurance Corporation, Financial Guaranty Insurance Company, Asset Guaranty
Insurance Company and American Capital Access Financial Guaranty Corporation.
The Fund is not obligated to obtain Municipal Obligation insurance from any of
these insurers, and may obtain Municipal Obligation insurance from insurers
other than or in addition to these insurers. While there is currently no limit
on the percentage of the Fund's assets that may be invested in Municipal
Obligations insured by any one insurer, guidelines of one or more Rating
Agencies which may issue ratings for any preferred shares which may be issued by
the Fund in the future may impose such limitations.
18
<PAGE> 21
Municipal Obligations covered by specific insurance, rather than by
portfolio insurance, will have the same rating as the rating of the
claims-paying ability of the insurer issuing the policy. Municipal Obligations
covered by portfolio insurance, however, will be rated based primarily on the
credit characteristics of the issuer, without regard to the portfolio insurance,
and generally will be rated below "Aaa" or "AAA." While the Fund holds a
Municipal Obligation covered by portfolio insurance, such Municipal Obligation
will, effectively, be of the same credit quality as a Municipal Obligation
covered by a specific insurance policy issued by the same insurance company.
The Fund's policy of generally buying Municipal Obligations insured by
insurers whose claims-paying ability is rated "Aaa" or "AAA" applies only at the
time the Fund buys the Municipal Obligation. If a Rating Agency downgrades an
insurer's claims-paying ability, the Fund is not required to sell Municipal
Obligations covered by that insurer's policies. If a Rating Agency downgrades
its rating of an insurer, it would probably downgrade its rating of a Municipal
Obligation covered by that insurer's original issue insurance or secondary
market insurance. Municipal Obligations in the Fund's portfolio covered by that
insurer's portfolio insurance would also probably be downgraded. Moody's and
Standard & Poor's continually assess the claims-paying ability of insurers and
the creditworthiness of Municipal Obligation issuers, and there can be no
assurance that Moody's and Standard & Poor's will not downgrade their ratings.
The value of Municipal Obligations covered by portfolio insurance that are in
default or in significant risk of default will be determined by separately
establishing a value for the Municipal Obligation and a value for the portfolio
insurance.
ORIGINAL ISSUE INSURANCE. Original issue insurance is insurance purchased
by the issuer of Municipal Obligations or a third party to cover a particular
issue of Municipal Obligations at the time those Municipal Obligations are
issued. Under this insurance, the insurer unconditionally guarantees to the
holder of the Municipal Obligation the timely payment of principal and interest
when and as these payments become due if the issuer does not pay them. However,
if the due date of the principal is accelerated because of mandatory or optional
redemption (other than acceleration because of a mandatory sinking fund
payment), default or otherwise, the payments guaranteed may be made in the
amounts and at the times as principal payments would have been due had there not
been any acceleration. The insurer is responsible for these payments less any
amounts the holders receive from any trustee for the Municipal Obligation issuer
or from any other source. Original issue insurance does not guarantee the
payment of any redemption premium (except for certain premium payments for
certain small issue industrial development and pollution control Municipal
Obligations), the value of the Fund's shares or the market value of Municipal
Obligations, or payments of any tender purchase price upon the tender of the
Municipal Obligations. Original issue insurance also does not insure against
nonpayment of principal or interest on Municipal Obligations resulting from the
insolvency, negligence, or any other act or omission of the trustee or other
paying agent for these Municipal Obligations.
Original issue insurance remains in effect as long as the Municipal
Obligations it covers remain outstanding and the insurer remains in business,
regardless of whether the Fund ultimately disposes of these Municipal
Obligations. Consequently, original issue insurance may be considered to
represent an element of market value of the Municipal Obligations so insured,
but the exact effect, if any, of this insurance on the market value cannot be
estimated.
SECONDARY MARKET INSURANCE. Secondary market insurance is insurance that
is purchased by the purchaser of a Municipal Obligation (such as the Fund),
rather than the issuer, to cover that security. Secondary market insurance
generally provides the same type of coverage as original issue insurance and, as
with original issue insurance, secondary market insurance remains in effect as
long as the Municipal Obligations it covers remain outstanding and the insurer
remains in business, regardless of whether the Fund ultimately disposes of these
Municipal Obligations.
19
<PAGE> 22
One of the purposes of acquiring secondary market insurance for a
particular Municipal Obligation is to enable the Fund to enhance the value of
that security. The Fund, for example, might seek to buy a particular Municipal
Obligation and obtain secondary market insurance for it if, in the Advisor's
opinion, the market value of the security, as insured, would exceed the current
value of the security without insurance plus the cost of the secondary market
insurance. Similarly, if the Fund owns but wishes to sell a Municipal Obligation
that is then covered by portfolio insurance, the Fund might seek to obtain
secondary market insurance for it if, in the Advisor's opinion, the net proceeds
of the Fund's sale of the security, as insured, would exceed the current value
of the security plus the cost of the secondary market insurance. In determining
whether to insure Municipal Obligations the Fund owns, an insurer will apply its
own standards, which correspond generally to the standards it has established
for determining the insurability of new issues of Municipal Obligations. See
"Original Issue Insurance" above.
PORTFOLIO INSURANCE. The Fund may also purchase policies of portfolio
insurance, each of which would guarantee the payment of principal and interest
on specified eligible Municipal Obligations the Fund has bought. Except as
described below, portfolio insurance generally provides the same type of
coverage as original issue insurance or secondary market insurance. Municipal
Obligations insured under one portfolio insurance policy would generally not be
insured under any other policy the Fund buys. A Municipal Obligation is eligible
for coverage under a policy if it meets certain requirements of the insurer. If
a Municipal Obligation is already covered by original issue insurance or
secondary market insurance, then the security is not required to be additionally
insured under any portfolio insurance policy that the Fund may buy.
Each portfolio insurance policy will terminate for any covered Municipal
Obligation that has been redeemed or that the Fund has sold on the date of
redemption or the settlement date of sale. A portfolio insurer will have no
liability after such date under the relevant portfolio insurance policy for any
such Municipal Obligation, except that if the redemption date or settlement date
occurs after a record date and before the related payment date for any Municipal
Obligation, the policy will terminate for that Municipal Obligation on the
business day immediately following the payment date.
One or more portfolio insurance policies purchased by the Fund may provide
the Fund, under an irrevocable commitment of the insurer, with an option to
obtain permanent insurance for a Municipal Obligation upon the sale of that
Municipal Obligation by the Fund. The Fund would exercise the right to obtain
permanent insurance upon payment of a single, predetermined insurance premium
payable from the sale proceeds of the Municipal Obligation. The Fund expects to
exercise any such option only if, in the Advisor's opinion, the net proceeds
from the sale of a given Municipal Obligation, as insured, would exceed the
proceeds from the sale of that security without insurance.
The permanent insurance premium for each Municipal Obligation is determined
based upon the insurability of each security as of the date the Fund originally
bought the security. This premium will not be increased or decreased for any
change in the security's creditworthiness, unless the security is in default as
to payment of principal or interest, or both. If this happens, the permanent
insurance premium will be subject to an increase predetermined at the date of
the Fund's purchase.
The Fund generally intends to retain any insured Municipal Obligations
covered by portfolio insurance that are in default or in significant risk of
default and to place a value on the insurance, which value ordinarily will be
the difference between the market value of the defaulted Municipal Obligation
and the market value of similar Municipal Obligations of minimum investment
grade (that is, rated "Baa" or "BBB") that are not in default. In certain
circumstances, however, the Advisor may determine that an alternative value for
the insurance, such as the difference between the market value of the defaulted
Municipal Obligation and either its par value or the market value of similar
Municipal Obligations that are
20
<PAGE> 23
not in default or in significant risk of default, is more appropriate. To the
extent that the Fund holds defaulted Municipal Obligations, it may be limited in
its ability to manage its investment portfolio and to purchase other Municipal
Obligations. Except as described above for Municipal Obligations covered by
portfolio insurance that are in default or subject to significant risk of
default, the Fund will not place any value on the insurance in valuing the
Municipal Obligations it holds.
Because each portfolio insurance policy will terminate for a particular
covered Municipal Obligation on the date the Fund sells that Municipal
Obligation, the insurer will be liable only for those payments of principal and
interest that are then due and owing (unless the Fund obtains permanent
insurance). Portfolio insurance will not enhance the marketability of the Fund's
Municipal Obligations, whether or not the Municipal Obligations are in default
or in significant risk of default. On the other hand, because original issue
insurance and secondary market insurance will remain in effect as long as the
Municipal Obligations they cover are outstanding, these insurance policies may
enhance the marketability of these Municipal Obligations even when they are in
default or in significant risk of default. The exact effect of insurance, if
any, on marketability, cannot be estimated. Accordingly, the Fund may determine
to retain or, alternatively, to sell Municipal Obligations covered by original
issue insurance or secondary market insurance that are in default or in
significant risk of default.
The Fund would generally pay the premiums for a portfolio insurance policy
monthly, and premiums are adjusted for purchases and sales of Municipal
Obligations covered by the policy during the month. The yield on the Fund's
portfolio would be reduced to the extent of the insurance premiums the Fund pays
which, in turn, will depend upon the characteristics of the covered Municipal
Obligations. If the Fund were to buy secondary market insurance for any
Municipal Obligation then covered by a portfolio insurance policy, the coverage
and the obligation to pay monthly premiums under the portfolio insurance policy
would cease with respect to that Municipal Obligation.
HEDGING ACTIVITIES
Hedging is a means of transferring risk that an investor does not desire to
assume. The Advisor believes it is possible to reduce or enhance the effects of
interest rate fluctuations through the use of futures contracts and options on
financial instruments.
The Fund may purchase and sell financial futures and tax-exempt bond index
futures contracts ("index futures") to hedge against changes caused by changing
interest rates or changes in the market value of Municipal Obligations that are
in its portfolio or that it intends to acquire. In order to hedge, the Fund may
also purchase and write put and call options on financial futures, tax-exempt
bond indices and index futures. The costs of and possible losses incurred from
these transactions may reduce the Fund's current return. The decision as to when
and to what extent the Fund will engage in hedging transactions will depend upon
a number of factors, including prevailing market conditions, the composition of
the Fund's portfolio and the availability of suitable transactions. Accordingly,
there can be no assurance that the Fund will engage in hedging transactions at
any given time or from time to time or that such transactions, if available,
will be effective.
Income earned by the Fund from its hedging activities will be treated as
capital gain in the Fund's hands and, if not offset by net realized capital
losses, will be distributed to shareholders in taxable distributions. See "Tax
Matters -- Federal Income Tax Matters."
The Fund will not engage in transactions in futures contracts or related
options for speculative purposes but only as a hedge against changes resulting
from market conditions in the values of securities in its portfolio or that it
intends to acquire. In addition, the Fund will not purchase or sell futures
contracts or purchase or sell related options if immediately thereafter the sum
of the amount of its initial margin
21
<PAGE> 24
deposits on its existing futures and related options positions and premiums paid
for related options would exceed 5% of its total assets (taken at current
value). In instances involving the purchase or sale of futures contracts or the
writing of call or put options thereon by the Fund, an amount of cash or liquid
high-grade debt securities equal to the underlying commodity value of the
futures contracts and options (less any related margin deposits) will be
deposited in a segregated account with the Fund's custodian to collateralize the
position and thereby ensure that the use of such futures contracts and options
is unleveraged.
The Fund might not employ any of the hedging strategies described below,
and no assurance can be given that any strategy used will succeed. If the
Advisor incorrectly forecasts interest rates, market values or other economic
factors in utilizing a hedging strategy for the Fund, the Fund might have been
in a better position if it had not entered into the position at all. Also,
suitable hedging transactions may not be available in all circumstances or, if
available, effective.
FINANCIAL FUTURES. In connection with its hedging activities, the Fund may
engage in transactions involving financial futures. A financial future is a
contract that obligates the seller to deliver and the purchaser to take delivery
of a specified type of financial instrument at a specified future time and at a
specified price. Although financial futures contracts by their terms require
actual delivery and acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract purchase or sale is effected by
entering into an offsetting transaction. Financial futures trade on boards of
trade that have been designated "contracts markets" by the Commodity Futures
Trading Commission. Financial futures trade on these markets in a manner that is
similar to the way a stock trades on a stock exchange. The boards of trade,
through their clearing corporations, guarantee performance of the contracts.
Currently, there are financial futures based on long-term U.S. Treasury bonds,
U.S. Treasury notes, Government National Mortgage Association ("GNMA")
certificates, three-month U.S. Treasury bills and three-month domestic bank
certificates of deposit. The Fund expects other financial futures to be
developed and traded. The Fund expects to engage in transactions involving
financial futures if, in the opinion of the Advisor, they are appropriate
hedging instruments for the Fund.
The sale of financial futures by the Fund is for the purpose of hedging the
Fund's holdings of long-term debt securities. In the event of a rise in interest
rates, the value of the Fund's short position in financial futures would
increase at approximately the same rate as the value of the long-term bonds in
its portfolio would decline, thereby keeping the net asset value of the Fund
from declining as much as it otherwise would have.
If, on the other hand, interest rates were expected to decline, the Fund
might purchase futures contracts and thus take advantage of the anticipated rise
in the value of long-term securities. In such an event, the futures contracts
could be liquidated and the Fund's cash reserves could be raised to buy long-
term securities in the cash market.
Unlike when the Fund purchases or sells a security, no price is paid or
received by the Fund upon the sale or purchase of a financial future. The Fund
will initially be required to deposit with the Fund's custodian an amount of
"initial margin" of cash or U.S. Treasury bills equal to a small percentage of
the contract amount. The nature of initial margin in futures transactions is
different from that of margin in securities transactions in that initial margin
on financial futures does not involve the borrowing of funds by the customer to
finance the transactions. Rather, the initial margin is in the nature of a
performance bond or good faith deposit on the contract which is returned to the
Fund upon termination of the financial future, assuming all contractual
obligations have been satisfied. Subsequent payments to and from the broker,
called maintenance margin, will be made on a daily basis as the price of the
underlying debt security fluctuates, making the long and short positions in the
financial future more or less valuable, a process
22
<PAGE> 25
known as "marking to market." For example, when the Fund has sold a financial
future and the price of the underlying debt security has declined, that position
will have increased in value and the Fund will receive from the broker a
maintenance margin payment equal to that increase. Conversely, where the Fund
has sold a financial future and the price of the underlying debt security has
increased, the position would be less valuable, and the Fund would be required
to make a maintenance margin payment to the broker. At any time prior to
expiration of the financial future, the Fund may elect to close the position by
taking an opposite position in the financial future. A final determination of
maintenance margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or a gain. While financial
futures based on debt securities do provide for the delivery and acceptance of
securities, such deliveries and acceptances are very seldom made. Generally, the
financial future is terminated by entering into an offsetting transaction. An
offsetting transaction for a financial future sale is effected by the Fund
entering into a financial future purchase for the same aggregate amount of the
specific type of financial instrument and same delivery date. If the price in
the sale exceeds the price in the offsetting purchase, the Fund immediately is
paid the difference and thus realizes a gain. If the offsetting purchase price
exceeds the sale price, the Fund pays the difference and realizes a loss.
There are several risks in connection with the use of financial futures by
the Fund as a hedging device. One risk may arise because of the imperfect
correlation between movements in the price of the financial future and movements
in the price of the debt securities that are the subject of the hedge. Financial
futures based on U.S. Government securities and GNMA certificates historically
have reacted to an increase or decrease in interest rates in a similar fashion
to the underlying U.S. Government securities and GNMA certificates. To the
extent, however, that the Fund enters into financial futures on other than
Municipal Obligations, there is a possibility that the value of such financial
futures would not vary in direct proportion to the value of the Fund's holdings
of Municipal Obligations.
Another result of the imperfect correlation between movements in the prices
of the financial future and of the debt securities being hedged is that the
price of the financial future may move more or less than the price of the debt
securities being hedged. If the price of the financial future moves less than
the price of the securities that are the subject of the hedge, the hedge will
not be fully effective, but if the price of the securities being hedged has
moved in an unfavorable direction, the Fund would be in a better position than
if it had not hedged at all. If the price of the securities being hedged has
moved in a favorable direction, the advantage will be partially offset by the
futures contract. If the price of the financial future moves more than the price
of the security, the Fund will experience either a loss or a gain on the future
which will not be completely offset by movements in the prices of the debt
securities which are the subject of the hedge. To compensate for the imperfect
correlation of movements in the price of debt securities being hedged and
movements in the price of related financial futures, the Fund may purchase or
sell financial futures in a greater or lesser dollar amount than the dollar
amount of the securities being hedged.
The market prices of financial futures may be affected by several factors
other than interest rates. First, all participants in the futures markets are
subject to margin deposit and maintenance requirements. Rather than meeting
additional margin deposit requirements, investors may close financial futures
through offsetting transactions, which could distort the normal relationship
between the debt securities and futures markets. Second, from the point of view
of speculators, the deposit requirements in the futures markets are less onerous
than margin requirements in the securities markets. Therefore, increased
participation by speculators in the futures markets may also cause temporary
price distortions. Due to the possibility of price distortions in the futures
markets and the imperfect correlation between movements in the prices of debt
securities and movements in the prices of related financial futures, a correct
forecast of interest rate trends by the Fund's investment advisor may still not
result in a successful hedging transaction.
23
<PAGE> 26
Positions in futures contracts may be closed out only on an exchange or
board of trade that provides a secondary market for such futures. Although the
Fund intends to engage in futures transactions only on exchanges or boards of
trade where there appear to be active secondary markets, there is no assurance
that a liquid secondary market on an exchange or board of trade will exist for
any particular contract or at any particular time. If there is not a liquid
secondary market at a particular time, it may not be possible to close a futures
position at such time, and in the event of adverse price movements, the Fund
would continue to be required to make daily cash payments of maintenance margin.
OPTIONS ON FINANCIAL FUTURES. The Fund may also purchase and sell put and
call options on financial futures which are traded on a U.S. exchange or board
of trade or over the counter and enter into closing transactions with respect to
such options to terminate an existing position. The purchase of put options on
financial futures is analogous to the sale of futures so as to hedge the Fund's
portfolio of debt securities against the risk of rising interest rates. The
purchase of call options on financial futures is analogous to the purchase of
futures contracts and represents a means of obtaining exposure to market
appreciation at limited risk.
The Fund may write call options on futures contracts, which constitutes a
partial hedge against any declining price of long-term debt securities. If the
futures price at expiration is below the exercise price, the Fund will retain
the full amount of the option premium, which provides a partial hedge against
any decline that may have occurred in the Fund's holdings of debt securities. If
the futures price at expiration exceeds the exercise price, the Fund will
ordinarily realize a loss equal to the amount of such excess.
The Fund may write put options on futures contracts, which constitutes a
partial hedge against an increase in the price of long-term debt securities when
the Fund is not fully invested. If the futures price at expiration is above the
exercise price, the Fund will retain the full amount of the option premium,
which provides a partial hedge against any increase in the market price of
long-term debt securities. If the futures price at expiration is less than the
exercise price, the Fund will ordinarily realize a loss equal to the difference
between the futures price and the exercise price.
An option on a futures contract gives the purchaser the right, in return
for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the period of the option. Upon
exercise of the option, the delivery of the futures position by the writer of
the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account which represents the
amount by which the market price of the futures contract, at exercise, exceeds,
in the case of a call, or is less than, in the case of a put, the exercise price
of the option on the futures contract. If an option is exercised on the last
trading day prior to the expiration date of the option, the settlement will be
made entirely in cash in an amount equal to the difference between the exercise
price of the option and the closing price of the futures contract on the
expiration date. Currently options can be purchased or written with respect to
futures contracts on U.S. Treasury bonds and notes on the Chicago Board of
Trade. The holder or writer of an option may terminate his position by selling
or purchasing an option of the same series. There is no guarantee that such
closing transactions can be effected.
There are several special risks related to transactions in options on
futures. The ability to establish and close out positions on such options will
be subject to the maintenance of a liquid secondary market. Compared to the sale
of financial futures, the purchase of put options on financial futures involves
less potential risk to the Fund because the maximum amount at risk is the
premium paid for the options (plus transaction costs). However, there may be
circumstances when the purchase of a put option on a financial future would
result in a loss to the Fund when the sale of a financial future would not, such
as when there is no movement in the price of debt securities.
24
<PAGE> 27
An option position may be closed out only on an exchange or board of trade
that provides a secondary market for an option of the same series. Although the
Fund generally will purchase only those options for which there appears to be an
active secondary market, there is no assurance that a liquid secondary market on
an exchange or board of trade will exist for any particular option, or at any
particular time, and for some options, no secondary market on an exchange or
board of trade may exist. In such event, it might not be possible to effect
closing transactions in particular options, with the result that the Fund would
have to exercise its options in order to realize any profit and would incur
transaction costs upon closing out the futures positions acquired pursuant to
the exercise of such option.
Reasons for the absence of a liquid secondary market for options on
financial futures on an exchange or board of trade include the following:
- there may be insufficient trading interest in certain options;
- restrictions may be imposed by an exchange or board of trade on opening
transactions or closing transactions or both;
- trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of options;
- unusual or unforeseen circumstances may interrupt normal operations on an
exchange or board of trade;
- the facilities of an exchange or board of trade or the Options Clearing
Corporation (the "Clearing Corporation") may not at all times be adequate
to handle current trading volume; or
- one or more exchanges or boards of trade could, for economic or other
reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which
event the secondary market on that exchange or board of trade (or in that
class or series of options) would cease to exist, although outstanding
options on that exchange or board of trade which had been issued by the
Clearing Corporation as a result of trades on that exchange or board of
trade could continue to be exercisable in accordance with their terms.
Privately negotiated and over-the-counter options on financial futures may not
be as regulated as and may be less marketable than options traded on an exchange
or board of trade.
There is no assurance that higher than anticipated trading activity or
other unforeseen events might not, at times, render certain of the facilities of
the Clearing Corporation inadequate, and thereby result in the institution by an
exchange or board of trade of special procedures that may interfere with the
timely execution of customers' orders.
TAX-EXEMPT BOND INDEX TRANSACTIONS. The Fund anticipates utilizing
tax-exempt bond index futures as a hedge against changes in the market value of
the Municipal Obligations in its portfolio or which it intends to acquire. A
tax-exempt bond index assigns relative values to the Municipal Obligations
included in the index. A tax-exempt bond index fluctuates with changes in the
market values of the Municipal Obligations included in the index. An index
future is a bilateral agreement pursuant to which two parties agree to receive
or deliver at settlement an amount of cash equal to a specified dollar amount
multiplied by the difference between the value of the index at the close of a
trading day of the contract and the price at which the future was originally
written. An index future has similar characteristics to financial futures
discussed above except that settlement is made through delivery of cash rather
than the underlying securities.
25
<PAGE> 28
The Fund's strategies in employing index futures will be similar to the
strategies involved in financial futures transactions. Tax-exempt bond index
futures transactions also will be subject to risks similar to those described
above with respect to financial futures, except that the correlation between
movements in the price of a futures contract and movements in the price of the
Fund's portfolio securities is likely to be higher for tax-exempt index futures
than for financial futures.
The Fund may also purchase and write put and call options on tax-exempt
bond indices and on tax-exempt bond index futures and enter into closing
transactions with respect to such options. An option on an index gives the
holder the right to receive cash upon exercise of the option in an amount equal
to a specified multiple times the amount by which the fixed exercise price of
the option exceeds, in the case of a put, or is less than, in the case of a
call, the closing value of the underlying index on the date of exercise. An
option on an index future gives the purchaser the right, in return for the
premium paid, to assume a position in an index contract rather than to sell (in
the case of a put option) or buy (in the case of a call option) a debt
instrument at a specified exercise price at any time during the period of the
option. Upon exercise of the put option, the delivery of the futures position by
the holder of the option to the writer of the option will be accompanied by
delivery of the accumulated balance of the writer's futures margin account,
which represents the amount by which the market price of the index futures
contract, at exercise, is less than the exercise price of the put option on the
index future.
FORWARD COMMITMENTS
New issues of Municipal Obligations are often purchased on a "when-issued"
or delayed delivery basis. The payment obligations and the interest rate that
will be received on the securities are fixed at the time the buyer enters into
the commitment. The Fund will not begin earning interest on such securities,
however, until the securities are scheduled for settlement. The Fund may enter
into such "forward commitments" if it holds and maintains until the settlement
date, in a segregated account, cash or liquid securities which are "marked to
market" daily in an amount sufficient to meet the purchase price. Forward
commitments involve a risk of loss if the value of the Municipal Obligation to
be purchased declines prior to the settlement date. Such a decline in value
could result from, among other things, changes in the level of interest rates or
other market factors. This risk is in addition to the risk of decline in the
value of the Fund's other assets. Although the Fund generally will enter into
forward commitments with the intention of acquiring Municipal Obligations for
its portfolio, the Fund may dispose of a commitment prior to settlement if the
Advisor deems it appropriate to do so. The Fund may realize capital gain or loss
upon the sale of forward commitments. Any such gains, if not offset by net
realized capital losses, will be distributed to shareholders in taxable
distributions.
REPURCHASE AGREEMENTS
The Fund may purchase U.S. Government securities and concurrently enter
into so-called "repurchase agreements" with the seller, usually a bank or
broker-dealer, whereby the seller agrees to repurchase such securities at the
Fund's cost plus interest within a specified time (normally one day). While
repurchase agreements involve certain risks not associated with direct
investments in U.S. Government securities, the Fund will follow procedures
designed to minimize such risks. These procedures include effecting repurchase
transactions only with the member banks of the Federal Reserve System and
registered broker-dealers having creditworthiness substantially equivalent to
that of the issuers of investment grade debt securities. In addition, the Fund's
repurchase agreements will require that the Fund receive collateral which must
always be at least equal to the repurchase price, including any accrued interest
earned on the repurchase agreement. In the event of a default or bankruptcy by a
seller, the Fund will seek to liquidate such collateral. However, the exercise
of the Fund's right to liquidate such collateral could involve certain
26
<PAGE> 29
costs or delays and, to the extent that proceeds from any sale upon a default of
the obligation to repurchase were less than the repurchase price, the Fund could
suffer a loss.
INVESTMENT COMPANY SECURITIES
The Fund may purchase common shares of closed-end investment companies that
have a similar investment objective and policies to the Fund. In addition to
providing tax-exempt income, such securities may provide capital appreciation.
Such investments, which may also be leveraged and subject to the same risks as
the Fund, will not exceed 10% of the Fund's total assets, and no such company
will be affiliated with the Advisor. These companies bear fees and expenses that
the Fund will incur indirectly.
TEMPORARY AND DEFENSIVE INVESTMENTS
A portion of the Fund's assets will be held in cash or invested in
short-term securities for day-to-day operating purposes. It is the intention of
the Fund that short-term investments will also be invested in securities exempt
from regular federal and California state income taxes. However, if such
securities are not available or if they are available only on a when-issued
basis, the Fund may invest up to 20% of its total assets in short-term
obligations of the U.S. Government. In such situations, the Fund may also invest
in repurchase agreements or short-term notes and obligations rated A-1+ of banks
that have or whose parent holding companies have long-term debt ratings of
Aaa/AAA or of corporations with long-term debt ratings of Aaa/AAA, the interest
on all of which is not exempt from federal or California state income taxes.
Notwithstanding the foregoing, the Fund may temporarily invest more than 20% of
its assets in such taxable obligations for defensive purposes. The ability of
the Fund to invest in securities other than tax-exempt securities (as well as
its ability to enter into repurchase agreements) is limited, however, by a
requirement of the Internal Revenue Code of 1986, as amended (the "Code"), that
at least 50% of its total assets be invested in tax-exempt securities at the end
of each quarter in order to pass through to shareholders the federal income tax
exemption for dividends derived from net investment income on tax-exempt
securities. See "Tax Matters -- Federal Taxation of Shareholders." The Fund's
use of temporary and defensive investments may prevent it from achieving its
investment objective.
USE OF LEVERAGE AND RELATED RISKS
The Fund expects to use leverage primarily through the future issuance of
Municipal Preferred Shares. The Fund initially intends to use leverage of
approximately 38% of its total assets (including the amount obtained through
leverage). The Fund generally will not use leverage if the Advisor anticipates
that it would result in a lower return to Common Shareholders for any
significant amount of time. The Fund also may borrow money as a temporary
measure for extraordinary or emergency purposes, including the payment of
dividends and the settlement of securities transactions which otherwise might
require untimely dispositions of Fund securities.
The use of leverage creates risks for holders of the Common Shares,
including the likelihood of greater volatility of the net asset value and market
price of the Common Shares. There is a risk that fluctuations in the dividend
rates on any Municipal Preferred Shares may adversely affect the return to the
holders of the Common Shares. If the income from the securities purchased with
such funds is not sufficient to cover the cost of leverage (i.e., the dividends
paid on the Municipal Preferred Shares), the return on the Fund would be less
than if leverage had not been used, and therefore the amount available for
distribution to Common Shareholders as dividends and other distributions would
be reduced or eliminated. The Advisor in its best judgment nevertheless may
determine to maintain the Fund's leveraged position, even if the Fund's
distribution to Common Shareholders is reduced, if it deems such action to be
appropriate in the circumstances. Investment by the Fund in inverse floaters may
amplify the effects of leverage and, during
27
<PAGE> 30
periods of rising short-term interest rates, may adversely affect the Fund's
income and distributions to Common Shareholders. During periods in which the
Fund is using leverage, the fees paid to the Advisor for investment advisory and
administrative services will be higher than if the Fund did not use leverage
because the fees paid will be calculated on the basis of the Fund's total net
assets, including proceeds from the issuance of preferred shares.
Capital raised through leverage would be subject to dividend payments which
may exceed the income and appreciation on the assets purchased. The issuance of
preferred shares would involve offering expenses and other costs and may limit
the Fund's freedom to pay dividends on Common Shares or to engage in other
activities. The issuance of a class of preferred shares having priority over the
Fund's Common Shares could create an opportunity for greater return per Common
Share, but at the same time such leveraging is a speculative technique in that
it could increase the Fund's exposure to capital risk. Unless the income and
appreciation, if any, on assets acquired with the proceeds of any offering of
preferred shares exceed the cost of issuing an additional class of securities
(and other Fund expenses), the use of leverage will diminish the investment
performance of the Fund's Common Shares compared with what it would have been
without leverage.
The Fund may be subject to certain restrictions on investments imposed by
guidelines of one or more Rating Agencies which may issue ratings for any
preferred shares issued by the Fund. These guidelines may impose asset coverage
and Fund composition requirements that are more stringent than those imposed on
the Fund by the 1940 Act. It is not anticipated that these covenants or
guidelines will impede the Advisor from managing the Fund's portfolio in
accordance with the Fund's investment objective and policies.
Under the 1940 Act, the Fund is not permitted to issue preferred shares
unless, immediately after such issuance, the net asset value of the Fund's
portfolio is at least 200% of the liquidation value of the outstanding preferred
shares (i.e., such liquidation value may not exceed 50% of the Fund's total
assets). In addition, the Fund is not permitted to declare any cash dividend or
other distribution on its Common Shares unless, at the time of such declaration,
the net asset value of the Fund's portfolio (determined after deducting the
amount of such dividend or other distribution) is at least 200% of such
liquidation value. If preferred shares are issued, the Fund intends, to the
extent possible, to purchase or redeem preferred shares from time to time to
maintain asset coverage of any preferred shares of at least 200%. In addition,
under current federal income tax law, the Fund is required to allocate a portion
of any capital gains or other taxable income to holders of preferred shares. The
terms of any preferred shares are expected to require the Fund to pay to any
preferred shareholders additional dividends intended to compensate the preferred
shareholders for federal taxes payable on any capital gains or other taxable
income allocated to the preferred shares, and may require the Fund to pay such
preferred shareholders additional dividends intended to compensate them for
state taxes payable on such allocated capital gains or other taxable income. Any
such additional dividends will reduce the amount available for distribution to
the Common Shareholders. If the Fund has preferred shares outstanding, two of
the Fund's Trustees will be elected by the holders of preferred shares voting as
a separate class. The remaining Trustees will be elected by holders of Common
Shares and preferred shares voting together as a single class. In the event the
Fund failed to pay dividends on its preferred shares for two years, preferred
shareholders would be entitled to elect a majority of the Trustees until the
dividends were paid.
The Fund is required to meet certain distribution requirements in order to
qualify for federal income taxation as a "regulated investment company" and in
order to avoid corporate level income and excise tax. To the extent dividends on
any preferred shares do not meet these requirements, the remainder must be
distributed to the holders of the Common Shares. If the Fund is precluded from
making distributions on the Common Shares because of any applicable asset
coverage requirements, the Fund may be liable for an excise tax or an income
tax, and may also fail to qualify for federal income tax treatment as a
regulated investment company.
28
<PAGE> 31
The Fund's willingness to issue new securities for investment purposes, and
the amount the Fund will issue, will depend on many factors, the most important
of which are market conditions and interest rates. Successful use of a
leveraging strategy may depend on the Advisor's ability to correctly predict
interest rates and market movements, and there is no assurance that a leveraging
strategy will be successful during any period in which it is employed.
Assuming the utilization of leverage in the amount of 38% of the Fund's
total assets and an annual dividend rate on preferred shares of 3.65% payable on
such leverage based on market rates as of the date of this prospectus, the
additional income that the Fund must earn (net of expenses) in order to cover
such dividend payments would be 1.39%. The Fund's actual cost of leverage will
be based on market rates at the time the Fund undertakes a leveraging strategy,
and such actual cost of leverage may be higher or lower than that assumed in the
previous example.
The following table is designed to illustrate the effect on the return to a
holder of the Fund's Common Shares of leverage in the amount of approximately
38% of the Fund's total assets, assuming hypothetical annual returns on the
Fund's portfolio of minus 10% to plus 10%. As the table shows, leverage
generally increases the return to Common Shareholders when portfolio return is
positive and greater than the cost of leverage and decreases the return when the
portfolio return is negative or less than the cost of leverage. The figures
appearing in the table are hypothetical and actual returns may be greater or
less than those appearing in the table.
<TABLE>
<S> <C> <C> <C> <C> <C>
Assuming Portfolio Return (net of expenses)........ (10%) (5%) 0% 5% 10%
Corresponding Share Return Assuming 38% Leverage... (18.37%) (10.30%) (2.24%) 5.83% 13.89%
</TABLE>
If the Fund issues Municipal Preferred Shares, the ability of the Fund to
take certain actions or enter into certain transactions, such as transactions in
which other entities or persons acquire control of the Fund or convert the Fund
to open-end status, may be limited. See "Description of Shares -- Municipal
Preferred Shares."
Unless and until the Fund issues preferred shares, the Common Shares will
not be leveraged, and the risks and special considerations related to leverage
described in this prospectus will not apply. Such leveraging of the Shares
cannot be achieved until the proceeds resulting from the use of leverage have
been invested in accordance with the Fund's investment objective and policies.
29
<PAGE> 32
ADDITIONAL RISK CONSIDERATIONS
CERTAIN RISKS ASSOCIATED WITH INVESTMENTS IN CALIFORNIA MUNICIPAL
OBLIGATIONS. Since the Fund will invest primarily in California Municipal
Obligations, the performance of the Fund is especially affected by factors
pertaining to the California economy and other factors specifically affecting
the ability of issuers of California Municipal Obligations to meet their
obligations. As a result, the value of the Fund's shares may fluctuate more
widely than the value of shares of a fund investing in a number of different
states. The ability of state, county, or local governments or other issuers of
California Municipal Obligations to meet their obligations will depend primarily
on the availability of tax and other revenues to those entities and on their
fiscal conditions generally. The amounts of tax and other revenues available to
issuers of California Municipal Obligations may be affected from time to time by
economic, political and demographic conditions. In addition, constitutional or
statutory restrictions may limit an issuer's power to raise revenues or increase
taxes. The availability of federal, state and local aid to issuers of California
Municipal Obligations may also affect their ability to meet their obligations.
Payments of principal of and interest on revenue bonds will depend on the
economic condition of the facility or specific revenue source from whose
revenues the payments will be made, which in turn could be affected by economic,
political and demographic conditions in California or elsewhere. Any reduction
in the actual or perceived ability of an issuer of California Municipal
Obligations to meet its obligations (including a reduction in the rating of its
outstanding securities) would likely adversely affect the market value and
marketability of its obligations and could adversely affect the values of other
California Municipal Obligations as well.
The State of California and other California public bodies have in the past
experienced financial difficulties and may continue to do so. Such difficulties
could have an adverse effect on the ability (or the perceived ability) of
issuers of certain California Municipal Obligations to meet their obligations on
such securities. If that were the case, the ratings of certain California
Municipal Obligations held by the Fund could be downgraded and the values of
such securities could decline. In recent years, the ratings of a number of
California Municipal Obligations have been downgraded in response to fiscal and
economic factors affecting their issuers.
After suffering from a recession in the early 1990s, the California economy
has largely recovered. The State's financial condition improved markedly during
the 1995-1998 fiscal years. The State's cash position also improved in those
years, erasing deficits that were amassed during the late 1980s and early 1990s.
The State has enjoyed numerous upgrades of its credit ratings, with the most
recent coming from Standard & Poor's in August 1999. The Asian economic crisis,
which began in 1997, has had some dampening effects on the State's economic
growth (particularly in high technology manufacturing), however, and the pace of
growth in the State's economy is projected to slow.
At various times over the past 21 years, California voters have approved
constitutional amendments that restrict State and/or local taxing or spending
authority. The most notable of these provisions is Proposition 13, approved in
1978, which limits ad valorem taxes on real property and restricts the ability
of taxing entities to increase real property and other taxes. In 1996,
California voters passed Proposition 218, which requires that local governments
obtain voter approval for many new and existing taxes and fees. These and other
future amendments could limit State and local governments' financial flexibility
and ultimately impair their ability to repay their debt obligations.
For a more detailed description of these and other risks affecting
investments in California Municipal Obligations, see "Appendix B -- Special
Considerations Relating to California" in the Statement of Additional
Information.
INTEREST RATE AND MARKET RISK. The prices of Municipal Obligations tend to
fall as interest rates rise. Securities that have longer maturities tend to
fluctuate more in price in response to changes in market
30
<PAGE> 33
interest rates. A decline in the prices of the Municipal Obligations owned by
the Fund would cause a decline in the net asset value of the Fund, which could
adversely affect the trading price of the Fund's Common Shares. This risk is
usually greater among Municipal Obligations with longer maturities or durations
and when inverse floaters are held by the Fund. Although the Fund has no policy
governing the maturities or durations of its investments, the Fund expects that
it will invest in a portfolio of longer-term securities. This means that the
Fund will be subject to greater market risk (other things being equal) than a
fund investing solely in shorter-term securities. Market risk is often greater
among certain types of income securities, such as zero-coupon bonds, which do
not make regular interest payments. As interest rates change, these bonds often
fluctuate in price more than bonds that make regular interest payments.
Conversely, the values of lower-quality securities are less likely than
higher-quality securities to fluctuate inversely with changes in interest rates.
Because the Fund may invest in these types of income securities, it may be
subject to greater market risk than a fund that invests only in current
interest-paying securities.
Until such time as the Fund is fully invested (approximately two to three
months after the completion of the offering), the Fund may invest to a
significant extent in residual interest municipal bonds known as inverse
floaters. Compared to similar fixed-rate Municipal Obligations, the value of
inverse floaters will fluctuate to a greater extent in response to changes in
prevailing long-term interest rates. Moreover, the income earned on inverse
floaters will fluctuate in response to changes in prevailing short-term interest
rates. Thus, when inverse floaters are held by the Fund, an increase in short-
or long-term market interest rates will adversely affect the income received
from such bonds or the net asset value of the Fund's shares. To the extent that
the Fund has preferred shares outstanding, an increase in short-term rates would
also result in an increased cost of leverage, which would adversely affect the
Fund's income available for distribution. The Fund does not intend to invest in
inverse floaters once it becomes fully invested.
Although insurance on the Municipal Obligations will reduce the credit risk
to which the Fund is subject by guaranteeing the timely payment of principal at
maturity and interest, it does not protect against fluctuations in the value of
the Municipal Obligations held by the Fund or the Fund's shares caused by
changes in interest rates or other factors.
LOWER-RATED SECURITIES. Municipal Obligations in the lower rating
categories of recognized Rating Agencies and unrated Municipal Obligations of
comparable quality generally involve greater risk of nonpayment of principal and
interest than securities in higher rating categories. The Fund may invest up to
20% of its total assets in California Municipal Obligations that, at the time of
investment, are rated Ba or B by Moody's or BB or B by Standard & Poor's, or
considered to be of comparable quality by another Rating Agency, or unrated
California Municipal Obligations judged to be of comparable quality by the
Advisor. The possibility of defaults by or bankruptcies of issuers of these
securities causes, in part, this principal and interest risk and may result in
nonpayment of principal or interest or restructuring of the debt obligation and,
possibly, a reduction in the Fund's net asset value. The lower-rated California
Municipal Obligations in which the Fund may invest are speculative to varying
degrees. While such securities may have some quality and protective
characteristics, large uncertainties or major risk exposures to adverse
conditions are expected to outweigh such characteristics. In addition, the
values of lower-rated securities may be more susceptible to real or perceived
adverse economic conditions than higher-rated securities. Municipal Obligations
in the lower rating categories are regarded as predominantly speculative in
character. With respect to lower-rated or unrated Municipal Obligations, the
Fund will rely more on the judgment, analysis and experience of the Advisor than
for investment grade securities.
31
<PAGE> 34
In evaluating the creditworthiness of a Municipal Obligation, whether rated
or unrated, the Advisor may consider, among other things, the following factors:
- the issuer's financial resources;
- the issuer's sensitivity to economic conditions and trends;
- any operating history of and the community support for the facility, if
any, financed by the issue;
- the ability of the issuer's management; and
- regulatory matters.
In addition, lower-rated or unrated Municipal Obligations are frequently
traded only in markets where the number of potential purchasers and sellers, if
any, is very limited. This may limit the availability of such securities for the
Fund to purchase and the ability of the Fund to sell such securities at their
fair value. The Advisor will attempt to reduce the risks of investing in
lower-rated or unrated Municipal Obligations to the greatest extent practicable
through the use of credit analysis.
INCOME RISK. The income investors receive from the Fund is based primarily
on the interest it earns from its investments, which can vary widely over the
short and long term. If interest rates drop, investors' income from the Fund
over time could drop as well if the Fund purchases securities paying lower rates
of interest. This risk is magnified when prevailing short-term interest rates
increase and the Fund holds inverse floaters.
CALL RISK. If interest rates fall, it is possible that issuers of callable
bonds with high interest coupons will "call" (or prepay) their bonds before
their maturity date. If a call were exercised by the issuer during a period of
declining interest rates, the Fund would be likely to replace the called
security with a lower-yielding security. If that were to happen, it would
decrease the Fund's dividends.
CREDIT RISK. Municipal Obligations are subject to the risk of nonpayment
of scheduled interest and/or principal payments. Such nonpayment would result in
a reduction of income to the Fund, a reduction in the value of the security
experiencing nonpayment and a potential decrease in the net asset value of the
Fund. Securities rated below investment grade or unrated securities of
comparable quality (generally, "lower-rated" securities) are subject to the risk
of an issuer's inability to meet principal and interest payments on the
obligations ("credit risk") and may also be subject to price volatility due to
such factors as interest rate sensitivity, market perception of the
creditworthiness of the issuer and general market liquidity ("market risk"). The
prices of lower-rated securities are also more likely to react to real or
perceived developments affecting market and credit risk than are prices of
investment grade or comparable unrated securities, which react primarily to
movements in the general level of interest rates.
As indicated above, the Fund may invest in Municipal Obligations rated
below investment grade and comparable unrated obligations. Such obligations are
commonly called "junk bonds" and will have speculative characteristics in
varying degrees. While such obligations may have some quality and protective
characteristics, these characteristics can be expected to be offset or
outweighed by uncertainties or major risk exposures to adverse conditions. The
Advisor seeks to minimize the risks of investing in below investment grade
securities through professional investment analysis, attention to current
developments in interest rates and economic conditions, and industry and
geographic diversification (if practicable). Because the Fund invests in
lower-rated and unrated Municipal Obligations, the achievement of the Fund's
goals is more dependent on the Advisor's ability than would be the case if the
Fund were investing solely in investment grade or comparable unrated Municipal
Obligations. In evaluating the credit quality of a particular security, whether
rated or unrated, the Advisor will normally take into consideration, among other
things, the financial resources of the issuer (or, as appropriate, of the
underlying source of funds for
32
<PAGE> 35
debt service), its sensitivity to economic conditions and trends, any operating
history of and the community support for the facility financed by the issue, the
ability of the issuer's management and regulatory matters. The Advisor will
attempt to reduce the risks of investing in below investment grade and
comparable unrated obligations through active portfolio management, credit
analysis and attention to current developments and trends in the economy and the
financial markets.
Increases in interest rates and changes in the economy may adversely affect
the ability of issuers of lower-rated Municipal Obligations to pay interest and
to repay principal, to meet projected financial goals and to obtain additional
financing. In the event that an issuer of securities held by the Fund
experiences difficulties in the timely payment of principal or interest and such
issuer seeks to restructure the terms of its borrowings, the Fund may incur
additional expenses and may determine to invest additional assets with respect
to such issuer or the project or projects to which the Fund's portfolio
securities relate. Further, the Fund may incur additional expenses to the extent
that it is required to seek recovery upon a default in the payment of interest
or the repayment of principal on its portfolio holdings, and the Fund may be
unable to obtain full recovery thereof.
To the extent that there is no established retail market for some of the
lower-rated Municipal Obligations in which the Fund may invest, trading in such
securities may be relatively inactive. The Advisor is responsible for
determining the net asset value of the Fund, subject to the supervision of the
Board of Trustees of the Fund. During periods of reduced market liquidity and in
the absence of readily available market quotations for lower-rated Municipal
Obligations held in the Fund's portfolio, the ability of the Advisor to value
the Fund's securities becomes more difficult and the Advisor's use of judgment
may play a greater role in the valuation of the Fund's securities due to the
reduced availability of reliable objective data. The effects of adverse
publicity and investor perceptions may be more pronounced for securities for
which no established retail market exists as compared with the effects on
securities for which such a market does exist. Further, the Fund may have more
difficulty selling such securities in a timely manner and at their stated value
than would be the case for securities for which an established retail market
does exist.
Changes in the credit quality of the issuers of Municipal Obligations held
by the Fund will affect the principal value of (and possibly the income earned
on) such obligations. In addition, the values of such securities are affected by
changes in general economic conditions and business conditions affecting the
relevant economic sectors. Changes by Rating Agencies in their ratings of a
security and in the ability of the issuer to make payments of principal and
interest may also affect the value of the Fund's investments. The amount of
information about the financial condition of an issuer of Municipal Obligations
may not be as extensive as that made available by corporations whose securities
are publicly traded.
The Fund may invest in municipal leases and participations in municipal
leases. The obligation of the issuer to meet its obligations under such leases
is often subject to the appropriation by the appropriate legislative body, on an
annual or other basis, of funds for the payment of the obligations. Investments
in municipal leases are thus subject to the risk that the legislative body will
not make the necessary appropriation and the issuer will not otherwise be
willing or able to meet its obligations.
PORTFOLIO INSURANCE RESTRICTIONS. The Fund may be subject to certain
restrictions on investments imposed by guidelines of one or more insurance
companies which may issue portfolio insurance to the Fund. These guidelines may
impose asset coverage and Fund composition requirements that are more stringent
than those imposed on the Fund by the 1940 Act. Although the Fund does not
anticipate that these guidelines will impede the Advisor from managing the
Fund's portfolio in accordance with the Fund's investment objective and
policies, the Fund can offer no assurance to that effect.
CONCENTRATION. The Fund normally will invest 80% or more of its total
assets in California Municipal Obligations. This may make the Fund more
susceptible to adverse economic, political or regulatory
33
<PAGE> 36
occurrences affecting California. As concentration increases, so does the
potential for fluctuation of the net asset value of Fund Common Shares.
LIQUIDITY RISK. At times, a substantial portion of the Fund's assets may
be invested in securities as to which the Fund, by itself or together with other
accounts managed by the Advisor and its affiliates, holds a major portion of all
of such securities. Under adverse market or economic conditions or in the event
of adverse changes in the financial condition of the issuer, the Fund could find
it more difficult to sell such securities when the Advisor believes it is
advisable to do so or may be able to sell such securities only at prices lower
than if such securities were more widely held. Under such circumstances, it may
also be more difficult to determine the fair value of such securities for
purposes of computing the Fund's net asset value.
The secondary market for some Municipal Obligations is less liquid than is
the secondary market for taxable debt obligations or other more widely traded
Municipal Obligations. No established resale market exists for certain Municipal
Obligations in which the Fund may invest. The market for Municipal Obligations
rated below investment grade is also likely to be less liquid than the market
for higher-rated Municipal Obligations. As a result, the Fund may be unable to
dispose of these Municipal Obligations at times when it would otherwise wish to
do so at the prices at which they are valued.
A secondary market may be subject to irregular trading activity, wide
bid/ask spreads and extended trade settlement periods. The Fund has no
limitation on the amount of its assets which may be invested in securities which
are not readily marketable or are subject to restrictions on resale. The risks
associated with illiquidity are particularly acute in situations where the
Fund's operations require cash, such as if the Fund tenders for its Common
Shares, and may result in the Fund borrowing to meet short-term cash
requirements.
OPTIONS AND FUTURES TRANSACTIONS. The Fund may seek to hedge its portfolio
against changes in interest rates using options, index options and futures and
financial futures contracts. The Fund's hedging transactions are designed to
manage the average duration of the Fund's portfolio, but come at some cost. For
example, the Fund must pay for the option, and the price of the security may not
in fact drop. In large part, the success of the Fund's hedging activities
depends on the Advisor's ability to forecast movements in securities prices and
interest rates, and the Fund can offer no assurance that the Advisor will be
able to forecast such movements successfully. The Fund does not, however, intend
to enter into options and futures transactions for speculative purposes. The
Fund is not required to hedge its portfolio.
CLOSED-END FUNDS. The Fund is a closed-end investment company with no
history of operations and is designed primarily for long-term investors and not
as a trading vehicle. The shares of closed-end investment companies often trade
at a discount from their net asset value, and the Common Shares may likewise
trade at a discount from net asset value. The trading price of the Fund's Common
Shares may be less than the initial public offering price, creating a risk of
loss for investors purchasing in the initial public offering of the Common
Shares. This market price risk may be greater for investors who sell their
Common Shares within a relatively short period after completion of this
offering.
NONDIVERSIFICATION. The Fund has registered as a "nondiversified"
investment company under the 1940 Act so that, subject to its investment
restrictions and applicable federal income tax diversification requirements,
with respect to 50% of its total assets, it will be able to invest more than 5%
(but not more than 25%) of the value of its total assets in the obligations of
any single issuer. To the extent the Fund invests a relatively high percentage
of its assets in obligations of a limited number of issuers, the Fund will be
more susceptible than a more widely diversified investment company to any single
corporate, economic, political or regulatory occurrence.
34
<PAGE> 37
YEAR 2000 COMPLIANCE. Like other investment companies, financial and
business organizations and individuals around the world, the Fund could be
adversely affected if the computer systems used by the Advisor, other service
providers and the issuers in which the Fund invests do not properly process and
calculate date-related information and data from and after January 1, 2000. This
is commonly known as the "Year 2000 Problem." The Advisor is taking steps that
it believes are reasonably designed to address the Year 2000 Problem, including
communicating with vendors who provide services, software and systems to the
Fund in an attempt to ensure that date-related information and data can be
properly processed and calculated on and after January 1, 2000. Many Fund
service providers and vendors, including the Advisor, and the insurers who will
provide portfolio insurance for the Fund or insurance for specific Municipal
Obligations in which the Fund invests are in the process of making Year 2000
modifications to their services, software and systems and believe that such
modifications will be completed on a timely basis prior to January 1, 2000. In
addition, Year 2000 readiness information, if available, is one of the factors
considered by the Advisor in its assessment of the issuers in which the Fund
invests. There can be no assurance that these steps will be sufficient to avoid
any adverse impact on the Fund.
HOW THE FUND MANAGES RISK
INVESTMENT LIMITATIONS
The Fund has adopted certain investment limitations designed to limit
investment risk and maintain portfolio diversification. These limitations are
fundamental and may not be changed without the approval of the holders of a
majority of the outstanding Common Shares and Municipal Preferred Shares, if
any, voting together as a single class, and the approval of the holders of a
majority of the Municipal Preferred Shares voting as a separate class. The Fund
may not invest more than 25% of total Fund assets in securities of issuers in
any one industry; except that this limitation does not apply to municipal bonds
backed by the assets and revenues of governments or political subdivisions of
governments.
The Fund may become subject to guidelines which are more limiting than the
investment restrictions set forth above in order to obtain and maintain ratings
from Moody's or Standard & Poor's on the Municipal Preferred Shares that it
intends to issue. The Fund does not anticipate that such guidelines would have a
material adverse effect on the Fund's Common Shareholders or the Fund's ability
to achieve its investment objective. See "Investment Objective and
Policies -- Investment Restrictions" in the Statement of Additional Information
for information about these guidelines and additional fundamental and
nonfundamental investment policies of the Fund.
LIMITED ISSUANCE OF MUNICIPAL PREFERRED SHARES
Under the 1940 Act, the Fund could issue Municipal Preferred Shares having
a total liquidation value (the liquidation of the original purchase price of the
shares plus any accrued and unpaid dividends) of up to one-half of the value of
the total net assets of the Fund. If the total liquidation value of the
Municipal Preferred Shares was ever more than one-half of the value of the
Fund's total net assets, the Fund would not be able to declare dividends on the
Common Shares until the liquidation value, as a percentage of the Fund's assets,
was reduced. The Fund intends to issue Municipal Preferred Shares representing
about 38% of the Fund's total capital at the time of issuance, if the Fund sells
all the Common Shares offered in this prospectus and all the Municipal Preferred
Shares which may be offered in the future through a different prospectus. This
higher than required margin of net asset value provides a cushion against later
fluctuations in the value of the Fund's portfolio and will subject Common
Shareholders to less income and net asset value volatility than if the Fund were
more leveraged. The Fund intends to purchase or redeem Municipal
35
<PAGE> 38
Preferred Shares, if necessary, to keep the liquidation value of the Municipal
Preferred Shares below one-half of the value of the Fund's total net assets.
MANAGEMENT OF INVESTMENT PORTFOLIO AND CAPITAL STRUCTURE TO LIMIT LEVERAGE RISK
The Fund may take certain actions if short-term rates increase or market
conditions otherwise change (or the Fund anticipates such an increase or change)
and the Fund's leverage begins (or is expected) to adversely affect Common
Shareholders. In order to attempt to offset such a negative impact of leverage
on Common Shareholders, the Fund may shorten the average maturity of its
investment portfolio (by investing in short-term, high-quality securities) or
may extend the maturity of any outstanding Municipal Preferred Shares. The Fund
may also attempt to reduce the leverage by redeeming or otherwise purchasing
Municipal Preferred Shares. As explained above under "Use of Leverage and
Related Risks," the success of any such attempt to limit leverage risk depends
on the Advisor's ability to accurately predict interest rate or other market
changes. Because of the difficulty of making such predictions, the Fund may
never attempt to manage its capital structure in the manner described above.
If market conditions suggest that additional leverage would be beneficial,
the Fund may sell previously unissued Municipal Preferred Shares or Municipal
Preferred Shares that the Fund previously issued but later repurchased.
HEDGING STRATEGIES
The Fund may use various investment strategies designed to manage the
"duration" of the Fund's portfolio. The duration of a bond measures the
sensitivity of the bond's price to changes in interest rates. Generally, the
shorter the duration of the Fund's portfolio, the less its net asset value will
change when interest rates change. These hedging strategies include using
financial futures contracts, including index futures, options on financial
futures or options based on either an index of long-term municipal securities or
on taxable debt securities whose prices, in the opinion of the Advisor,
correlate with the prices of the Fund's investments. The Fund may use
over-the-counter options, which are considered to be less marketable than
options traded on an exchange or board of trade. Successful implementation of
most hedging strategies would generate taxable income.
36
<PAGE> 39
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The Board of Trustees is responsible for the general supervision of the
Fund, including general supervision of the duties performed by the Advisor under
its Management Agreement (as defined below) with the Fund. There are 13 trustees
of the Fund, four of whom are "interested persons" (as defined in the 1940 Act).
The names and addresses of the trustees and officers of the Fund and their
principal occupations and other affiliations during the past five years are set
forth under "Management of the Fund" in the Statement of Additional Information.
THE ADVISOR
Colonial Management Associates, Inc. (the "Advisor") is a Massachusetts
corporation having its principal offices at One Financial Center, Boston,
Massachusetts 02111. The Advisor is a wholly owned subsidiary of Liberty Funds
Group LLC ("Liberty Funds Group") and both Liberty Funds Group and the Advisor
are indirect, majority-owned subsidiaries of Liberty Mutual Insurance Company
("Liberty"). The Advisor has been an investment advisor since 1931. As of August
31, 1999, the Advisor was serving as investment advisor, sub-advisor or
administrator for 62 open-end and 7 closed-end management investment company
portfolios and managing over $20.7 billion in assets.
The Advisor's mutual funds and institutional investment advisory businesses
are part of a larger business unit that includes several separate legal entities
known as Liberty Funds Group LLC ("LFG"). LFG includes certain affiliates of the
Advisor, principally Stein Roe & Farnham Incorporated ("Stein Roe"). The Advisor
and the LFG business unit are managed by a single management team. The Advisor,
Stein Roe and the other LFG entities also share personnel, facilities and
systems that may be used in providing administrative or operational services to
the Fund. The Advisor is a registered investment advisor. The Advisor, Stein Roe
and the other entities that make up LFG are subsidiaries of Liberty Financial
Companies, Inc.
William C. Loring and Brian M. Hartford, each a Senior Vice President at
the Advisor, will manage the Fund. Messrs. Loring and Hartford have managed
various other Colonial tax-exempt funds since 1986 and 1993, respectively.
MANAGEMENT AGREEMENT
The Management Agreement between the Advisor and the Fund (the "Management
Agreement") provides that, subject to the direction of the Board of Trustees of
the Fund and the applicable provisions of the 1940 Act, the Advisor is
responsible for the actual management of the Fund's portfolio. The
responsibility for making decisions to buy, sell or hold a particular investment
rests with the Advisor, subject to review by the Board of Trustees of the Fund
and compliance with the applicable provisions of the 1940 Act.
The Advisor provides the Fund with accounting, bookkeeping and pricing
services and other services and office facilities (the expenses of which are
borne by the Fund as specified below), except to the extent these services are
provided by an administrator or an accounting firm hired by the Fund.
Under the Management Agreement with the Fund, the Advisor receives a
monthly advisory fee at the annual rate of 0.65% of the average weekly net
assets of the Fund (including net assets, if any, attributable to Municipal
Preferred Shares).
37
<PAGE> 40
The Advisor places all orders for the purchase and sale of portfolio
securities. In selecting broker-dealers, the Advisor may consider research and
brokerage services furnished by such broker-dealers to the Advisor and its
affiliates. In recognition of the research and brokerage services provided, the
Advisor may cause the Fund to pay the selected broker-dealer a higher commission
than would have been charged by another broker-dealer not providing such
services. Subject to seeking best execution, the Advisor may consider sales of
shares of certain other funds distributed by affiliates of Liberty in selecting
broker-dealers for portfolio security transactions.
In addition to the fee of the Advisor, the Fund pays all other costs and
expenses of its operations, including compensation of its trustees (other than
those affiliated with the Advisor), custodian, registrar, transfer and dividend
disbursing expenses, legal fees, expenses of independent auditors, expenses of
repurchasing shares, expenses of shareholder reports, expenses of preparing,
printing and distributing notices, proxy statements and reports to governmental
agencies, and taxes, if any.
For the first ten years of the Fund's operation, the Advisor has agreed to
waive the Fund's fees and expenses in the amounts, and for the time periods, set
forth below:
<TABLE>
<CAPTION>
PERCENTAGE WAIVED
YEAR ENDING (AS A PERCENTAGE OF AVERAGE
NOVEMBER 30, WEEKLY TOTAL NET ASSETS)*
- ------------ ----------------------------
<S> <C>
2000**................ 0.30%
2001.................. 0.30%
2002.................. 0.30%
2003.................. 0.30%
2004.................. 0.30%
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE WAIVED
YEAR ENDING (AS A PERCENTAGE OF AVERAGE
NOVEMBER 30, WEEKLY TOTAL NET ASSETS)*
- ------------ ----------------------------
<S> <C>
2005.................. 0.25%
2006.................. 0.20%
2007.................. 0.15%
2008.................. 0.10%
2009.................. 0.05%
</TABLE>
- ---------------
* Including net assets attributable to Municipal Preferred Shares.
** From the commencement of operations.
The Advisor has not agreed to waive any portion of the Fund's fees and
expenses beyond November 30, 2009.
NET ASSET VALUE
Net asset value of the Fund will be determined no less frequently than as
of the close of regular trading on the New York Stock Exchange (generally 4:00
p.m. Eastern time) on the last business day of each week (generally Friday), and
at such other times as the Fund may authorize. The net asset value of the Fund
equals the value of the Fund's assets less the Fund's liabilities. Portfolio
securities for which market quotations are readily available are valued at
current market value. Short-term investments maturing in 60 days or less are
valued at amortized cost when the Advisor determines, pursuant to procedures
adopted by the Board of Trustees, that such cost approximates current market
value. All other securities and assets are valued at their fair value following
procedures adopted by the Board of Trustees.
When price quotes are not readily available (which is usually the case for
Municipal Obligations), the pricing service establishes a fair market value
based on prices of comparable Municipal Obligations. All valuations are subject
to review by the Fund's Board of Trustees or its delegate, the Advisor.
38
<PAGE> 41
DISTRIBUTIONS
The Fund intends to make monthly distributions of its net tax-exempt
interest income, after payment of any dividends on any outstanding preferred
shares. The Fund will distribute annually any taxable income and capital gain.
Distributions to Common Shareholders cannot be assured, and the amount of each
monthly distribution is likely to vary. Initial distributions to Common
Shareholders are expected to be paid approximately 60 days after the completion
of this offering. While there are any preferred shares outstanding, the Fund
might not be permitted to declare any cash dividend or other distributions on
its Common Shares in certain circumstances. See "Description of Shares."
If any of the dividends on the Preferred Shares (as defined below in
"Description of Share -- Municipal Preferred Shares") is determined to be from
taxable ordinary income or capital gain, the terms of the Preferred Shares may
require the Fund to pay an extra amount of dividends on the Preferred Shares in
an amount sufficient to make each holder of the Preferred Shares whole (on an
after-tax basis) with respect to the estimated federal and/or California state
personal income tax which the holder would be required to pay on the taxable
distributions ("gross-up payments"), in which case the amount of any dividends
payable to Common Shareholders would be reduced by the amount of any such
gross-up payments. For information regarding important income tax consequences
of distributions to Common Shareholders, see "Tax Matters."
DIVIDEND REINVESTMENT PLAN
Pursuant to the Fund's Dividend Reinvestment Plan (the "Plan"), all Common
Shareholders whose shares are registered in their own names will have all
distributions reinvested automatically in additional shares of the Fund by
EquiServe (the "Plan Agent"), as agent under the Plan, unless a Common
Shareholder elects to receive cash. An election to receive cash may be revoked
or reinstated at the option of the Common Shareholder. Shareholders whose shares
are held in the name of a broker or nominee will have distributions reinvested
automatically by the broker or nominee in additional shares under the Plan,
unless the service is not provided by the broker or nominee, or unless the
shareholder elects to receive distributions in cash. If the service is not
available, such distributions will be paid in cash. Shareholders whose shares
are held in the name of a broker or nominee should contact the broker or nominee
for details. All distributions to investors who elect not to participate (or
whose broker or nominee elects not to participate) in the Plan will be paid by
check mailed directly to the record holder by the Plan Agent, as dividend paying
agent.
The Plan Agent will furnish each person who buys shares in the offering
with written information relating to the Plan. Included in such information will
be procedures for electing to receive distributions in cash (or, in the case of
shares held in the name of a broker or nominee who does not participate in the
Plan, procedures for having such shares registered in the name of the
shareholder so that such shareholder may participate in the Plan).
If the Trustees of the Fund declare a dividend (including a capital gain
dividend) payable either in shares or in cash, as holders of shares may have
elected, then nonparticipants in the Plan will receive cash and participants in
the Plan will receive the equivalent in shares valued as set forth below.
Whenever a market price is equal to or exceeds net asset value at the time
shares are valued for the purpose of determining the number of shares equivalent
to the distribution, participants will be issued shares at the net asset value
most recently determined as provided under "Net Asset Value" in this prospectus
and the Statement of Additional Information, but in no event less than 95% of
the market price. If the net asset value of the shares at such time exceeds the
market price of shares at such time, or if the Fund should declare a dividend
(including a capital gain dividend) payable only in cash, the Plan Agent will,
as agent for
39
<PAGE> 42
the participants, use the cash that the shareholders would have received as a
dividend to buy shares in the open market, the American Stock Exchange or
elsewhere, for the participants' accounts. If, before the Plan Agent has
completed its purchases, the market price exceeds the net asset value of the
shares, the average per share purchase price paid by the Plan Agent may exceed
the net asset value of the shares, resulting in the acquisition of fewer shares
than if the dividend (including a capital gain dividend) had been paid in shares
issued by the Fund. The Plan Agent will apply all cash received as a dividend
(including a capital gain dividend) to purchase shares on the open market as
soon as practicable after the payment date of such dividend, but in no event
later than 30 days after such date, except where necessary to comply with
applicable provisions of the federal securities laws.
The Plan Agent maintains all shareholder accounts in the Plan and furnishes
written confirmations of all transactions in such accounts, including
information needed by shareholders for personal and tax records. Shares in the
account of each Plan participant will be held by the Plan Agent in
noncertificated form in the name of the participant, and each shareholder's
proxy will include those shares purchased pursuant to the Plan.
There is no charge to participants for reinvesting dividends (including
capital gain dividends). The Plan Agent's fees for handling the reinvestment of
dividends (including capital gain dividends) will be paid by the Fund. 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 stock
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 (including capital gain
dividends).
The automatic reinvestment of dividends (including capital gain dividends)
will not relieve participants of any income tax which may be payable on such
dividends. The amount of the dividend for tax purposes may vary depending on
whether the Fund issues new Common Shares or purchases them on the open market.
For additional information, please see "Tax Matters."
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan as
applied to any dividend (including a capital gain dividend) paid after written
notice of the change sent to the members of the Plan at least 30 days before the
record date for such dividend. All correspondence concerning the Plan should be
directed to the Plan Agent at 150 Royall Street, Canton, Massachusetts 02021.
40
<PAGE> 43
DESCRIPTION OF SHARES
COMMON SHARES
The Fund's Declaration of Trust authorizes the issuance of an unlimited
number of Common Shares, no par value per share. All Common Shares have equal
rights to the payment of dividends and the distribution of assets upon
liquidation. Common Shares will, when issued, be fully paid and, subject to
matters discussed in "Shareholder Liability" in the Statement of Additional
Information, nonassessable, and will have no preemptive or conversion rights or
rights to cumulative voting. Whenever Municipal Preferred Shares are
outstanding, Common Shareholders will not be entitled to receive any
distributions from the Fund unless all accrued dividends on Municipal Preferred
Shares have been paid, and unless asset coverage (as defined in the 1940 Act)
with respect to Municipal Preferred Shares would be at least 200% after giving
effect to the distributions. See "Municipal Preferred Shares" below.
The Fund has applied for listing of the Common Shares on the American Stock
Exchange subject to notice of issuance. The Fund intends to hold annual meetings
of shareholders so long as the Common Shares are listed on a national securities
exchange and such meetings are required as a condition to such listing.
The Fund's net asset value per share generally increases when interest
rates decline, and decreases when interest rates rise, and these changes are
likely to be greater because the Fund intends to have a leveraged capital
structure. Net asset value will be reduced immediately following the offering by
the amount of the sales load and organization, if any, and offering expenses
paid by the Fund. The Advisor has agreed to pay (i) all organizational expenses
and (ii) offering costs (other than sales loads) that exceed $0.03 per Common
Share. See "Use of Proceeds."
Unlike open-end funds, closed-end funds like the Fund do not continuously
offer shares and do not provide daily redemptions. Rather, if a shareholder
determines to buy additional Common Shares or sell shares already held, the
shareholder may do so by trading on the American Stock Exchange, through a
broker or otherwise. Shares of closed-end investment companies may frequently
trade at prices lower than net asset value. Shares of closed-end investment
companies like the Fund that invest predominantly in municipal bonds during some
periods have traded at prices higher than net asset value and during other
periods have traded at prices lower than net asset value. Because the market
value of the Common Shares may be influenced by such factors as dividend levels
(which are in turn affected by expenses), call protection, dividend stability,
portfolio credit quality, net asset value, relative demand for and supply of
such shares in the market, general market and economic conditions, and other
factors beyond the control of the Fund, the Fund cannot assure you that Common
Shares will trade at a price equal to or higher than net asset value in the
future. The Common Shares are designed primarily for long-term investors, and
investors in the Common Shares should not view the Fund as a vehicle for trading
purposes. See "Use of Leverage and Related Risks" and "Additional Risk
Considerations" and the Statement of Additional Information under "Repurchase of
Fund Shares; Conversion to Open-End Fund."
MUNICIPAL PREFERRED SHARES
The Declaration of Trust provides that the Fund may authorize separate
classes of shares of beneficial interest. The By-Laws of the Fund will, at the
time they are amended and restated, authorize the issuance of preferred shares
of beneficial interest, no par value per share, which may be issued from time to
time in such series and with such designations, preferences and other rights,
qualifications, limitations and restrictions as are determined in a resolution
of the Board of Trustees ("Preferred Shares"). Municipal Preferred Shares will
carry one vote per share. Municipal Preferred Shares will, when issued, be fully
paid
41
<PAGE> 44
and, subject to matters discussed in "Shareholder Liability" in the Statement of
Additional Information, nonassessable, and will have no preemptive or conversion
rights or rights to cumulative voting.
The Fund's Board of Trustees has indicated its intention to authorize an
offering of Municipal Preferred Shares (representing approximately 38% of the
Fund's capital immediately after the time the Municipal Preferred Shares are
issued) approximately one to three months after completion of the offering of
Common Shares. Any such decision is subject to market conditions and to the
Board's continuing belief that leveraging the Fund's capital structure through
the issuance of Municipal Preferred Shares is likely to achieve the benefits to
the Common Shareholders described in this prospectus. Although the terms of the
Municipal Preferred Shares will be determined by the Board of Trustees (subject
to applicable law and the Fund's Declaration of Trust) if and when it authorizes
an offering of Municipal Preferred Shares, the Board has determined that the
Municipal Preferred Shares, at least initially, would likely pay cumulative
dividends at rates determined over relatively shorter-term periods (such as 7
days), by providing for the periodic redetermination of the dividend rate
through an auction or remarketing procedure. The Board of Trustees has indicated
that the preference on distribution, liquidation preference, voting rights and
redemption provisions of the Municipal Preferred Shares will likely be as stated
below.
LIMITED ISSUANCE OF MUNICIPAL PREFERRED SHARES. Under the 1940 Act, the
Fund could issue Municipal Preferred Shares with an aggregate liquidation value
of up to one-half of the value of the Fund's total net assets, measured
immediately after issuance of the Municipal Preferred Shares. "Liquidation
value" means the original purchase price of the shares being liquidated plus any
accrued and unpaid dividends. In addition, the Fund is not permitted to declare
any cash dividend or other distribution on its Common Shares unless the
liquidation value of the Municipal Preferred Shares is less than one-half of the
value of the Fund's total net assets (determined after deducting the amount of
such dividend or distribution) immediately after the distribution. If the Fund
sells all the Common Shares and Municipal Preferred Shares discussed in this
prospectus, the liquidation value of the Municipal Preferred Shares is expected
to be approximately 38% of the value of the Fund's total net assets. The Fund
intends to purchase or redeem Municipal Preferred Shares, if necessary, to keep
that fraction below one-half.
DISTRIBUTION PREFERENCE. The Municipal Preferred Shares have complete
priority over the Common Shares as to distribution of assets.
LIQUIDATION PREFERENCE. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Fund, holders of
Municipal Preferred Shares will be entitled to receive a preferential
liquidating distribution (expected to equal the original purchase price per
share plus accumulated and unpaid dividends thereon, whether or not earned or
declared) before any distribution of assets is made to holders of Common Shares.
VOTING RIGHTS. Municipal Preferred Shares are required to be voting shares
and to have equal voting rights with Common Shares. Except as otherwise
indicated in this prospectus or the Statement of Additional Information and
except as otherwise required by applicable law, holders of Municipal Preferred
Shares will vote together with Common Shareholders as a single class.
Holders of Municipal Preferred Shares, voting as a separate class, will be
entitled to elect two of the Fund's trustees. The remaining trustees will be
elected by Common Shareholders and holders of Municipal Preferred Shares, voting
together as a single class. In the unlikely event that two full years of accrued
dividends are unpaid on the Municipal Preferred Shares, the holders of all
outstanding Municipal Preferred Shares, voting as a separate class, will be
entitled to elect a majority of the Fund's trustees until all dividends in
arrears have been paid or declared and set apart for payment. In order for the
Fund to take certain actions or enter into certain transactions (such as
authorizing, creating or issuing additional Municipal Preferred Shares or other
preferred shares ranking prior to or on parity with the Municipal
42
<PAGE> 45
Preferred Shares or amending, altering or repealing the provisions of the
Declaration of Trust or By-Laws of the Fund so as to materially affect the
preferences, rights or powers of the Municipal Preferred Shares), a separate
class vote of holders of Municipal Preferred Shares will be required, in
addition to the single class vote of the holders of Municipal Preferred Shares
and Common Shares. See the Statement of Additional Information under
"Description of Shares -- Municipal Preferred Shares -- Voting Rights."
REDEMPTION, PURCHASE AND SALE OF MUNICIPAL PREFERRED SHARES. The terms of
the Municipal Preferred Shares may provide that they are redeemable at certain
times, in whole or in part, at the original purchase price per share plus
accumulated dividends. The terms may also state that the Fund may tender for or
purchase Municipal Preferred Shares and resell any shares so tendered. Any
redemption or purchase of Municipal Preferred Shares by the Fund will reduce the
leverage applicable to Common Shares, while any resale of such Municipal
Preferred Shares by the Fund will increase such leverage. See "Use of Leverage
and Related Risks."
The discussion above describes the Board of Trustees' present intention
with respect to a possible offering of Municipal Preferred Shares. If the Board
of Trustees determines to authorize such an offering, the terms of the Municipal
Preferred Shares may be the same as, or different from, the terms described
above, subject to applicable law and the Fund's Declaration of Trust.
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST
The Board of Trustees is divided into three classes, each having a term of
three years. Each year the term of one class expires. This may make it more
difficult to change the Fund's management and could have the effect of depriving
shareholders of an opportunity to sell their Common Shares at a premium over
prevailing market prices by discouraging a third party from seeking to obtain
control of the Fund in a tender offer or similar transaction. In addition, the
Declaration of Trust provides that the affirmative vote or consent of two-thirds
of the outstanding Common Shares and any preferred shares of the Fund (including
Municipal Preferred Shares), voting together as a single class, and of the
Preferred Shares (including Municipal Preferred Shares) voting together as a
single class, would be required to authorize the conversion of the Fund from a
closed-end to an open-end investment company. This two-thirds vote requirement
is higher than the vote required under the 1940 Act.
Please refer to the Declaration of Trust, a copy of which is on file with
the Securities and Exchange Commission, for the full text of these provisions.
REPURCHASE OF COMMON SHARES; CONVERSION TO OPEN-END FUND
REPURCHASE OF SHARES
Shares of closed-end investment companies frequently trade at a discount
from net asset value. The Board of Trustees regularly monitors the relationship
between the market price and net asset value of the Common Shares. If the Common
Shares were to trade at a substantial discount to net asset value for an
extended period of time, the Board may consider the repurchase of its Common
Shares on the open market or the making of tender offers for such shares. No
assurances can be given that such actions will be taken. Subject to its
investment restrictions, the Fund may borrow money to finance the repurchase of
shares, subject to compliance with the asset coverage requirements of the 1940
Act and the other limitations described under "Use of Leverage and Related
Risks." Shares may not be repurchased, however, (i) if applicable asset coverage
requirements under the 1940 Act (i.e., 200% with respect to any preferred shares
of the Fund, including Municipal Preferred Shares) are not met or would not be
met following such repurchase or (ii) if otherwise prohibited by applicable law.
43
<PAGE> 46
There can be no assurance that repurchases or tenders, if they were to
occur, would result in the Common Shares trading at a price which is equal to
their net asset value. The Fund anticipates that the market price of the Common
Shares will usually vary from net asset value. The market price of the Common
Shares will be determined, among other things, by the relative demand for and
supply of the Common Shares in the market, the Fund's investment performance,
the Fund's dividends and yield and investor perception of the Fund's overall
attractiveness as an investment as compared with other investment alternatives.
It should be recognized that any such acquisitions of Common Shares would
decrease the total assets of the Fund and therefore have the effect of
increasing the Fund's expense ratio. Furthermore, any interest on borrowings to
finance share repurchase transactions would reduce the Fund's net income.
CONVERSION TO OPEN-END STATUS
The Fund's Board of Trustees may from time to time consider submitting to
the holders of the shares of beneficial interest of the Fund a proposal to
convert the Fund to an open-end investment company. In determining whether to
exercise its discretion to submit this issue to shareholders, the Board of
Trustees would consider all factors then relevant, including the relationship of
the market price of the Common Shares to net asset value, the extent to which
the Fund's capital structure is leveraged and the possibility of re-leveraging,
the spread, if any, between yields on securities in the Fund's portfolio and
interest and dividend charges on preferred shares issued by the Fund and general
market and economic conditions. In addition to any vote required by
Massachusetts law, conversion of the Fund to an open-end investment company
would require the affirmative vote of two-thirds of the Common Shares and any
preferred shares of the Fund (including Municipal Preferred Shares), voting
together as a single class, and of the preferred shares (including Municipal
Preferred Shares) voting together as a single class, entitled to be voted on the
matter. This two-thirds vote requirement is higher than the vote required under
the 1940 Act. Shareholders of an open-end investment company may require the
company to redeem their shares at any time (except in certain circumstances as
authorized by or under the 1940 Act) at their net asset value, less such
redemption charges, if any, as might be in effect at the time of redemption. If
the Fund were to convert to an open-end investment company, it would be required
to redeem all Municipal Preferred Shares then outstanding at the Municipal
Preferred Shares redemption price. In addition, the Fund could be required to
liquidate portfolio securities to meet required and requested redemptions, and
its Common Shares would no longer be listed on the American Stock Exchange. No
assurance can be given that the Board will, at any time in the future, decide to
submit a proposal to convert to open-end status to the shareholders of the Fund.
TAX MATTERS
FEDERAL INCOME TAX MATTERS
The following federal tax discussion reflects provisions of the Code,
existing Treasury Regulations, rulings published by the Internal Revenue
Service, and other applicable authority, as of the date of this prospectus.
These authorities are subject to change by legislative or administrative action.
The discussions below and in the Statement of Additional Information are only a
summary of some of the important tax considerations generally applicable to
investments in the Common Shares of the Fund. There may be other important tax
considerations applicable to particular investors. Because tax laws are complex
and often change, you should consult your tax advisor about the tax consequences
of an investment in the Fund.
The Fund primarily invests in municipal bonds issued by the State of
California or its political subdivisions, agencies, authorities and
instrumentalities, by other states (including the District of Columbia), cities
and local authorities and certain possessions and territories of the United
States (such as Puerto Rico or Guam) or in municipal bonds whose income is
otherwise exempt from regular federal income tax. Consequently, the regular
monthly dividends you receive (whether paid in cash or reinvested in additional
44
<PAGE> 47
Common Shares) will generally be exempt from regular federal income taxes. A
portion of these dividends, however, will likely be subject to the federal AMT.
If you are subject to the federal AMT, a portion of your regular monthly
dividends may be taxable. Furthermore, if you receive Social Security or
Railroad Retirement benefits, you should be aware that tax-free income is taken
into account in calculating the amount of these benefits that may be subject to
federal income tax.
For corporate shareholders, interest on all tax-exempt Municipal
Obligations is taken into account in the computation of income subject to the
federal AMT, and dividends from the Fund will not qualify for the dividends
received deduction.
Although the Fund does not seek to realize taxable income or capital gains,
the Fund may realize and distribute taxable income or capital gains from time to
time as a result of the Fund's normal investment activities. The Fund will
distribute at least annually any taxable income or capital gains. Distributions
of any taxable net investment income and net short-term capital gain are taxable
as ordinary income. Distributions of the Fund's net capital gain (i.e., the
excess of the Fund's net long-term capital gain over net short-term capital
loss) ("capital gain dividends"), if any, are taxable to you as long-term
capital gain, regardless of how long you have held your Common Shares. Because
Fund expenses attributable to earning tax-exempt income do not reduce the Fund's
current earnings and profits, a portion of any distribution in excess of the
Fund's net tax-exempt and taxable income may be considered as paid out of the
Fund's earnings and profits and may therefore be treated as a taxable dividend
(even though that portion represents a return of the Fund's capital).
Distributions, if any, in excess of the Fund's earnings and profits will first
reduce the adjusted tax basis of your Common Shares and, after that basis has
been reduced to zero, will constitute capital gains to you (assuming that you
held your Common Shares as a capital asset).
Distributions of taxable income or capital gains will be taxable to you
whether received in cash or in Common Shares under the Dividend Reinvestment
Plan. In the latter case, you will be treated as receiving an amount equal to
the cash used to purchase such shares (where the Plan Agent purchases shares on
the open market on behalf of Plan participants) or generally the fair market
value of the Common Shares on the date of issuance of such Shares (where the
Fund issues shares to Plan participants).
Distributions of taxable income or capital gains are taxable to you even if
they are paid from income or gains earned by the Fund prior to your investment
(and thus were included in the price that you paid).
Each year, you will receive a year-end statement that describes the tax
status of dividends paid to you during the preceding year, including the source
of net tax-exempt interest income by state and the portion of income that is
subject to the federal AMT. You will receive this statement from the firm where
you purchased your Common Shares if you hold your investment in street name; the
Fund will send you this statement if you hold your shares in registered form.
If you sell your Common Shares, you will generally recognize gain or loss
in an amount equal to the difference between your adjusted tax basis in the
Common Shares and the amount received. If you hold your Common Shares as capital
assets, the gain or loss will be a capital gain or loss. The maximum tax rate
applicable to net capital gains recognized by individuals and other noncorporate
taxpayers is (i) the same as the maximum ordinary income tax rate for gains
recognized on the sale of capital assets held for one year or less or (ii) 20%
for gains recognized on the sale of capital assets held for more than one year
(as well as capital gain dividends).
Any loss recognized on a disposition of Common Shares held for six months
or less will be disallowed to the extent of any exempt interest dividends
received with respect to those Common Shares. In addition, any loss not already
disallowed as provided in the preceding sentence will be treated as a long-term
capital loss to the extent of any capital gain dividends received with respect
to those Common Shares. For purposes
45
<PAGE> 48
of determining whether Common Shares have been held for six months or less, the
holding period is suspended for any periods during which your risk of loss is
diminished as a result of holding one or more other positions in substantially
similar or related property, or through certain options or short sales. In
addition, any loss realized on a sale or exchange of Common Shares will be
disallowed to the extent that you replace the disposed of Common Shares with
other Common Shares within a period of 61 days beginning 30 days before and
ending 30 days after the date of disposition, which could, for example, occur if
you are a participant in the Dividend Reinvestment Plan. In such an event, your
basis in the replacement Common Shares will be adjusted to reflect the
disallowed loss.
If you borrow money to buy Fund shares, you may not deduct the interest on
that loan. Under I.R.S. rules, Fund shares may be treated as having been bought
with borrowed money even if the purchase of the Fund shares cannot be traced
directly to borrowed money.
The Fund's investments in Municipal Obligations issued at a discount and
certain other portfolio positions will require the Fund to accrue and distribute
income and gains not yet received. In such cases, the Fund may be required to
sell assets (including when it is not advantageous to do so) to generate the
cash necessary to distribute as dividends to its shareholders all of its income
and gains and therefore eliminate any tax liability at the Fund level.
In order to avoid corporate taxation of its earnings and to pay tax-free
dividends, the Fund intends to qualify each year as a regulated investment
company under Subchapter M of the Code by meeting certain I.R.S. requirements
that govern the Fund's sources of income and diversification of assets, and
distributing substantially all of its earnings to shareholders. In particular,
in order for the Fund to pay tax-free dividends, at least 50% of the value of
the Fund's total assets must consist of tax-exempt obligations. If the Fund
fails to qualify for treatment as a regulated investment company in any taxable
year, the Fund will be subject to tax on its income at corporate rates, and
could be required to recognize unrealized gains, pay substantial taxes and
interest and make substantial distributions before requalifying as a regulated
investment company that is accorded special tax treatment.
The Fund may be required to withhold 31% of certain of your dividends if
you have not provided the Fund with your correct taxpayer identification number
(normally your Social Security number), or if you are otherwise subject to
back-up withholding.
STATE AND LOCAL TAX MATTERS
The exemption from federal income tax for exempt-interest dividends does
not necessarily result in exemption for such dividends under the income or other
tax laws of any state or local taxing authority. However, the Fund intends to
invest substantially all of its total assets (at least 80%) in debt obligations,
the interest on which is, in the opinion of issuers counsel (or on the basis of
other reliable authority), exempt from California state personal income tax. See
Appendix B to the Statement of Additional Information -- "Special Considerations
Relating to California." In addition, some other states also exempt from state
income tax that portion of any exempt-interest dividend that is derived from
interest received by a regulated investment company on its holdings of
securities of that state and its political subdivisions and instrumentalities.
The Fund will report annually to its shareholders the percentage of
interest income earned by the Fund during the preceding year on tax-exempt
obligations indicating, on a state-by-state basis, the source of such income.
Shareholders of the Fund are advised to consult with their own tax advisors
about state and local tax matters.
Please refer to the Statement of Additional Information for more detailed
information. You are urged to consult your tax advisor.
46
<PAGE> 49
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, each Underwriter named below has severally agreed to
purchase, and the Fund has agreed to sell to such Underwriter, the number of
Common Shares set forth opposite the name of such Underwriter.
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
- ---- ---------
<S> <C>
Salomon Smith Barney Inc. ..................................
A.G. Edwards & Sons, Inc. ..................................
PaineWebber Incorporated....................................
Sutro & Co. Incorporated....................................
Wedbush Morgan Securities ..................................
Total.............................................
========
</TABLE>
The underwriting agreement provides that the obligations of the several
Underwriters to purchase the Common Shares included in this offering are subject
to approval of certain legal matters by counsel and to certain other conditions.
The Underwriters are obligated to purchase all the Common Shares (other than
those covered by the over-allotment option described below) if they purchase any
of the Common Shares. The representatives have advised the Fund that the
Underwriters do not intend to confirm any sales to any accounts over which they
exercise discretionary authority.
The Underwriters, for whom Salomon Smith Barney Inc. is acting as
representative, propose to offer some of the Common Shares directly to the
public at the public offering price set forth on the cover page of this
prospectus and some of the Common Shares to certain dealers at the public
offering price less a concession not in excess of $ per Common Share. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $ per Common Share on sales to certain other dealers. If all of the
Common Shares are not sold at the initial offering price, the representatives
may change the public offering price and other selling terms. Investors must pay
for any Common Shares purchased on or before , 1999.
The Fund has granted to the Underwriters an option, exercisable for 45 days
from the date of this prospectus, to purchase up to additional Common
Shares at the public offering price less the underwriting discount. The
Underwriters may exercise such option solely for the purpose of covering
overallotments, if any, in connection with this offering. To the extent such
option is exercised, each Underwriter will be obligated, subject to certain
conditions, to purchase a number of additional Common Shares approximately
proportionate to such Underwriter's initial purchase commitment.
The Fund and the Advisor have agreed that, for a period of 180 days from
the date of this prospectus, they will not, without the prior written consent of
Salomon Smith Barney Inc., on behalf of the Underwriters, dispose of or hedge
any Common Shares or any securities convertible into or exchangeable for Common
Shares. Salomon Smith Barney Inc. in its sole discretion may release any of the
securities subject to these agreements at any time without notice.
Prior to the offering, there has been no public market for the Common
Shares. Consequently, the initial public offering price for the Common Shares
was determined by negotiation among the Fund, the Advisor and the Underwriters
named above. There can be no assurance, however, that the price at which the
Common Shares will sell in the public market after this offering will not be
lower than the price at which they are sold by the Underwriters or that an
active trading market in the Common Shares will
47
<PAGE> 50
develop and continue after this offering. The Fund has applied for listing of
the Common Shares on the American Stock Exchange.
The Fund and the Advisor have each agreed to indemnify the several
Underwriters or contribute to losses arising out of certain liabilities,
including liabilities under the Securities Act.
The Advisor has agreed to pay (i) all organizational expenses and (ii)
offering costs (other than sales loads) that exceed $0.03 per share. In
addition, the Advisor has agreed to reimburse Underwriters for certain expenses
incurred by the Underwriter in the offering.
In connection with the requirements for listing the Fund's Common Shares on
the American Stock Exchange, the Underwriters have undertaken to sell lots of
100 or more Common Shares to a minimum of 400 beneficial owners in the United
States. The minimum investment requirement is 100 Common Shares.
Certain Underwriters may make a market in the Common Shares after trading
in the Common Shares has commenced on the American Stock Exchange. No
Underwriter is, however, obligated to conduct market-making activities and any
such activities may be discontinued at any time without notice, at the sole
discretion of the Underwriter. No assurance can be given as to the liquidity of,
or the trading market for, the Common Shares as a result of any market-making
activities undertaken by any Underwriter. This prospectus is to be used by any
Underwriter in connection with the offering and, during the period in which a
prospectus must be delivered, with offers and sales of the Common Shares in
market-making transactions in the over-the-counter market at negotiated prices
related to prevailing market prices at the time of the sale.
The Underwriters have advised the Fund that, pursuant to Regulation M under
the Securities Exchange Act of 1934, as amended, certain persons participating
in the offering may engage in transactions, including stabilizing bids, covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Shares at a level
above that which might otherwise prevail in the open market. A "stabilizing bid"
is a bid for or the purchase of the Common Shares on behalf of an Underwriter
for the purpose of fixing or maintaining the price of the Common Shares. A
"covering transaction" is a bid for or purchase of the Common Shares on behalf
of an Underwriter to reduce a short position incurred by the Underwriters in
connection with the offering. A "penalty bid" is a contractual arrangement
whereby if, during a specified period after the issuance of the Common Shares,
the Underwriters purchase Common Shares in the open market for the account of
the underwriting syndicate and the Common Shares purchased can be traced to a
particular Underwriter or member of the selling group, the underwriting
syndicate may require the Underwriter or selling group member in question to
purchase the Common Shares in question at the cost price to the syndicate or may
recover from (or decline to pay to) the Underwriter or selling group member in
question any or all compensation (including, with respect to a representative,
the applicable syndicate management fee) applicable to the Common Shares in
question. As a result an Underwriter or selling group member and, in turn,
brokers may lose the fees that they otherwise would have earned from a sale of
the Common Shares if their customer resells the Common Shares while the penalty
bid is in effect. The Underwriters are not required to engage in any of these
activities, and any such activities, if commenced, may be discontinued at any
time.
Representatives that sell at least a specified number of Common Shares will
share in the syndicate management fee based on the respective number of shares
sold by them.
The Fund anticipates that from time to time the representatives of the
Underwriters and certain other Underwriters may act as brokers or dealers in
connection with the execution of the Fund's portfolio transactions after they
have ceased to be Underwriters and, subject to certain restrictions, may act as
brokers while they are Underwriters.
The principal business address of Salomon Smith Barney Inc. is 388
Greenwich Street, New York, New York 10010.
48
<PAGE> 51
CUSTODIAN, DIVIDEND DISBURSING AGENT,
TRANSFER AGENT AND REGISTRAR
The Fund's securities and cash are held by The Chase Manhattan Bank, whose
principal business address is 270 Park Avenue, New York, New York 10017-2070, as
custodian (the "Custodian") under a custodian contract.
EquiServe, whose principal business address is 150 Royall Street, Canton,
Massachusetts 02021, acts as servicing agent for BankBoston, N.A., in serving as
dividend disbursing agent, as agent under the Plan and as transfer agent and
registrar for the shares.
LEGAL OPINIONS
Certain legal matters in connection with the Common Shares will be passed
upon for the Fund by Ropes & Gray, Boston, Massachusetts, and for the
Underwriters by Simpson Thacher & Bartlett, New York, New York. Simpson Thacher
& Bartlett will rely, as to certain matters of Massachusetts law in its opinion,
on the opinion of Ropes & Gray.
49
<PAGE> 52
TABLE OF CONTENTS FOR THE
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<S> <C>
Use of Proceeds............................................. B-2
Investment Objective and Policies........................... B-2
Fund Charges and Expenses................................... B-4
Management of the Fund...................................... B-5
Portfolio Transactions...................................... B-11
Net Asset Value............................................. B-11
Description of Shares....................................... B-12
Repurchase of Common Shares................................. B-14
Miscellaneous Investment Practices.......................... B-16
Tax Matters................................................. B-26
Shareholder Liability....................................... B-29
Custodian................................................... B-29
Independent Accountants..................................... B-29
Miscellaneous Matters....................................... B-29
Financial Statements........................................ B-30
Report of Independent Accountants........................... B-31
Appendix A -- Ratings of Investments........................ B-32
Appendix B -- Special Considerations Relating to
California................................................ B-37
</TABLE>
50
<PAGE> 53
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1,000,000 SHARES
COLONIAL CALIFORNIA
INSURED MUNICIPAL FUND
COMMON SHARES
$15.00 PER SHARE
-------------------------
PROSPECTUS
, 1999
-------------------------
SALOMON SMITH BARNEY
A.G. EDWARDS & SONS, INC.
PAINEWEBBER INCORPORATED
SUTRO & CO. INCORPORATED
WEDBUSH MORGAN SECURITIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 54
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE AND
MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
STATEMENT OF ADDITIONAL INFORMATION IS NOT AN OFFER TO SELL THESE SECURITIES AND
IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED OCTOBER 26, 1999
COLONIAL CALIFORNIA
INSURED MUNICIPAL FUND
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information ("SAI") relating to the common
shares of beneficial interest ("Common Shares") offered by Colonial California
Insured Municipal Fund (the "Fund") contains information which may be useful to
investors but which is not included in the Prospectus of the Fund. This SAI is
not a prospectus and is authorized for distribution only when accompanied or
preceded by the Prospectus of the Fund dated , 1999, describing the
Common Shares (the "Prospectus"). This SAI should be read together with the
Prospectus. Investors may obtain a free copy of the Prospectus by calling
Colonial Management Associates, Inc. at 1-800-426-3750. Capitalized terms used
but not defined in this SAI have the meanings ascribed to them in the
Prospectus.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Use of Proceeds............................................. B-2
Investment Objective and Policies........................... B-2
Fund Charges and Expenses................................... B-4
Management of the Fund...................................... B-5
Portfolio Transactions...................................... B-11
Net Asset Value............................................. B-11
Description of Shares....................................... B-12
Repurchase of Common Shares................................. B-14
Miscellaneous Investment Practices.......................... B-16
Tax Matters................................................. B-26
Shareholder Liability....................................... B-29
Custodian................................................... B-29
Independent Accountants..................................... B-29
Miscellaneous Matters....................................... B-29
Financial Statements........................................ B-30
Report of Independent Accountants........................... B-31
Appendix A -- Ratings of Investments........................ B-32
Appendix B -- Special Considerations Relating to
California................................................ B-37
</TABLE>
IC-16/948H-1099
<PAGE> 55
USE OF PROCEEDS
The net proceeds of the offering of Common Shares will be approximately
$ ($ if the underwriters exercise their overallotment option
in full) after payment of the sales load to Salomon Smith Barney Inc. (the
"Underwriter") and estimated organization and offering costs. A portion of the
offering costs has been advanced by the Fund's investment advisor, Colonial
Management Associates, Inc. (the "Advisor").
The net proceeds of the offering will be invested in accordance with the
Fund's investment objective and policies. It is presently anticipated that the
Fund will be able to invest substantially all of the net proceeds in California
Municipal Obligations (as defined below) that meet the Fund's investment
objective at or shortly (within three months) after the completion of the
offering. To the extent that all of the proceeds cannot be so invested, pending
such investment, they will be invested initially in high-quality, short-term,
tax-exempt securities, to the extent such securities are available. If necessary
to invest fully the net proceeds of the offerings immediately, the Fund may also
purchase, as temporary investments, short-term taxable investments of the type
described under "Investment Objective and Policies -- Temporary and Defensive
Investments" in the Prospectus, the income on which may be subject to federal
income taxes.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's Prospectus describes its investment objective and investment
policies. This SAI includes additional information concerning, among other
things, the investment policies of the Fund and information about certain
securities and investment techniques that are described or referred to in the
Prospectus or in which the Fund expects to engage. Except as indicated under
"Fundamental Investment Policies," the Fund's investment policies are not
fundamental and the Trustees may change the policies without shareholder
approval.
As used in this Statement of Additional Information, the term "Municipal
Obligations" refers to debt obligations the interest on which was at the time of
issuance, in the opinion of issuer's counsel (or on the basis of other reliable
authority), exempt from federal income tax (other than the possible incidence of
any alternative minimum tax ("AMT")). The term "California Municipal
Obligations" refers to Municipal Obligations the interest on which is also, in
the opinion of issuer's counsel (or the basis of other reliable authority),
exempt from California state personal income tax.
FUNDAMENTAL INVESTMENT POLICIES
The following fundamental restrictions are for the protection of the Fund's
shareholders and cannot be changed without the approval of the holders of a
"majority of the outstanding" Common Shares and preferred shares, including any
Municipal Preferred Shares which may be issued in the future by means of a
separate prospectus, voting together as a single class, and of the holders of a
"majority of the outstanding" Preferred Shares, including any Municipal
Preferred Shares, voting as a separate class. A "majority of the outstanding"
shares means the lesser of (i) 67% of the shares represented at a meeting at
which more than 50% of the outstanding shares are represented or (ii) more than
50% of the outstanding shares.
The Fund may:
1. issue senior securities or borrow money to the extent permitted by the
1940 Act;
2. only own real estate acquired as a result of owning securities;
3. purchase and sell futures contracts and related options;
4. underwrite securities issued by others only when disposing of portfolio
securities;
5. make loans only through lending of securities, through the purchase of
debt instruments or similar evidences of indebtedness typically sold to
financial institutions and through repurchase agreements;
6. not concentrate more than 25% of its total assets in any one industry
(in the utilities category, gas, electric, water and telephone companies
will be considered as separate industries);
B-2
<PAGE> 56
7. purchase or sell commodities or commodities contracts, except that,
consistent with its investment policies, the Fund may purchase and sell
financial futures contracts and options and may enter into swap
agreements, foreign (semi-color) exchange contracts and other financial
transactions not requiring the delivery of physical commodities; and
8. will, under normal circumstances, invest at least 80% of its assets in
debt obligations issued by or on behalf of the State of California or
its political subdivisions, agencies or instrumentalities, the interest
on which is, in the opinion of issuer's counsel (or on the basis of
other reliable authority), exempt from regular federal income tax and
California state personal income taxes.
For the purpose of applying the limitation set forth above in subparagraph
(6), an issuer shall be deemed the sole issuer of a security when its assets and
revenues are separate from other governmental entities and its securities are
backed only by its assets and revenues. Similarly, in the case of a
non-governmental issuer, such as an industrial corporation or a privately owned
or operated hospital, if the security is backed only by the assets and revenues
of the non-governmental issuer, then such non-governmental issuer would be
deemed to be the sole issuer. Where a security is also backed by the enforceable
obligation of a superior or unrelated governmental or other entity (other than a
bond insurer), it shall also be included in the computation of securities owned
that are issued by such governmental or other entity. Where a security is
guaranteed by a governmental entity or some other facility, such as a bank
guarantee or letter of credit, such a guarantee or letter of credit would be
considered a separate security and would be treated as an issue of such
government, other entity or bank. When a Municipal Obligation is insured by bond
insurance, it shall not be considered a security that is issued or guaranteed by
the insurer; instead, the issuer of such Municipal Obligation will be determined
in accordance with the principles set forth above. The foregoing restrictions do
not limit the percentage of the Fund's assets that may be invested in Municipal
Obligations insured by any given insurer.
The restrictions and other limitations set forth above will apply only at
the time of purchase of securities and will not be considered violated unless an
excess or deficiency occurs or exists immediately after and as a result of an
acquisition of securities.
The Fund has no intention to file a voluntary application for relief under
federal bankruptcy law or any similar application under state law for so long as
the Fund is solvent, and does not foresee becoming insolvent.
OTHER INVESTMENT POLICIES
As non-fundamental investment policies which may be changed by the Fund
without a shareholder vote, the Fund may not:
1. purchase securities on margin, but it may receive short-term credit to
clear securities transactions and may make initial or maintenance margin
deposits in connection with futures transactions;
2. make short sales of securities, other than short sales "against the
box," provided that this restriction will not be applied to limit the
use of options, futures contracts and related options, in the manner
otherwise permitted by the investment restrictions, policies and
investment program of the Fund. The Fund has no current intention of
making short sales against the box; and
3. invest in interests in oil, gas or other mineral exploration or
development programs, including leases.
The Fund intends to apply for ratings for the Municipal Preferred Shares
which it may offer in the future from Moody's Investors Service, Inc.
("Moody's") and/or Standard & Poor's Ratings Services ("Standard & Poor's"). In
order to obtain and maintain the required ratings, the Fund may be required to
comply with investment quality, diversification and other guidelines established
by Moody's or Standard & Poor's. Such guidelines will likely be more restrictive
than the restrictions set forth above. The Fund does not anticipate that such
guidelines would have a material adverse effect on the Fund's Common
Shareholders or its ability to achieve its investment objectives. The Fund
presently anticipates that any Municipal Preferred Shares that it intends to
issue would be initially given the highest ratings by Moody's ("Aaa") or by
Standard & Poor's ("AAA"), but no assurance can be given that such ratings will
be obtained. No minimum rating is required for the issuance of Municipal
Preferred Shares by the Fund. Moody's and Standard & Poor's receive fees in
connection with their ratings issuances.
B-3
<PAGE> 57
FUND CHARGES AND EXPENSES
Under the Fund's Management Agreement with the Advisor, the Fund pays the
Advisor a monthly fee based on the average weekly net assets of the Fund,
including the proceeds of the offering of shares of Municipal Preferred, if any,
for such month at the annual rate of 0.65% of average weekly total net assets.
For the first ten years of the Fund's operation, the Advisor has agreed to
waive the Fund's fees and expenses in the amounts, and for the time periods, set
forth below:
<TABLE>
<CAPTION>
PERCENTAGE WAIVED
YEAR ENDING (AS A PERCENTAGE OF AVERAGE
NOVEMBER 30, WEEKLY TOTAL NET ASSETS)*
------------ ---------------------------
<S> <C>
2000**................. 0.30%
2001................... 0.30%
2002................... 0.30%
2003................... 0.30%
2004................... 0.30%
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE WAIVED
YEAR ENDING (AS A PERCENTAGE OF AVERAGE
NOVEMBER 30, WEEKLY TOTAL NET ASSETS)*
------------ ---------------------------
<S> <C>
2005................... 0.25%
2006................... 0.20%
2007................... 0.15%
2008................... 0.10%
2009................... 0.05%
</TABLE>
- ---------------
* Including net assets attributable to Municipal Preferred Shares.
** From the commencement of operations.
The Advisor has not agreed to waive any portion of the Fund's fees and
expenses beyond November 30, 2009.
The Fund recently commenced operations and has not paid any advisory fees
to the Advisor.
BROKERAGE COMMISSIONS
The Fund recently commenced operations and has not paid any brokerage
commissions.
B-4
<PAGE> 58
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The names and business addresses of the Trustees and officers of the Fund
and their principal occupations and other affiliations during the past five
years are set forth below.
<TABLE>
<CAPTION>
NAME (AGE) POSITIONS AND PRINCIPAL OCCUPATIONS
AND ADDRESS OFFICES WITH FUND DURING PAST FIVE YEARS
- ----------- ----------------- ----------------------
<S> <C> <C>
Robert J. Birnbaum (71) Trustee Consultant (formerly Special Counsel,
313 Bedford Road Dechert Price & Rhoads (law firm) from
Ridgewood, NJ 07450 September, 1988 to December, 1993;
President, New York Stock Exchange
from May, 1985 to June, 1988;
President, American Stock Exchange,
Inc. from 1977 to May, 1985).
Tom Bleasdale (69) Trustee Retired (formerly Chairman of the
502 Woodlands Drive Board and Chief Executive Officer,
Linville, NC 28646 Shore Bank & Trust Company from 1992
to 1993); Director of The Empire
Company since June, 1995.
John V. Carberry* (52) Trustee Senior Vice President of Liberty
56 Woodcliff Road Financial Companies, Inc. (formerly
Wellesley Hills, MA 02481 Managing Director, Salomon Brothers
(investment banking) from January,
1988 to January, 1998).
Lora S. Collins (63) Trustee Attorney (formerly Attorney, Kramer,
1175 Hill Road Levin, Naftalis & Frankel (law firm)
Southold, NY 11971 from September, 1986 to November,
1996).
James E. Grinnell (69) Trustee Private Investor since November, 1988.
22 Harbor Avenue
Marblehead, MA 01945
Richard W. Lowry* (63) Trustee Private Investor since August, 1987.
Seven Winter Street
Nantucket, MA 02554
Salvatore Macera (67) Trustee Private Investor (formerly Executive
26 Little Neck Lane Vice President and Director of Itek
New Seabury, MA 02649 Corporation (electronics) from 1975 to
1981).
William E. Mayer* (59) Trustee Partner, Development Capital, LLC
500 Park Avenue, 5th Floor (venture capital) (formerly Dean,
New York, NY 10022 College of Business and Management,
University of Maryland from October,
1992 to November, 1996; Dean, Simon
Graduate School of Business,
University of Rochester from October,
1991 to July, 1992).
James L. Moody, Jr.* (67) Trustee Retired (formerly Chairman of the
16 Running Tide Road Board, Hannaford Bros. Co. (food
Cape Elizabeth, ME 04107 retailer) from May, 1984 to May, 1997,
and Chief Executive Officer, Hannaford
Bros. Co. from May, 1973 to May,
1992).
</TABLE>
B-5
<PAGE> 59
<TABLE>
<CAPTION>
NAME (AGE) POSITIONS AND PRINCIPAL OCCUPATIONS
AND ADDRESS OFFICES WITH FUND DURING PAST FIVE YEARS
- ----------- ----------------- ----------------------
<S> <C> <C>
John J. Neuhauser (56) Trustee Dean, Boston College School of
84 College Road Management since September, 1977.
Chestnut Hill, MA 02467
Thomas E. Stitzel (63) Trustee Professor of Finance, College of
2208 Tawny Woods Place Business, Boise State University
Boise, ID 83706 (higher education); Business
consultant and author.
Robert L. Sullivan (71) Trustee Retired (formerly Partner, KPMG Peat
45 Sankaty Avenue Marwick LLP, from July, 1966 to June,
Siasconset, MA 02564 1985).
Anne-Lee Verville (53) Trustee Consultant (formerly General Manager,
359 Stickney Hill Road Global Education Industry from 1994 to
Hopkinton, NH 03229 1997, and President, Applications
Solutions Division from 1991 to 1994,
IBM Corporation (global education and
global applications)).
Stephen E. Gibson (45) President President of the Fund and the Liberty
Funds since June, 1998, Chairman of
the Board since July, 1998, and Chief
Executive Officer and President since
December, 1996, and Director since
1996 of the Advisor (formerly
Executive Vice President from July,
1996 to December, 1996); Director,
Chief Executive Officer and President
of Liberty Funds Group LLC (formerly
known as COGRA, LLC) ("LFG") since
December, 1998 (formerly Director,
Chief Executive Officer and President
of The Colonial Group, Inc. ("TCG")
from December, 1996 to December,
1998); Assistant Chairman of Stein Roe
& Farnham Incorporated ("SR&F") since
August, 1998 (formerly Managing
Director of Marketing of Putnam
Investments from June, 1992 to July,
1996).
J. Kevin Connaughton (34) Controller and Chief Controller and Chief Accounting
Accounting Officer Officer of the Fund and the Liberty
Funds, except Liberty Funds Trust IX,
since February, 1998; Controller,
Liberty Funds Trust IX, since
December, 1998; Vice President of the
Advisor since February, 1998 (formerly
Senior Tax Manager, Coopers & Lybrand,
LLP from April, 1996 to January, 1998;
Vice President, 440 Financial
Group/First Data Investor Services
Group from March, 1994 to April,
1996).
</TABLE>
B-6
<PAGE> 60
<TABLE>
<CAPTION>
NAME (AGE) POSITIONS AND PRINCIPAL OCCUPATIONS
AND ADDRESS OFFICES WITH FUND DURING PAST FIVE YEARS
- ----------- ----------------- ----------------------
<S> <C> <C>
Timothy J. Jacoby (45) Treasurer and Chief Treasurer and Chief Financial Officer
Financial Officer of the Fund and the Liberty Funds,
except Liberty Funds Trust IX, since
October, 1996 (formerly Controller and
Chief Accounting Officer from October,
1997 to February, 1998); Treasurer of
Liberty Funds Trust IX since December,
1998; Senior Vice President of the
Advisor since September, 1996; Vice
President, Chief Financial Officer and
Treasurer of LFG since December, 1998
(formerly Vice President, Chief
Financial Officer and Treasurer of TCG
from July, 1997 to December, 1998);
Senior Vice President of SR&F since
August, 1998 (formerly Senior Vice
President, Fidelity Accounting and
Custody Services from September, 1993
to September, 1996).
Nancy L. Conlin (45) Secretary Secretary of the Fund and the Liberty
Funds, except Liberty Funds Trust IX,
since April, 1998 (formerly Assistant
Secretary from July, 1994 to April,
1998); Director, Senior Vice
President, General Counsel, Clerk and
Secretary of the Advisor since April,
1998 (formerly Vice President,
Counsel, Assistant Secretary and
Assistant Clerk from July, 1994 to
April, 1998); Vice President, General
Counsel and Secretary of LFG since
December, 1998 (formerly Vice
President, General Counsel and Clerk
of TCG from April, 1998 to December,
1998; formerly Assistant Clerk from
July, 1994 to April, 1998).
</TABLE>
- ---------------
* Denotes those Trustees who are "interested persons" (as defined in the
Investment Company Act of 1940, as amended (the "1940 Act")) of the Fund, the
Advisor or one or more of the Underwriters. Mr. Carberry is an "interested
person" as defined in the 1940 Act because of his affiliation with Liberty
Financial Companies, Inc., an indirect parent company of the Advisor, and also
because he has a direct or indirect beneficial interest in one of the
Underwriters. Mr. Mayer is an "interested person" as defined in the 1940 Act
because he is a director of Hambrecht & Quist Incorporated, a registered
broker-dealer. Messrs. Lowry and Moody are "interested persons" as defined in
the 1940 Act because each has a direct or indirect beneficial interest in, or
is designated as trustee, executor or guardian of a legal interest in, one or
more of the Underwriters or a controlling person (as such term is defined in
the 1940 Act) of one or more of the Underwriters.
The business address of the officers of the Fund is One Financial Center,
Boston, MA 02111.
The Trustees of the Fund are also directors or trustees, as the case may
be, of Liberty Funds Trust I, Liberty Funds Trust II, Liberty Funds Trust III,
Liberty Funds Trust IV, Liberty Funds Trust V, Liberty Funds Trust VI, Liberty
Funds Trust VII, Liberty Funds Trust VIII (formerly known as LFC Utilities
Trust), Liberty Variable Investment Trust ("LVIT"), Colonial Municipal Income
Trust, Colonial High Income Municipal Trust, Colonial Investment Grade Municipal
Trust, Colonial Insured Municipal Fund, Colonial Massachusetts Insured Municipal
B-7
<PAGE> 61
Fund, Colonial New York Insured Municipal Fund, Colonial Intermediate High
Income Fund, and Colonial Intermarket Income Trust I (collectively, each trust
or any series thereof termed the "Liberty Funds").
At the first annual meeting of the Fund's shareholders following the
issuance of Municipal Preferred Shares, holders of outstanding shares of
Municipal Preferred, voting together as one separate class, will elect two
Trustees, and holders of outstanding Common Shares and shares of Municipal
Preferred, voting together as a single class, will elect the remaining Trustees.
See "Description of Shares -- Municipal Preferred Shares -- Voting Rights."
The Trustees serve as trustees of all Liberty Funds for which each Trustee
(except Mr. Carberry) receives an annual retainer of $45,000 and attendance fees
of $8,000 for each regular joint meeting and $1,000 for each special joint
meeting. Committee chairs and the lead Trustee receive an annual retainer of
$1,000 and Committee chairs receive $1,000 for each special meeting attended on
a day other than a regular joint meeting day. Committee members receive an
annual retainer of $1,000 and $1,000 for each special meeting attended on a day
other than a regular joint meeting day. Two-thirds of the Trustee fees are
allocated among the Liberty Funds based on each Liberty Fund's relative net
assets, and one-third of the fees are divided equally among the Liberty Funds.
TRUSTEES AND TRUSTEES' FEES
It is estimated that the Trustees will receive the amounts set forth below
for the fiscal year ending November 30, 1999. For the calendar year ended
December 31, 1998, the Trustees received the compensation set forth below for
serving as trustees of the Liberty Funds.(a)
<TABLE>
<CAPTION>
TOTAL COMPENSATION FROM
ESTIMATED COMPENSATION FROM THE FUND COMPLEX PAID TO THE
THE FUND FOR THE FISCAL YEAR TRUSTEES FOR THE CALENDAR YEAR
TRUSTEE ENDED NOVEMBER 30, 1999 Ended December 31, 1998(b)
- ------- ---------------------------- ------------------------------
<S> <C> <C>
Robert J. Birnbaum(c)..................... $812 $ 99,429
Tom Bleasdale(c).......................... 845(d) 115,000(e)
John V. Carberry(f)(g).................... N/A N/A
Lora S. Collins(c)........................ 812 97,429
James E. Grinnell(c)...................... 845 103,071
Richard W. Lowry(c)....................... 812 98,214
Salvatore Macera(h)....................... 804 25,250
William E. Mayer(c)....................... 845 99,286
James L. Moody, Jr.(c).................... 845(i) 105,857(j)
John J. Neuhauser(c)...................... 849 105,323
Thomas E. Stitzel(h)...................... 804 25,250
Robert L. Sullivan(c)..................... 876 104,100
Anne-Lee Verville(c)(f)................... 804(k) 23,445(l)
</TABLE>
- ---------------
(a) Neither the Fund nor the Fund Complex currently provides pension or
retirement plan benefits to the Trustees.
(b) At December 31, 1998, the complex consisted of 56 open-end and 5 closed-end
management investment portfolios in the Liberty Funds (together, the "Fund
Complex").
(c) Elected by the shareholders of LVIT on October 30, 1998.
(d) Is expected to include $431 payable in later years as deferred
compensation.
(e) Includes $52,000 payable in later years as deferred compensation.
(f) Elected by the trustees of the closed-end Liberty Funds on June 18, 1998,
and by the shareholders of the open-end Liberty Funds on October 30, 1998.
(g) Does not receive compensation because he is an affiliated Trustee and
employee of Liberty Financial Companies, Inc. ("Liberty Financial").
B-8
<PAGE> 62
(h) Elected by the shareholders of the open-end Liberty Funds on October 30,
1998, and by the trustees of the closed-end Liberty Funds on December 17,
1998.
(i) Total estimated compensation of $845 for the fiscal year ended November 30,
1999, is expected to be payable in later years as deferred compensation.
(j) Total compensation of $105,857 for the calendar year ended December 31,
1998, will be payable in later years as deferred compensation.
(k) Total estimated compensation of $804 for the fiscal year ended November 30,
1999, is expected to be payable in later years as deferred compensation.
(l) Total compensation of $23,445 for the calendar year ended December 31,
1998, will be payable in later years as deferred compensation.
For the calendar year ended December 31, 1998, certain of the Trustees
received the following compensation in their capacities as trustees or directors
of Liberty All-Star Equity Fund, Liberty All-Star Growth Fund, Inc. and Liberty
Funds Trust IX (formerly known as LAMCO Trust I) (together, the "Liberty
All-Star Funds")(m).
<TABLE>
<CAPTION>
TOTAL COMPENSATION FROM
THE LIBERTY ALL-STAR FUNDS FOR THE CALENDAR
TRUSTEE Year Ended December 31, 1998(n)
- ------- -------------------------------------------
<S> <C>
Robert J. Birnbaum........................................ $25,000
John V. Carberry(o)....................................... N/A
James E. Grinnell......................................... 25,000
Richard W. Lowry.......................................... 25,000
William E. Mayer(p)....................................... 14,000
John J. Neuhauser(q)...................................... 25,000
</TABLE>
- ---------------
(m) The Liberty All-Star Funds do not currently provide pension or retirement
plan benefits to the trustees/ directors.
(n) The Liberty All-Star Funds are advised by Liberty Asset Management Company
("LAMCO"). LAMCO is an indirect wholly owned subsidiary of Liberty
Financial (an intermediate parent of the Advisor).
(o) Elected by the trustees/directors of the Liberty All-Star Funds on June 30,
1998. Does not receive compensation because he is an affiliated trustee and
employee of Liberty Financial.
(p) Elected by the shareholders of the Liberty All-Star Equity Fund on April
22, 1998, and by the directors of the Liberty All-Star Growth Fund, Inc. on
December 17, 1998.
(q) Elected by the shareholders of the Liberty All-Star Funds on April 22,
1998.
At , 1999, the Fund's officers and Trustees as a group owned less
than 1% of the outstanding Common Shares.
At , 1999, , owned of record shares,
representing , of the Fund's outstanding shares.
In addition to the provisions discussed in the Prospectus under "Certain
Provisions in the Agreement and Declaration of Trust," the Declaration provides
that the obligations of the Fund are not binding upon the Trustees of the Fund
individually, but only upon the assets and property of the Fund. The Declaration
also provides that the Fund will indemnify its Trustees and officers against
liabilities and expenses incurred in connection with litigation in which they
may be involved because of their offices with the Fund but that such
indemnification will not relieve any officer or Trustee of any liability to the
Fund or its shareholders by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of his or her duties. The Fund, at its expense,
provides liability insurance for the benefit of its Trustees and officers.
B-9
<PAGE> 63
INVESTMENT ADVISOR
Colonial Management Associates, Inc. (the "Advisor"), and/or its affiliate,
Colonial Advisory Services, Inc. ("CASI"), has rendered investment advisory
services to investment company, institutional and other clients since 1931. The
Advisor currently serves as investment advisor, sub-advisor or administrator for
62 open-end and 7 closed-end management investment company portfolios. Trustees
and officers of the Fund, who are also officers of the Advisor or its
affiliates, will benefit from the advisory fees, sales commissions and agency
fees paid or allowed by the Fund. More than 30,000 financial advisors have
recommended the Liberty Funds to over 800,000 clients worldwide, representing
more than $16.3 billion in assets.
The Advisor is a subsidiary of Liberty Funds Group LLC ("LFG"), One
Financial Center, Boston, MA 02111. LFG is an indirect wholly owned subsidiary
of Liberty Financial Companies, Inc. ("Liberty Financial"), which in turn is a
direct majority-owned subsidiary of LFC Management Corporation, which in turn is
a direct wholly owned subsidiary of Liberty Corporate Holdings, Inc., which in
turn is a direct wholly owned subsidiary of LFC Holdings, Inc., which in turn is
a direct wholly owned subsidiary of Liberty Mutual Equity Corporation, which in
turn is a direct wholly owned subsidiary of Liberty Mutual Insurance Company
("Liberty Mutual"). Liberty Mutual is an underwriter of workers' compensation
insurance and of property and casualty insurance in the United States. Liberty
Financial's address is 600 Atlantic Avenue, Boston, MA 02210. Liberty Mutual's
address is 175 Berkeley Street, Boston, MA 02117.
Under a Management Agreement (the "Agreement"), the Advisor has contracted
to furnish the Fund with investment research and recommendations or fund
management, respectively, and accounting and administrative personnel and
services, and with office space, equipment and other facilities. For these
services and facilities, the Fund pays a monthly fee based on the average weekly
net assets of the Fund for such month. Under the Agreement, any liability of the
Advisor to the Fund and/or its shareholders is limited to situations involving
the Advisor's own willful misfeasance, bad faith, gross negligence or reckless
disregard of its duties.
The Agreement may be terminated with respect to the Fund at any time on 60
days' written notice by the Advisor or by the Trustees of the Fund or by a vote
of a majority of the outstanding voting securities of the Fund. The Agreement
will automatically terminate upon any assignment thereof and shall continue in
effect from year to year only so long as such continuance is approved at least
annually (i) by the Trustees of the Fund or by a vote of a majority of the
outstanding voting securities of the Fund and (ii) by vote of a majority of the
Trustees who are not interested persons (as such term is defined in the 1940
Act) of the Advisor or the Fund, cast in person at a meeting called for the
purpose of voting on such approval.
The Advisor pays all salaries of officers of the Fund. The Fund pays all
expenses not assumed by the Advisor, including, but not limited to, auditing,
legal, custodial, investor servicing and shareholder reporting expenses. The
Fund pays the cost of printing and mailing any prospectuses sent to
shareholders.
The Advisor also provides the Fund with bookkeeping and pricing services,
and for these services, the Fund pays the Advisor a monthly fee of $1,500 for
the first $50 million of Fund assets, plus a monthly percentage fee at the
following annual rates: 0.0233% on the next $950 million; 0.0167% on the next $1
billion; 0.0100% on the next $1 billion; and 0.0007% on the excess over $3
billion of the average weekly net assets of the Fund for such month.
The Advisor also acts as investment advisor to the other Liberty Funds
(described under "Fund Charges and Expenses -- Trustees' Fees"). The Advisor's
affiliate, CASI, advises other institutional, corporate, fiduciary and
individual clients for which CASI performs various services. Various officers
and Trustees of the Fund also serve as officers, directors or trustees of other
Liberty Funds and the other corporate or fiduciary clients of the Advisor. The
other investment companies and clients advised by the Advisor may sometimes
invest in securities and options in which the Fund will also invest. If the
Fund, such other investment companies and such clients desire to buy or sell the
same portfolio securities or options at about the same time, the purchases and
sales will normally be made as nearly as practicable on a pro rata basis in
proportion to the amounts desired to be purchased or sold by each. Although in
some cases these practices may have a detrimental effect on the price or volume
of the securities or options as far as the Fund is concerned, in most cases it
is believed that these practices should produce better executions. It is the
opinion of the Trustees that the desirability of retaining the Advisor as
investment advisor to the Liberty Funds outweighs the disadvantages, if any,
which might result from these practices.
B-10
<PAGE> 64
PORTFOLIO TRANSACTIONS
The Advisor is responsible for decisions to buy and sell securities and
other portfolio holdings for the Fund, the selection of brokers and dealers to
effect the transactions and the negotiation of brokerage commissions, if any.
Fixed-income securities are generally traded on a "net" basis with dealers
acting as principals for their own accounts without a stated commission,
although the price of the security will likely include a profit to the dealer.
In underwritten offerings, securities are usually purchased at a fixed price
which includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount. On occasion, certain money
market instruments may be purchased directly from an issuer, in which case no
commissions or discounts are paid.
In placing orders for portfolio securities of the Fund, the Advisor is
required to give primary consideration to obtaining the most favorable price and
efficient execution. This means that the Advisor will seek to execute each
transaction at a price and commission, if any, which provides the most favorable
total cost or proceeds reasonably attainable under the circumstances. In seeking
the most favorable price and execution, the Advisor, having in mind the Fund's
best interests, will consider all factors it deems relevant, including, by way
of illustration, price, the size of the transaction, the nature of the market
for the security, the amount of commission, the timing of the transaction taking
into account market prices and trends, the reputation, experience and financial
stability of the broker-dealer involved and the quality of service rendered by
the broker-dealer in other transactions. Though the Advisor generally seeks
reasonably competitive spreads or commissions, the Fund will not necessarily be
paying the lowest spread or commission available. Within the framework of the
policy of obtaining the most favorable price and efficient execution, the
Advisor will consider research and investment services provided by brokers and
dealers who effect or are parties to portfolio transactions with the Fund, the
Advisor or the Advisor's other clients. Such research and investment services
are those which brokerage houses customarily provide to institutional investors
and include statistical and economic data and research reports on particular
issuers and industries. Such services are used by the Advisor in connection with
all of its investment activities, and some of such services obtained in
connection with the execution of transactions for the Fund may be used in
managing other investment accounts. Conversely, brokers furnishing such services
may be selected for the execution of transactions for such other accounts, and
the services furnished by such brokers may be used by the Advisor in providing
investment management for the Fund. Commission rates are established pursuant to
negotiations based on the quality and quantity of execution services provided by
the broker or dealer in light of generally prevailing rates. The management fee
paid by the Fund will not be reduced because the Advisor and/or other clients
receive such services. The allocation of orders and the commission rates paid by
the Fund will be reviewed periodically by the Board of Trustees.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, as
amended (the "1934 Act"), the Advisor may cause the Fund to pay a broker-dealer
which provides "brokerage and research services" (as defined in the 1934 Act) to
the Advisor, an amount of disclosed commission for effecting a securities
transaction for the Fund in excess of the commission which another broker-dealer
would have charged for effecting that transaction.
The Fund recently commenced operations and has not paid any brokerage
commissions for the execution of portfolio transactions. The rate of portfolio
turnover for the Fund is expected to be approximately 50%.
NET ASSET VALUE
Net asset value of the Fund will be determined no less frequently than as
of the close of regular trading on the New York Stock Exchange (generally 4:00
p.m. Eastern time) on the last Business Day of each week (generally Friday), and
at such other times as the Fund may authorize. The net asset value of the Fund
equals the value of the Fund's assets less the Fund's liabilities. Portfolio
securities for which market quotations are readily available are valued at
current market value. Short-term investments maturing in 60 days or less are
valued at amortized cost when the Advisor determines, pursuant to procedures
adopted by the Board of Trustees, that such cost approximates current market
value. All other securities and assets are valued at their fair value following
procedures adopted by the Board of Trustees.
B-11
<PAGE> 65
In determining net asset value for the Fund, the Fund's custodian utilizes
the valuations of portfolio securities furnished by a pricing service approved
by the Board of Trustees. Securities for which quotations are not readily
available (which will constitute a majority of the securities held by the Fund)
are valued at fair value as determined by the pricing service using methods
which include consideration of the following: yields or prices of municipal
bonds of comparable quality, type of issue, coupon, maturity and rating;
indications as to value from dealers; and general market conditions. The pricing
service may employ electronic data processing techniques or a matrix system, or
both, to determine valuations. The procedures of the pricing service and its
valuations are reviewed by the officers of the Fund under the general
supervision of the Board of Trustees.
DESCRIPTION OF SHARES
The descriptions of the Common Shares and the Municipal Preferred Shares
contained in the Prospectus and this Statement of Additional Information do not
purport to be complete and are subject to and qualified in their entireties by
reference to the Declaration of Trust of the Trust (the "Declaration") and the
By-Laws of the Trust (the "By-Laws"), each as from time to time amended. Copies
of the Declaration and the form of the By-Laws are filed as exhibits to the
Registration Statement of which the Prospectus and this Statement of Additional
Information are a part and may be inspected, and copies thereof may be obtained,
as described under "Further Information" in the Prospectus.
COMMON SHARES
The Declaration authorizes the issuance of an unlimited number of Common
Shares, no par value. All Common Shares have equal rights as to the payment of
dividends and the distribution of assets upon liquidation. Common Shares will,
when issued, be fully paid and, subject to matters discussed in "Shareholder
Liability," non-assessable, and will have no pre-emptive or conversion rights or
rights to cumulative voting. At any time when the Fund's Municipal Preferred
Shares are outstanding, Common Shareholders will not be entitled to receive any
distributions from the Fund unless all accrued dividends on Municipal Preferred
Shares have been paid, and unless asset coverage (as defined in the 1940 Act)
with respect to Municipal Preferred Shares would be at least 200% after giving
effect to such distributions. See "Municipal Preferred Shares" below.
The Fund has applied for listing of the Common Shares on the American Stock
Exchange subject to notice of issuance. The Fund intends to hold annual meetings
of shareholders so long as the Common Shares are listed on a national securities
exchange and such meetings are required as a condition to such listing.
Shares of closed-end investment companies may frequently trade at prices
lower than net asset value. Shares of closed-end investment companies like the
Fund that invest predominantly in investment grade municipal bonds have during
some periods traded at prices higher than net asset value and during other
periods have traded at prices lower than net asset value. There can be no
assurance that Common Shares or shares of other municipal funds will trade at a
price higher than net asset value in the future. Net asset value will be reduced
immediately following the offering after payment of the sales load and
organization and offering expenses. Net asset value generally increases when
interest rates decline, and decreases when interest rates rise, and these
changes are likely to be greater in the case of a fund having a leveraged
capital structure such as the Fund will have once it issues Municipal Preferred
Shares. Whether investors will realize gains or losses upon the sale of Common
Shares will not depend upon the Fund's net asset value but will depend entirely
upon whether the market price of the Common Shares at the time of sale is above
or below the original purchase price for the shares. Since the market price of
the Fund's Common Shares will be determined by factors beyond the control of the
Fund, the Fund cannot predict whether the Common Shares will trade at, below, or
above net asset value or at, below or above the initial public offering price.
Accordingly, the Common Shares are designed primarily for long-term investors,
and investors in the Common Shares should not view the Fund as a vehicle for
trading purposes. See "Repurchase of Fund Shares" in this Statement of
Additional Information and the Prospectus under "Use of Leverage and Related
Risks" and "Additional Risk Considerations."
B-12
<PAGE> 66
MUNICIPAL PREFERRED SHARES
The Declaration authorizes the issuance of an unlimited number of Municipal
Preferred Shares, no par value, in one or more classes or series, with rights as
determined by the Board of Trustees, by action of the Board of Trustees without
the approval of the Common Shareholders.
The Fund's Board of Trustees has indicated its intention to authorize an
offering of Municipal Preferred Shares (representing approximately 38% of the
Fund's capital immediately after the time the Municipal Preferred Shares are
issued) within approximately one to three months after completion of the
offering of Common Shares, subject to market conditions and to the Board's
continuing belief that leveraging the Fund's capital structure through the
issuance of Municipal Preferred Shares is likely to achieve the benefits to the
Common Shareholders described in this Statement of Additional Information. That
offering would be made through a separate prospectus. Although the terms of the
Municipal Preferred Shares, including their dividend rate, voting rights,
liquidation preference and redemption provisions, will be determined by the
Board of Trustees (subject to applicable law and the Fund's Declaration) if and
when it authorizes a Municipal Preferred Shares offering, the Board has stated
that the initial series of Municipal Preferred Shares would likely pay
cumulative dividends at relatively shorter-term periods (such as 7 days), by
providing for the periodic redetermination of the dividend rate through an
auction or remarketing procedure. The Board of Trustees has indicated that the
preference on distribution, liquidation preference, voting rights and redemption
provisions of the Municipal Preferred Shares will likely be as stated below.
PREFERENCE ON DISTRIBUTION. The Municipal Preferred Shares have complete
priority over the Common Shares as to distribution of assets.
LIQUIDATION PREFERENCE. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Fund, holders of
Municipal Preferred Shares will be entitled to receive a preferential
liquidating distribution (expected to equal the original purchase price per
share plus accumulated and unpaid dividends thereon, whether or not earned or
declared) before any distribution of assets is made to holders of Common Shares.
After payment of the full amount of the liquidating distribution to which they
are entitled, holders of Municipal Preferred Shares will not be entitled to any
further participation in any distribution of assets by the Fund. Neither the
sale of all or substantially all the property or business of the Fund, nor the
merger or consolidation of the Fund with or into any Massachusetts business
trust or corporation shall be deemed to be a liquidation, dissolution or winding
up of the Fund.
VOTING RIGHTS. In connection with any issuance of Municipal Preferred
Shares, the Fund must comply with Section 18(i) of the Investment Company Act of
1940 (the "1940 Act") which requires, among other things, that Municipal
Preferred Shares be voting shares and have equal voting rights with Common
Shares. Except as otherwise indicated in this Statement of Additional
Information and except as otherwise required by applicable law, holders of
Municipal Preferred Shares will vote together with Common Shareholders as a
single class.
In connection with the election of the Fund's trustees, holders of
Municipal Preferred Shares, voting as a separate class, will be entitled to
elect two of the Fund's trustees, and the remaining trustees shall be elected by
Common Shareholders and holders of Municipal Preferred Shares, voting together
as a single class. In addition, if at any time dividends (whether or not earned
or declared) on the Fund's outstanding Municipal Preferred Shares shall be
unpaid in an amount equal to two full years' dividends thereon, the holders of
all outstanding Municipal Preferred Shares, voting as a separate class, will be
entitled to elect a majority of the Fund's trustees until all such dividends in
arrears have been paid or declared and set apart for payment.
The affirmative vote of the holders of a majority of the outstanding
Municipal Preferred Shares of any class or series, as the case may be, voting as
a separate class, will be required to, among other things (1) take certain
actions which would affect the preferences, rights, or powers of such class or
series or (2) authorize or issue any class or series ranking prior to the
Municipal Preferred Shares. Except as may otherwise be required by law, (1) the
affirmative vote of the holders of at least two-thirds of the Municipal
Preferred Shares outstanding at the time, voting as a separate class, will be
required to approve any conversion of the Fund from a closed-end to an open-end
investment company and (2) the affirmative vote of the holders of at least two-
B-13
<PAGE> 67
thirds of the outstanding Municipal Preferred Shares, voting as a separate
class, shall be required to approve any plan of reorganization (as such term is
used in the 1940 Act) adversely affecting such shares, provided however, that
such separate class vote shall be a majority vote if the action in question has
previously been approved, adopted or authorized by the affirmative vote of
two-thirds of the total number of Trustees fixed in accordance with the
Declaration or the By-laws. The affirmative vote of the holders of a majority of
the outstanding Municipal Preferred Shares, voting as a separate class, shall be
required to approve any action not described in the preceding sentence requiring
a vote of security holders under Section 13(a) of the 1940 Act including, among
other things, changes in the Fund's investment objective or changes in the
investment restrictions described as fundamental policies under "Investment
Objective and Policies -- Investment Restrictions." The class or series vote of
holders of Municipal Preferred Shares described above shall in each case be in
addition to any separate vote of the requisite percentage of Common Shares and
Municipal Preferred Shares necessary to authorize the action in question.
The foregoing voting provisions will not apply with respect to the Fund's
Municipal Preferred Shares if, at or prior to the time when a vote is required,
such shares shall have been (1) redeemed or (2) called for redemption and
sufficient funds shall have been deposited in trust to effect such redemption.
REDEMPTION, PURCHASE AND SALE OF MUNICIPAL PREFERRED SHARES BY THE
FUND. The terms of the Municipal Preferred Shares may provide that they are
redeemable at certain times, in whole or in part, at the original purchase price
per share plus accumulated dividends, that the Fund may tender for or purchase
Municipal Preferred Shares and that the Fund may subsequently resell any shares
so tendered for or purchased. Any redemption or purchase of Municipal Preferred
Shares by the Fund will reduce the leverage applicable to Common Shares, while
any resale of shares by the Fund will increase such leverage. See "Use of
Leverage and Related Risks" in the Prospectus.
The discussion above describes the Board of Trustees' present intention
with respect to a possible offering of Municipal Preferred Shares. If the Board
of Trustees determines to authorize such an offering, the terms of the Municipal
Preferred Shares may be the same as, or different from, the terms described
above, subject to applicable law and the Fund's Declaration.
REPURCHASE OF COMMON SHARES
The Fund is a closed-end investment company and as such its shareholders
will not have the right to cause the Fund to redeem their shares. Common Shares
trade in the open market at a price that is a function of several factors,
including net asset value and yield. Shares of closed-end investment companies
like the Fund that invest predominantly in municipal bonds sometimes have traded
at prices higher than net asset value and at other times have traded at prices
lower than net asset value. Although the common shares of a closed-end
investment company such as the Fund that invests substantially all of its assets
in investment grade municipal obligations have generally traded at a premium to
net asset value, such shares have occasionally traded at a discount to net asset
value. The Board of Trustees has currently determined that, at least annually,
it will consider action that might be taken to reduce or eliminate any material
discount from net asset value in respect of Common Shares, which may include the
repurchase of such shares in the open market or in private transactions, the
making of a tender offer for such shares at net asset value, or the conversion
of the Fund to an open-end investment company. There can be no assurance,
however, that the Board of Trustees will decide to take any of these actions, or
that share repurchases or tender offers, if undertaken, will reduce market
discount. In addition, see "Description of Shares -- Municipal Preferred Shares"
for a discussion of the limitations on the Fund's ability to engage in certain
transactions. The staff of the SEC currently requires that any tender offer made
by a closed-end investment company for its shares must be at a price equal to
the net asset value of such shares on the close of business on the last day of
the tender offer. Any service fees incurred in connection with any tender offer
made by the Fund will be borne by the Fund and will not reduce the stated
consideration to be paid to tendering shareholders.
Subject to its investment limitations, the Fund may borrow to finance the
repurchase of shares or to make a tender offer. Interest on any borrowings to
finance share repurchase transactions or the accumulation of cash by the Fund in
anticipation of share repurchases or tenders will reduce the Fund's net income.
Any share repurchase,
B-14
<PAGE> 68
tender offer or borrowing that might be approved by the Board of Trustees would
have to comply with the 1934 Act and the 1940 Act and the rules and regulations
thereunder.
Although the decision to take action in response to a discount from net
asset value will be made by the Board of Trustees at the time it considers such
issue, it is the Board's present policy, which may be changed by the Board, not
to authorize repurchases of the Fund's Common Shares or a tender offer for such
shares if (1) such transactions, if consummated, would (a) result in the
delisting of the Common Shares from the American Stock Exchange, or (b) impair
the Fund's status as a regulated investment company under the Code (which would
make the Fund a taxable entity, causing the Fund's income to be taxed at the
corporate level in addition to the taxation of shareholders who receive
dividends from the Fund) or as a registered closed-end investment company under
the 1940 Act; (2) the Fund would not be able to liquidate portfolio securities
in an orderly manner and consistent with the Fund's investment objective and
policies in order to repurchase shares; or (3) there is, in the Board's
judgment, any (a) material legal action or proceeding instituted or threatened
challenging such transactions or otherwise materially adversely affecting the
Fund, (b) general suspension of or limitation on prices for trading securities
on the American Stock Exchange, (c) declaration of a banking moratorium by
federal or state authorities or any suspension of payment by United States or
New York State banks in which the Fund invests, (d) material limitation
affecting the Fund or the issuers of its portfolio securities by federal or
state authorities on the extension of credit by lending institutions or on the
exchange of foreign currency, (e) commencement of war, armed hostilities or
other international or national calamity directly or indirectly involving the
United States, or (f) other event or condition which would have a material
adverse effect (including any adverse tax effect) on the Fund or its
shareholders if shares were repurchased. The Board of Trustees may in the future
modify these conditions in light of experience. Before deciding whether to take
any action in response to a discount from net asset value, the Board of Trustees
would consider all relevant factors, including the extent and duration of the
discount, the liquidity of the Fund's portfolio, the impact of any action that
might be taken on the Fund or its shareholders, and market considerations. Based
on these considerations, even if the Fund's Common Shares should trade at a
discount, the Board may determine that, in the interest of the Fund and its
shareholders, no action should be taken.
B-15
<PAGE> 69
MISCELLANEOUS INVESTMENT PRACTICES
SHORT-TERM TRADING
In seeking to accomplish the Fund's investment objective, the Advisor may
buy or sell portfolio securities whenever the Advisor believes it appropriate to
do so. In deciding whether to sell a portfolio security, the Advisor does not
consider how long the Fund has owned the security. From time to time the Fund
may buy securities intending to seek short-term trading profits. A change in the
securities held by the Fund is known as "portfolio turnover" and generally
involves some expense to the Fund. This expense may include brokerage
commissions or dealer markups and other transaction costs on both the sale of
securities and the reinvestment of the proceeds in other securities. If sales of
portfolio securities cause the Fund to realize net short-term capital gain, such
gain generally will be taxable as ordinary income. As a result of the Fund's
investment policies, under certain market conditions the Fund's portfolio
turnover rate may be higher than that of other investment companies. Portfolio
turnover rate for a fiscal year is the ratio of the lesser of purchases or sales
of portfolio securities to the monthly average of the value of portfolio
securities -- excluding securities whose maturities at acquisition were one year
or less. The Fund's portfolio turnover rate is not a limiting factor when the
Advisor considers a change in the Fund's portfolio.
LOWER-RATED SECURITIES
The Fund may invest up to 20% of its total assets in California Municipal
Obligations that, at the time of investment, are rated Ba or B by Moody's or BB
or B by Standard & Poor's or comparably rated by another Rating Agency and
unrated California Municipal Obligations considered to be of comparable quality
by the Advisor. The Fund may not invest in bonds rated below B by Moody's or
Standard & Poor's or comparably rated by another Rating Agency. Bonds rated
Ba/BB and below are regarded as having predominantly speculative characteristics
with respect to capacity to pay interest and repay principal, and are commonly
referred to as "junk bonds." These risks include greater sensitivity to a
general economic downturn and less secondary market trading. The lower ratings
of certain securities held by the Fund reflect a greater possibility that
adverse changes in the financial condition of the issuer or in general economic
conditions, or both, or an unanticipated rise in interest rates, may impair the
ability of the issuer to make payments of interest and principal. The inability
(or perceived inability) of issuers to make timely payments of interest and
principal would likely make the values of securities held by the Fund more
volatile and could limit the Fund's ability to sell its securities at prices
approximating the values the Fund had placed on such securities. In the absence
of a liquid trading market for securities held by it, the Fund at times may be
unable to establish the fair value for such securities.
Securities ratings are based largely on the issuer's historical financial
condition and the rating agencies' analysis at the time of rating. Consequently,
the rating assigned to any particular security is not necessarily a reflection
of the issuer's current financial condition, which may be better or worse than
the rating would indicate. In addition, the rating assigned to a security by
Moody's or Standard & Poor's (or by any other nationally recognized securities
rating organization) does not reflect an assessment of the volatility of the
security's market value or the liquidity of an investment in the security. See
Appendix A for a description of security ratings.
Like those of other fixed-income securities, the values of lower-rated
securities fluctuate in response to changes in interest rates. A decrease in
interest rates will generally result in an increase in the value of the Fund's
assets. Conversely, during periods of rising interest rates, the value of the
Fund's assets will generally decline. The values of lower-rated securities may
often be affected to a greater extent by changes in general economic conditions
and business conditions affecting the issuers of such securities and their
industries. Negative publicity or investor perceptions may also adversely affect
the values of lower-rated securities. Changes by recognized rating services in
their ratings of any fixed-income security and changes in the ability of an
issuer to make payments of interest and principal may also affect the value of
these investments. Changes in the value of portfolio securities generally will
not affect income derived from these securities, but will affect the Fund's net
asset value. The Fund will not necessarily dispose of a security when its rating
is reduced below its rating at the time of purchase. However, the Advisor will
monitor the investment to determine whether its retention will assist in meeting
the Fund's investment objective.
B-16
<PAGE> 70
Issuers of lower-rated securities are often highly leveraged, so that their
ability to service their debt obligations during an economic downturn or during
sustained periods of rising interest rates may be impaired. Such issuers may not
have more traditional methods of financing available to them and may be unable
to repay outstanding obligations at maturity by refinancing. The risk of loss
due to default in payment of interest or repayment of principal by such issuers
is significantly greater because such securities frequently are unsecured and
subordinated to the prior payment of senior indebtedness.
At times, a substantial portion of the Fund's assets may be invested in
securities as to which the Fund, by itself or together with other Funds and
accounts managed by the Advisor and its affiliates, holds all or a major portion
of the securities outstanding. Although the Advisor generally considers such
securities to be liquid because of the availability of an institutional market
for such securities, it is possible that, under adverse market or economic
conditions or in the event of adverse changes in the financial condition of the
issuer, the Fund could find it more difficult to sell these securities when the
Advisor believes it advisable to do so or may be able to sell the securities
only at prices lower than if they were more widely held. Under these
circumstances, it may also be more difficult to determine the fair value of such
securities for purposes of computing the Fund's net asset value. In order to
enforce its rights in the event of a default under such securities, the Fund may
be required to participate in various legal proceedings or take possession of
and manage assets securing the issuer's obligations on such securities. This
could increase the Fund's operating expenses and adversely affect the Fund's net
asset value.
Certain securities held by the Fund may permit the issuer at its option to
"call," or redeem, its securities. If an issuer were to redeem securities held
by the Fund during a time of declining interest rates, the Fund might not be
able to reinvest the proceeds in securities providing the same investment return
as the securities redeemed. The Fund may invest without limit in such bonds.
To the extent the Fund invests in lower-rated or unrated securities, the
achievement of the Fund's goals is more dependent on the Advisor's investment
analysis than would be the case if the Fund were investing in investment grade
securities.
PRIVATE PLACEMENTS
The Fund may invest in securities that are purchased in private placements
and, accordingly, may be subject to restrictions on resale as a matter of
contract or under federal securities laws. Because there may be relatively few
potential purchasers for such investments, especially under adverse market or
economic conditions or in the event of adverse changes in the financial
condition of the issuer, the Fund could find it more difficult to sell such
securities when the Advisor believes it advisable to do so or may be able to
sell such securities only at prices lower than if such securities were more
widely held. At times, it may also be more difficult to determine the fair value
of such securities for purposes of computing the Fund's net asset value.
STEP COUPON BONDS (STEPS)
The Fund may invest in debt securities which do not pay interest for a
stated period of time and then pay interest at a series of different rates for a
series of periods. In addition to the risks associated with the credit rating of
the issuers, these securities are subject to the volatility risk of zero coupon
bonds for the period when no interest is paid.
TENDER OPTION BONDS
A tender option bond is a municipal security (generally held pursuant to a
custodial arrangement) having a relatively long maturity and bearing interest at
a fixed rate substantially higher than prevailing short-term tax-exempt rates
that has been coupled with the agreement of a third party, such as a bank,
broker-dealer or other financial institution, pursuant to which such institution
grants the security holders the option, at periodic intervals, to tender their
securities to the institution and receive the face value thereof. As
consideration for providing the option, the financial institution receives
periodic fees equal to the difference between the municipal security's fixed
coupon rate and the rate, as determined by a remarketing or similar agent at or
near the commencement of such period, that would cause the securities, coupled
with the tender option, to trade at
B-17
<PAGE> 71
par on the date of such determination. Thus, after payment of this fee, the
security holder effectively holds a demand obligation that bears interest at the
prevailing short-term tax-exempt rate. The Advisor will consider on an ongoing
basis the creditworthiness of the issuer of the underlying municipal securities,
of any custodian, and of the third-party provider of the tender option. In
certain instances and for certain tender option bonds, the option may be
terminable in the event of a default in payment of principal or interest on the
underlying municipal securities and for other reasons.
PAY-IN-KIND (PIK) SECURITIES
The Fund may invest in securities which pay interest either in cash or
additional securities at the issuer's option. These securities are generally
high yield securities and in addition to the other risks associated with
investing in high yield securities are subject to the risks that the interest
payments, which consist of additional securities, will also be subject to the
risks of high yield securities.
MONEY MARKET INSTRUMENTS
The Fund may invest in short-term money market instruments as follows:
Government obligations are issued by the U.S. or foreign governments, their
subdivisions, agencies and instrumentalities. Supranational obligations are
issued by supranational entities and are generally designed to promote economic
improvements. Certificates of deposit are issued against deposits in a
commercial bank with a defined return and maturity. Banker's acceptances are
used to finance the import, export or storage of goods and are "accepted" when
guaranteed at maturity by a bank. Commercial paper is promissory notes issued by
businesses to finance short-term needs (including those with floating or
variable interest rates, or including a frequent interval put feature).
Short-term corporate obligations are bonds and notes (with one year or less to
maturity at the time of purchase) issued by businesses to finance long-term
needs.
FORWARD COMMITMENTS
The Fund may enter into contracts to purchase securities for a fixed price
at a future date beyond customary settlement time ("forward commitments") if the
Fund sets aside, on the books and records of its custodian, liquid assets in an
amount sufficient to meet the purchase price, or if the Fund enters into
offsetting contracts for the forward sale of other securities it owns. In the
case of to-be-announced ("TBA") purchase commitments, the unit price and the
estimated principal amount are established when the Fund enters into a contract,
with the actual principal amount being within a specified range of the estimate.
Forward commitments may be considered securities in themselves, and involve a
risk of loss if the value of the security to be purchased declines prior to the
settlement date, which risk is in addition to the risk of decline in the value
of the Fund's other assets. Where such purchases are made through dealers, the
Fund relies on the dealer to consummate the sale. The dealer's failure to do so
may result in the loss to the Fund of an advantageous yield or price. Although
the Fund will generally enter into forward commitments with the intention of
acquiring securities for its portfolio or for delivery pursuant to options
contracts it has entered into, the Fund may dispose of a commitment prior to
settlement if the Advisor deems it appropriate to do so. The Fund may realize
short-term profits or losses on the sale of forward commitments.
The Fund may enter into TBA sale commitments to hedge its portfolio
positions or to sell securities it owns under delayed delivery arrangements.
Proceeds of TBA sale commitments are not received until the contractual
settlement date. During the time a TBA sale commitment is outstanding,
equivalent deliverable securities, or an offsetting TBA purchase commitment
deliverable on or before the sale commitment date, are held as "cover" for the
transaction. Unsettled TBA sale commitments are valued at current market value
of the underlying securities. If the TBA sale commitment is closed through the
acquisition of an offsetting purchase commitment, the Fund realizes a gain or
loss on the commitment without regard to any unrealized gain or loss on the
underlying security. If the Fund delivers securities under the commitment, the
Fund realizes a gain or loss from the sale of the securities based upon the unit
price established at the date the commitment was entered into.
B-18
<PAGE> 72
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements. A repurchase agreement is a
contract under which the Fund acquires a security for a relatively short period
(usually not more than one week), subject to the obligation of the seller to
repurchase and the Fund to resell such security at a fixed time and price
(representing the Fund's cost plus interest). It is the Fund's present intention
to enter into repurchase agreements only with commercial banks and registered
broker-dealers and only with respect to obligations of the U.S. government or
its agencies or instrumentalities. Repurchase agreements may also be viewed as
loans made by the Fund which are collateralized by the securities subject to
repurchase. The Advisor will monitor such transactions to ensure that the value
of the underlying securities will be at least equal at all times to the total
amount of the repurchase obligation, including the interest factor. If the
seller defaults, the Fund could realize a loss on the sale of the underlying
security to the extent that the proceeds of sale, including accrued interest,
are less than the resale price provided in the agreement, including interest. In
addition, if the seller should be involved in bankruptcy or insolvency
proceedings, the Fund may incur delay and costs in selling the underlying
security or may suffer a loss of principal and interest if the Fund is treated
as an unsecured creditor and required to return the underlying collateral to the
seller's estate.
Pursuant to an exemptive order issued by the Securities and Exchange
Commission, the Fund may transfer uninvested cash balances into a joint account,
along with cash of other Liberty Funds and certain other accounts. These
balances may be invested in one or more repurchase agreements and/or short-term
money market instruments.
OPTIONS ON SECURITIES
WRITING COVERED OPTIONS. The Fund may write covered call options and
covered put options on optionable securities held in its portfolio, when in the
opinion of the Advisor such transactions are consistent with the Fund's
investment objective and policies. Call options written by the Fund give the
purchaser the right to buy the underlying securities from the Fund at a stated
exercise price; put options give the purchaser the right to sell the underlying
securities to the Fund at a stated price.
The Fund may write only covered options, which means that, so long as the
Fund is obligated as the writer of a call option, it will own the underlying
securities subject to the option (or comparable securities satisfying the cover
requirements of securities exchanges). In the case of put options, the Fund will
hold cash and/or high-grade short-term debt obligations equal to the price to be
paid if the option is exercised. In addition, the Fund will be considered to
have covered a put or call option if and to the extent that it holds an option
that offsets some or all of the risk of the option it has written. The Fund may
write combinations of covered puts and calls on the same underlying security.
The Fund will receive a premium from writing a put or call option, which
increases the Fund's return on the underlying security in the event the option
expires unexercised or is closed out at a profit. The amount of the premium
reflects, among other things, the relationship between the exercise price and
the current market value of the underlying security, the volatility of the
underlying security, the amount of time remaining until expiration, current
interest rates and the effect of supply and demand in the options market and in
the market for the underlying security. By writing a call option, the Fund
limits its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the option but continues to bear
the risk of a decline in the value of the underlying security. By writing a put
option, the Fund assumes the risk that it may be required to purchase the
underlying security for an exercise price higher than its then-current market
value, resulting in a potential capital loss unless the security subsequently
appreciates in value.
The Fund may terminate an option that it has written prior to its
expiration by entering into a closing purchase transaction in which it purchases
an offsetting option. The Fund realizes a profit or loss from a closing
transaction if the cost of the transaction (option premium plus transaction
costs) is less or more than the premium received from writing the option. If the
Fund writes a call option but does not own the underlying security, and when it
writes a put option, the Fund may be required to deposit cash or securities with
its broker as "margin," or collateral, for its obligation to buy or sell the
underlying security. As the value of the underlying security varies, the Fund
may have to deposit additional margin with the broker. Margin
B-19
<PAGE> 73
requirements are complex and are fixed by individual brokers, subject to minimum
requirements currently imposed by the Federal Reserve Board and by stock
exchanges and other self-regulatory organizations.
PURCHASING PUT OPTIONS. The Fund may purchase put options to protect its
portfolio holdings in an underlying security against a decline in market value.
Such protection is provided during the life of the put option since the Fund, as
holder of the option, is able to sell the underlying security at the put
exercise price regardless of any decline in the underlying security's market
price. In order for a put option to be profitable, the market price of the
underlying security must decline sufficiently below the exercise price to cover
the premium and transaction costs. By using put options in this manner, the Fund
will reduce any profit it might otherwise have realized from appreciation of the
underlying security by the premium paid for the put option and by transaction
costs.
PURCHASING CALL OPTIONS. The Fund may purchase call options to hedge
against an increase in the price of securities that the Fund wants ultimately to
buy. Such hedge protection is provided during the life of the call option since
the Fund, as holder of the call option, is able to buy the underlying security
at the exercise price regardless of any increase in the underlying security's
market price. In order for a call option to be profitable, the market price of
the underlying security must rise sufficiently above the exercise price to cover
the premium and transaction costs.
RISK FACTORS IN OPTIONS TRANSACTIONS
The successful use of the Fund's options strategies depends on the ability
of the Advisor to forecast interest rate and market movements correctly. For
example, if the Fund were to write a call option based on the Advisor's
expectation that the price of the underlying security would fall, but the price
were to rise instead, the Fund could be required to sell the security upon
exercise at a price below the current market price. Similarly, if the Fund were
to write a put option based on the Advisor's expectation that the price of the
underlying security would rise, but the price were to fall instead, the Fund
could be required to purchase the security upon exercise at a price higher than
the current market price.
When the Fund purchases an option, it runs the risk that it will lose its
entire investment in the option in a relatively short period of time, unless the
Fund exercises the option or enters into a closing sale transaction before the
option's expiration. If the price of the underlying security does not rise (in
the case of a call) or fall (in the case of a put) to an extent sufficient to
cover the option premium and transaction costs, the Fund will lose part or all
of its investment in the option. This contrasts with an investment by the Fund
in the underlying security, since the Fund will not realize a loss if the
security's price does not change.
The effective use of options also depends on the Fund's ability to
terminate option positions at times when the Advisor deems it desirable to do
so. There is no assurance that the Fund will be able to effect closing
transactions at any particular time or at an acceptable price.
If a secondary market in options were to become unavailable, the Fund could
no longer engage in closing transactions. Lack of investor interest might
adversely affect the liquidity of the market for particular options or series of
options. A market may discontinue trading of a particular option or options
generally. In addition, a market could become temporarily unavailable if unusual
events -- such as volume in excess of trading or clearing capability -- were to
interrupt its normal operations.
A market may at times find it necessary to impose restrictions on
particular types of options transactions, such as opening transactions. For
example, if an underlying security ceases to meet qualifications imposed by the
market or the Options Clearing Corporation, new series of options on that
security will no longer be opened to replace expiring series, and opening
transactions in existing series may be prohibited. If an options market were to
become unavailable, the Fund as a holder of an option would be able to realize
profits or limit losses only by exercising the option, and the Fund, as option
writer, would remain obligated under the option until expiration or exercise.
Disruptions in the markets for the securities underlying options purchased
or sold by the Fund could result in losses on the options. If trading is
interrupted in an underlying security, the trading of options on that security
is normally halted as well. As a result, the Fund as purchaser or writer of an
option will be unable to
B-20
<PAGE> 74
close out its positions until options trading resumes, and it may be faced with
considerable losses if trading in the security reopens at a substantially
different price. In addition, the Options Clearing Corporation or other options
markets may impose exercise restrictions. If a prohibition on exercise is
imposed at the time when trading in the option has also been halted, the Fund as
purchaser or writer of an option will be locked into its position until one of
the two restrictions has been lifted. If the Options Clearing Corporation were
to determine that the available supply of an underlying security appears
insufficient to permit delivery by the writers of all outstanding calls in the
event of exercise, it may prohibit indefinitely the exercise of put options. The
Fund, as holder of such a put option, could lose its entire investment if the
prohibition remained in effect until the put option's expiration.
FUTURES CONTRACTS AND RELATED OPTIONS
Subject to applicable law, the Fund may invest without limit in the types
of futures contracts and related options identified in the Prospectus for
hedging and non-hedging purposes, such as to manage the effective duration of
the Fund's portfolio or as a substitute for direct investment. A financial
futures contract sale creates an obligation by the seller to deliver the type of
financial instrument called for in the contract in a specified delivery month
for a stated price. A financial futures contract purchase creates an obligation
by the purchaser to take delivery of the type of financial instrument called for
in the contract in a specified delivery month at a stated price. The
determination is made in accordance with the rules of the exchange on which the
futures contract sale or purchase was made. Futures contracts are traded in the
United States only on commodity exchanges or boards of trade -- known as
"contract markets" -- approved for such trading by the Commodity Futures Trading
Commission (the "CFTC"), and must be executed through a futures commission
merchant or brokerage firm which is a member of the relevant contract market.
Although futures contracts (other than index futures) by their terms call
for actual delivery or acceptance of commodities or securities, in most cases
the contracts are closed out before the settlement date without the making or
taking of delivery. Closing out a futures contract sale is effected by
purchasing a futures contract for the same aggregate amount of the specific type
of financial instrument or commodity with the same delivery date. If the price
of the initial sale of the futures contract exceeds the price of the offsetting
purchase, the seller is paid the difference and realizes a gain. Conversely, if
the price of the offsetting purchase exceeds the price of the initial sale, the
seller realizes a loss. If the Fund is unable to enter into a closing
transaction, the amount of the Fund's potential loss is unlimited. The closing
out of a futures contract purchase is effected by the purchaser's entering into
a futures contract sale. If the offsetting sale price exceeds the purchase
price, the purchaser realizes a gain, and if the purchase price exceeds the
offsetting sale price, the purchaser realizes a loss. In general, 40% of the
gain or loss arising from the closing out of a futures contract traded on an
exchange approved by the CFTC is treated as short-term gain or loss, and 60% is
treated as long-term gain or loss.
Unlike when the Fund purchases or sells a security, no price is paid or
received by the Fund upon the purchase or sale of a futures contract. Upon
entering into a contract, the Fund is required to deposit with its custodian in
a segregated account in the name of the futures broker an amount of liquid
assets. This amount is known as "initial margin." The nature of initial margin
in futures transactions is different from that of margin in security
transactions in that futures contract margin does not involve the borrowing of
funds to finance the transactions. Rather, initial margin is similar to a
performance bond or good faith deposit which is returned to the Fund upon
termination of the futures contract, assuming all contractual obligations have
been satisfied. Futures contracts also involve brokerage costs.
Subsequent payments, called "variation margin" or "maintenance margin," to
and from the broker (or the custodian) are made on a daily basis as the price of
the underlying security or commodity fluctuates, making the long and short
positions in the futures contract more or less valuable, a process known as
"marking to the market." For example, when the Fund has purchased a futures
contract on a security and the price of the underlying security has risen, that
position will have increased in value and the Fund will receive from the broker
a variation margin payment based on that increase in value. Conversely, when the
Fund has purchased a security futures contract and the price of the underlying
security has declined, the position would be less valuable and the Fund would be
required to make a variation margin payment to the broker.
B-21
<PAGE> 75
The Fund may elect to close some or all of its futures positions at any
time prior to their expiration in order to reduce or eliminate a position then
currently held by the Fund. The Fund may close its positions by taking opposite
positions which will operate to terminate the Fund's position in the futures
contracts. Final determinations of variation margin are then made, additional
cash is required to be paid by or released to the Fund, and the Fund realizes a
loss or a gain. Such closing transactions involve additional commission costs.
The Fund does not intend to purchase or sell futures or related options for
other than hedging purposes if, as a result, the sum of the initial margin
deposits on the Fund's existing futures and related options positions and
premiums paid for outstanding options on futures contracts would exceed 5% of
the Fund's net assets.
OPTIONS ON FUTURES CONTRACTS. The Fund may purchase and write call and put
options on futures contracts and it may buy or sell and enter into closing
transactions with respect to such options to terminate existing positions.
Options on futures contracts give the purchaser the right, in return for the
premium paid, to assume a position in a futures contract at the specified option
exercise price at any time during the period of the option. The Fund may use
options on futures contracts in lieu of writing or buying options directly on
the underlying securities or purchasing and selling the underlying futures
contracts. For example, to hedge against a possible decrease in the value of its
portfolio securities, the Fund may purchase put options or write call options on
futures contracts rather than selling futures contracts. Similarly, the Fund may
purchase call options or write put options on futures contracts as a substitute
for the purchase of futures contracts to hedge against a possible increase in
the price of securities which the Fund expects to purchase. Such options
generally operate in the same manner as options purchased or written directly on
the underlying investments.
As with options on securities, the holder or writer of an option may
terminate his position by selling or purchasing an offsetting option. There is
no guarantee that such closing transactions can be effected.
The Fund will be required to deposit initial margin and maintenance margin
with respect to put and call options on futures contracts written by it pursuant
to brokers' requirements, similar to those described above in connection with
the discussion of futures contracts.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. Successful
use of futures contracts by the Fund is subject to the Advisor's ability to
predict movements in various factors affecting securities markets, including
interest rates. Compared to the purchase or sale of futures contracts, the
purchase of call or put options on futures contracts involves less potential
risk to the Fund because the maximum amount at risk is the premium paid for the
options (plus transaction costs). However, there may be circumstances when the
purchase of a call or put option on a futures contract would result in a loss to
the Fund when the purchase or sale of a futures contract would not, such as when
there is no movement in the prices of the hedged investments. The writing of an
option on a futures contract involves risks similar to those risks relating to
the sale of futures contracts.
The use of options and futures strategies also involves the risk of
imperfect correlation among movements in the prices of the securities underlying
the futures and options purchased and sold by the Fund, of the options and
futures contracts themselves, and, in the case of hedging transactions, of the
securities which are the subject of a hedge.
There is no assurance that higher than normal trading activity or other
unforeseen events might not, at times, render certain market clearing facilities
inadequate, and thereby result in the institution by exchanges of special
procedures which may interfere with the timely execution of customer orders.
To reduce or eliminate a position held by the Fund, the Fund may seek to
close out such position. The ability to establish and close out positions will
be subject to the development and maintenance of a liquid secondary market. It
is not certain that this market will develop or continue to exist for a
particular futures contract or option. Reasons for the absence of a liquid
secondary market on an exchange include the following: (i) there may be
insufficient trading interest in certain contracts or options, (ii) restrictions
may be imposed by an exchange on opening transactions or closing transactions or
both, (iii) trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of contracts or options, or underlying
securities, (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange, (v) the facilities of an exchange or a clearing
corporation may not at all times be adequate to handle current trading
B-22
<PAGE> 76
volume, or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of
contracts or options (or a particular class or series of contracts or options),
in which event the secondary market on that exchange for such contracts or
options (or in the class or series of contracts or options) would cease to
exist, although outstanding contracts or options on the exchange that had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms.
U.S. TREASURY SECURITY FUTURES CONTRACTS AND OPTIONS. U.S. Treasury
security futures contracts require the seller to deliver, or the purchaser to
take delivery of, the type of U.S. Treasury security called for in the contract
at a specified date and price. Options on U.S. Treasury security futures
contracts give the purchaser the right, in return for the premium paid, to
assume a position in a U.S. Treasury security futures contract at the specified
option exercise price at any time during the period of the option.
Successful use of U.S. Treasury security futures contracts by the Fund is
subject to the Advisor's ability to predict movements in the direction of
interest rates and other factors affecting markets for debt securities. For
example, if the Fund has sold U.S. Treasury security futures contracts in order
to hedge against the possibility of an increase in interest rates which would
adversely affect securities held in its portfolio, and the prices of the Fund's
securities increase instead as a result of a decline in interest rates, the Fund
would be likely to lose part or all of the benefit of the increased value of its
securities which it has hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if the Fund has insufficient
cash, it may have to sell securities to meet daily maintenance margin
requirements at a time when it may be disadvantageous to do so.
There is also a risk that price movements in U.S. Treasury security futures
contracts and related options will not correlate closely with price movements in
markets for particular securities. For example, if the Fund has hedged against a
decline in the values of high yield corporate securities held by it by selling
Treasury security futures and the values of Treasury securities subsequently
increase while the values of its high yield corporate securities decrease, the
Fund would incur losses on both the Treasury security futures contracts written
by it and the high yield corporate securities held in its portfolio.
INDEX FUTURES CONTRACTS. An index futures contract is a contract to buy or
sell units of an index at a specified future date at a price agreed upon when
the contract is made. Entering into a contract to buy units of an index is
commonly referred to as buying or purchasing a contract or holding a long
position in the index. Entering into a contract to sell units of an index is
commonly referred to as selling a contract or holding a short position. A unit
is the current value of the index. The Fund may enter into stock index futures
contracts, debt index futures contracts, or other index futures contracts
appropriate to its objective. The Fund may also purchase and sell options on
index futures contracts.
There are several risks in connection with the use by the Fund of index
futures. One risk arises because of the imperfect correlation between movements
in the prices of the index futures and movements in the prices of securities
which are the subject of the hedge. The Advisor will, however, attempt to reduce
this risk by buying or selling, to the extent possible, futures on indices the
movements of which will, in its judgment, have a significant correlation with
movements in the prices of the securities sought to be hedged.
Successful use of index futures by the Fund is also subject to the
Advisor's ability to predict movements in the direction of the market. For
example, it is possible that, where the Fund has sold futures to hedge its
portfolio against a decline in the market, the index on which the futures are
written may advance and the value of securities held in the Fund's portfolio may
decline. If this occurred, the Fund would lose money on the futures and also
experience a decline in value in its portfolio securities. It is also possible
that, if the Fund has hedged against the possibility of a decline in the market
adversely affecting securities held in its portfolio and securities prices
increase instead, the Fund will lose part or all of the benefit of the increased
value of those securities it has hedged because it will have offsetting losses
in its futures positions. In addition, in such situations, if the Fund has
insufficient cash, it may have to sell securities to meet daily variation margin
requirements at a time when it is disadvantageous to do so.
B-23
<PAGE> 77
In addition to the possibility that there may be an imperfect correlation,
or no correlation at all, between movements in the index futures and the portion
of the portfolio being hedged, the prices of index futures may not correlate
perfectly with movements in the underlying index due to certain market
distortions. First, all participants in the futures market are subject to margin
deposit and maintenance requirements. Rather than meeting additional margin
deposit requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the index and
futures markets. Second, margin requirements in the futures market are less
onerous than margin requirements in the securities market, and as a result the
futures market may attract more speculators than the securities market does.
Increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortions in the
futures market and also because of the imperfect correlation between movements
in the index and movements in the prices of index futures, even a correct
forecast of general market trends by the Advisor may still not result in a
profitable position over a short time period.
OPTIONS ON INDEX FUTURES. Options on index futures are similar to options
on securities except that options on index futures give the purchaser the right,
in return for the premium paid, to assume a position in an index futures
contract (a long position if the option is a call and a short position if the
option is a put) at a specified exercise price at any time during the period of
the option. Upon exercise of the option, the delivery of the futures position by
the writer of the option to the holder of the option will be accompanied by
delivery of the accumulated balance in the writer's futures margin account which
represents the amount by which the market price of the index futures contract,
at exercise, exceeds (in the case of a call) or is less than (in the case of a
put) the exercise price of the option on the index future. If an option is
exercised on the last trading day prior to its expiration date, the settlement
will be made entirely in cash equal to the difference between the exercise price
of the option and the closing level of the index on which the future is based on
the expiration date. Purchasers of options who fail to exercise their options
prior to the exercise date suffer a loss of the premium paid.
OPTIONS ON INDICES
As an alternative to purchasing call and put options on index futures, the
Fund may purchase and sell call and put options on the underlying indices
themselves. Such options would be used in a manner identical to the use of
options on index futures.
INDEX WARRANTS
The Fund may purchase put warrants and call warrants whose values vary
depending on the change in the value of one or more specified securities indices
("index warrants"). Index warrants are generally issued by banks or other
financial institutions and give the holder the right, at any time during the
term of the warrant, to receive upon exercise of the warrant a cash payment from
the issuer based on the value of the underlying index at the time of exercise.
In general, if the value of the underlying index rises above the exercise price
of the index warrant, the holder of a call warrant will be entitled to receive a
cash payment from the issuer upon exercise based on the difference between the
value of the index and the exercise price of the warrant. If the value of the
underlying index falls, the holder of a put warrant will be entitled to receive
a cash payment from the issuer upon exercise based on the difference between the
exercise price of the warrant and the value of the index. The holder of a
warrant would not be entitled to any payments from the issuer at any time when,
in the case of a call warrant, the exercise price is greater than the value of
the underlying index, or, in the case of a put warrant, the exercise price is
less than the value of the underlying index. If the Fund were not to exercise an
index warrant prior to its expiration, then the Fund would lose the amount of
the purchase price paid by it for the warrant.
The Fund will normally use index warrants in a manner similar to its use of
options on securities indices. The risks of the Fund's use of index warrants are
generally similar to those relating to its use of index options. Unlike most
index options, however, index warrants are issued in limited amounts and are not
obligations of a regulated clearing agency, but are backed only by the credit of
the bank or other institution which issues the warrant. Also, index warrants
generally have longer terms than index options. Although the Fund will normally
invest only in exchange-listed warrants, index warrants are not likely to be as
liquid as certain index
B-24
<PAGE> 78
options backed by a recognized clearing agency. In addition, the terms of index
warrants may limit the Fund's ability to exercise the warrants at such time, or
in such quantities, as the Fund would otherwise wish to do.
ZERO COUPON SECURITIES (ZEROS)
The Fund may invest in zero coupon securities, which are securities issued
at a significant discount from face value and pay interest only at maturity
rather than at intervals during the life of the security and in certificates
representing undivided interests in the interest or principal of mortgage-backed
securities (interest only/principal only), which tend to be more volatile than
other types of securities. The Fund will accrue and distribute income from zero
coupon and stripped securities and certificates on a current basis and may have
to sell securities to generate cash for distributions.
INVERSE FLOATERS
Inverse floaters are derivative securities whose interest rates vary
inversely to changes in short-term interest rates and whose values fluctuate
inversely to changes in long-term interest rates. The value of certain inverse
floaters will fluctuate substantially more in response to a given change in
long-term rates than would a traditional debt security. These securities have
investment characteristics similar to leverage, in that interest rate changes
have a magnified effect on the value of inverse floaters.
ADDITIONAL INFORMATION ON MUNICIPAL OBLIGATION INSURANCE
ORIGINAL ISSUE INSURANCE. If interest or principal on a Municipal
Obligation is due, but the issuer fails to pay it, the insurer will make
payments in the amount due to its fiscal agent no later than one business day
after the insurer has been notified of the issuer's nonpayment. The fiscal agent
will pay the amount due to the Fund after the fiscal agent receives evidence of
the Fund's right to receive payment of principal and/or interest, and evidence
that all of the rights of payment due shall thereupon vest in the insurer. When
the insurer pays the Fund the payment due from the issuer, the insurer will
succeed to the Fund's rights to that payment.
PORTFOLIO INSURANCE. Each portfolio insurance policy will be
noncancellable and will remain in effect so long as (i) the Fund is in
existence, (ii) the Fund continues to own the Municipal Obligations covered by
the policy, and (iii) the Fund timely pays the premiums for the policy. Each
insurer generally will reserve the right at any time upon 90 days' written
notice to the Fund to refuse to insure any additional Municipal Obligations the
Fund buys after the effective date of the notice. The Fund's Board of Trustees
will generally reserve the right to terminate each policy upon seven days'
written notice to an insurer if it determines that the cost of the policy is not
reasonable in relation to the value of the insurance to the Fund.
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL OBLIGATIONS
Factors pertaining to the Fund's investment in California Municipal
Obligations are set forth in Appendix B -- "Special Considerations Relating to
California."
B-25
<PAGE> 79
TAX MATTERS
FEDERAL INCOME TAX MATTERS
Federal Taxation of the Fund
The ability of the Fund to qualify for taxation as a regulated investment
company under Subchapter M of the Code requires, among other things, that the
Fund satisfy income and asset diversification tests, and distribute
substantially all its income to its shareholders, as described below.
Specifically, in order to qualify as a regulated investment company, the Fund
must derive at least 90% of its gross income from dividends, interest, certain
payments with respect to securities loans, gains from the sale or other
disposition of stock or securities or foreign currencies (to the extent such
currency gains are directly related to the regulated investment company's
principal business of investing in stock or securities, or options and futures
with respect to stock or securities) and other income (including but not limited
to gains from options, futures or forward contracts) derived with respect to its
business of investing in such stock, securities or currencies. The Fund must
also satisfy an asset diversification test. Under this test, at the close of
each quarter of the Fund's taxable year, at least 50% of the value of the Fund's
assets must consist of cash and cash items (including receivables), U.S.
Government securities, securities of other regulated investment companies, and
securities of other issuers (as to which the Fund has not invested more than 5%
of the value of the Fund's total assets in securities of such issuer and as to
which the Fund does not hold more than 10% of the outstanding voting securities
of such issuer), and no more than 25% of the value of its total assets may be
invested in the securities of any one issuer (other than U.S. Government
securities and securities of other regulated investment companies), or in two or
more issuers which the Fund controls and which are engaged in the same or
similar trades or businesses or related trades or businesses. Finally, the Fund
must distribute to its shareholders with respect to each year at least 90% of
the sum of (1) its net tax-exempt interest income and (2) its taxable net
investment income (including, generally, taxable interest, dividends and certain
other income, less certain expenses, and the excess, if any, of net short-term
capital gain over net long-term capital loss) (the "Distribution Requirement").
A 4% non-deductible excise tax is imposed on a regulated investment company
that fails to distribute in each calendar year an amount at least equal to the
sum of 98% of ordinary taxable income for the calendar year and 98% of capital
gain net income for the one-year period ended on October 31 of such calendar
year (or, at the election of a regulated investment company having a taxable
year ending November 30 or December 31, for its taxable year), plus 100% of any
undistributed income from the preceding year. For the foregoing purposes, a
regulated investment company is treated as having distributed any amount on
which it is subject to income tax for any taxable year ending in such calendar
year.
The Fund generally intends to make sufficient distributions (including by
way of deemed distributions) of its ordinary taxable income and capital gain net
income prior to the end of each calendar year to avoid liability for the excise
tax. However, investors should note that the Fund may in certain circumstances
be required to liquidate portfolio investments to make sufficient distributions
to avoid excise tax liability. In addition, the Fund may elect to pay the excise
tax liability if it determines that the costs of making an excise tax
distribution are greater than the excise tax liability that would be due upon
the failure to make such excise tax distribution.
If the Fund does not qualify for taxation as a regulated investment company
for any taxable year, the Fund's income will be subject to corporate income
taxes imposed at the Fund level, and all distributions from earnings and
profits, including distributions of net exempt-interest income and net capital
gain (i.e., the excess, if any, of net long-term capital gain over net
short-term capital loss), will be taxable to shareholders as ordinary income. In
addition, in order to requalify for taxation as a regulated investment company,
the Fund may be required to recognize unrealized gains, pay substantial taxes
and interest, and make certain distributions.
If at any time when shares of Municipal Preferred are outstanding the Fund
does not meet applicable asset coverage requirements, the Fund will be required
to suspend distributions to holders of Common Shares until the requisite asset
coverage is restored. Any such suspension may cause the Fund to pay the 4%
federal excise tax described above and may prevent the Fund from satisfying the
Distribution Requirement. The Fund
B-26
<PAGE> 80
may redeem shares of Municipal Preferred in an effort to comply with the
Distribution Requirement and to avoid the excise tax. See "Description of
Municipal Preferred -- Dividends."
Federal Taxation of Shareholders
DIVIDENDS AND OTHER DISTRIBUTIONS. Prior proposed legislation that was
ultimately not enacted would have reinstated a deductible tax (the
"Environmental Tax"), imposed through tax years beginning before January 1,
1996, at a rate of 0.12% on a corporation's alternative minimum taxable income
(computed without regard to the alternative minimum tax net operating loss
deduction) in excess of $2 million. If the Environmental Tax is reinstated,
exempt-interest dividends paid by the Fund that are included in a corporate
shareholder's alternative minimum taxable income may subject such shareholder to
the Environmental Tax. It is not possible for the Fund to predict whether
similar legislation might be proposed and enacted in the future. Corporate
shareholders should consult with their own tax advisors regarding the likelihood
of such legislation and its effect on them.
As discussed in the Prospectus, exempt-interest dividends attributable to
interest received on certain private activity bonds and certain industrial
development bonds will not be tax-exempt to any shareholders who are, within the
meaning of Section 147(a) of the Code, "substantial users" of the facilities
financed by such obligations or bonds or who are "related persons" of such
substantial users. In general, a "substantial user" of a facility includes a
"non-exempt person who regularly uses a part of such facility in his trade or
business." "Related persons" are in general defined to include persons among
whom there exists a relationship, either by family or business, which would
result in a disallowance of losses in transactions among them under various
provisions of the Code (or if they are members of the same controlled group of
corporations under the Code), including a partnership and each of its partners
(and their spouses and minor children), an S corporation and each of its
shareholders (and their spouses and minor children) and various combinations of
these relationships. The foregoing is not a complete statement of all of the
provisions of the Code covering the definitions of "substantial user" and
"related person." For additional information, investors should consult their tax
advisors before investing in Common Shares.
Any dividend paid by the Fund during January of a given year generally is
deemed to have been received by shareholders on December 31 of the preceding
year, provided that the dividend actually was declared by the Fund in October,
November or December of such preceding year and was payable to shareholders of
record on a date in such month.
All or a portion of interest on indebtedness incurred or continued by a
shareholder to purchase or carry Fund shares may not be deductible by the
shareholder. The portion of interest that is not deductible is equal to the
total interest paid or accrued on the indebtedness multiplied by the percentage
of the Fund's total distributions (not including distributions of capital gain
net income) paid to the shareholder that are exempt-interest dividends. Under
rules used by the Internal Revenue Service for determining when borrowed funds
are considered to have been used for the purpose of purchasing or carrying
particular assets, the purchase of Common Shares may be considered to have been
made with borrowed funds even though such funds are not directly traceable to
the purchase of shares.
Under federal tax law in effect at the date of this Prospectus, a
shareholder's interest deduction generally will not be disallowed if the average
adjusted basis of the shareholder's tax-exempt obligations (including Common
Shares) does not exceed two percent of the average adjusted basis of the
shareholder's trade or business assets (in the case of most corporations and
some individuals) and portfolio investments (in the case of individuals). Prior
proposed legislation that was ultimately not enacted would have further limited
or repealed this two-percent de minimis exception, which could reduce the total
after-tax yield of the Municipal Preferred to investors to whom the de minimis
exception would otherwise apply. It is not possible for the Fund to predict
whether similar legislation might be proposed and enacted in the future.
Shareholders should consult with their own tax advisors regarding the likelihood
of such legislation and its effect on them.
If the Fund engages in hedging transactions, including hedging transactions
in options, futures contracts, and straddles, or other similar transactions, it
will be subject to special tax rules (including constructive sale,
mark-to-market, straddle, wash sale, and short sale rules), the effect of which
may be to accelerate income to
B-27
<PAGE> 81
the Fund, defer losses to the Fund, cause adjustments in the holding periods of
the Fund's securities, convert long-term capital gains into short-term capital
gains or convert short-term capital losses into long-term capital losses. These
rules could therefore affect the amount, timing and character of distributions
to shareholders. The Fund will endeavor to make any available elections
pertaining to such transactions in a manner believed to be in the best interests
of the Fund.
SALES OR REDEMPTIONS OF SHARES. From time to time the Fund may make a
tender or repurchase offer for its Common Shares. It is expected that the terms
of any such offer will require a tendering shareholder to tender all Common
Shares, and dispose of all shares of Municipal Preferred, held or considered
under Code rules to be held by such shareholder. Shareholders who tender all
Common Shares and dispose of all shares of Municipal Preferred held, or
considered held, by them will be treated as having sold such shares and
generally will realize a capital gain or loss. If, however, a shareholder
tenders fewer than all of its Common Shares, or retains a substantial portion of
its Municipal Preferred, such shareholder may be treated as having received a
taxable dividend upon the tender of its Common Shares. In such a case, there is
a remote risk that non-tendering shareholders (including holders of Municipal
Preferred) will be treated as having received taxable distributions from the
Fund. Likewise, if the Fund redeems some but not all of the Municipal Preferred
held by a holder of Municipal Preferred and such holder of Municipal Preferred
is treated as having received a taxable dividend upon such redemption, there is
a remote risk that holders of Common Shares and non-redeeming holders of
Municipal Preferred will be treated as having received taxable distributions
from the Fund.
FOREIGN INVESTORS. Non-resident alien individuals, foreign corporations
and certain other foreign entities generally will be subject to a U.S.
withholding tax at a rate of 30% on the Fund's distributions from its ordinary
income and the excess of its net short-term capital gain over its net long-term
capital loss, unless the tax is reduced or eliminated by an applicable tax
treaty. Distributions of the Fund's net capital gain received by such
shareholders and any gain from the sale or other disposition of shares of the
Fund generally will not be subject to U.S. federal income taxation, provided
that non-resident alien status has been certified by the shareholder. Different
U.S. tax consequences may result if the shareholder is engaged in a trade or
business in the United States, is present in the United States for a sufficient
period of time during a taxable year to be treated as a U.S. resident, or fails
to provide any required certifications regarding status as a non-resident alien
investor. Foreign shareholders should consult their tax advisors regarding the
U.S. and foreign tax consequences of an investment in the Fund.
The Internal Revenue Service revised its regulations affecting the
application to foreign investors of the back-up withholding and withholding tax
rules described above. The new regulations will generally be effective for
payments made after December 31, 2000. In some circumstances, the new rules will
increase the certification and filing requirements imposed on foreign investors
in order to qualify for exemption from the 31% back-up withholding tax and for
reduced withholding tax rates under income tax treaties. Foreign investors in
the Fund should consult their tax advisors with respect to the potential
application of these new regulations.
The foregoing is a general, abbreviated summary of the provisions of the
Code and regulations thereunder presently in effect as they directly govern the
taxation of the Fund and owners of Common Shares. These provisions are subject
to change by legislative or administrative action, and any such change may be
retroactive with respect to Fund transactions. Owners of Common Shares are
advised to consult with their own tax advisors for more detailed information
concerning federal income tax matters.
FOREIGN, STATE AND LOCAL TAX MATTERS
The exemption from federal income tax for exempt-interest dividends does
not necessarily result in exemption for such dividends under the income or other
tax laws of any foreign, state or local taxing authority. Some states exempt
from state income tax that portion of any exempt-interest dividend that is
derived from interest received by a regulated investment company on its holdings
of securities of that state and its political subdivisions and
instrumentalities. Therefore, the Fund will report annually to its shareholders
the percentage of interest income earned by the Fund during the preceding year
on tax-exempt obligations indicating, on a
B-28
<PAGE> 82
state-by-state basis, the source of such income. Holders of shares of Municipal
Preferred are advised to consult with their own tax advisors about foreign,
state and local tax matters.
SPECIAL TAX CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL OBLIGATIONS
Information regarding the California tax consequences of investing in the
Fund are set forth in Appendix B -- "Special Considerations Relating to
California."
SHAREHOLDER LIABILITY
Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of the Fund. However, the
Declaration disclaims shareholder liability for acts or obligations of the Fund
and requires that a notice of such disclaimer be given in each agreement,
obligation or instrument entered into or executed by the Fund or the Trustees.
The Declaration provides for indemnification out of Fund property for all loss
and expense of any shareholder held personally liable for the obligations of the
Fund. Thus, the risk of a shareholder's incurring financial loss on account of
shareholder liability is limited to circumstances (which are considered remote)
in which the Fund would be unable to meet its obligations and the disclaimer was
inoperative.
CUSTODIAN
The Chase Manhattan Bank, located at 270 Park Avenue, New York, New York
10017-2070, is the Fund's custodian. The custodian is responsible for
safeguarding the Fund's cash and securities, receiving and delivering securities
and collecting the Fund's interest and dividends.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, independent accountants, have audited the
Statement of Assets and Liabilities of the Fund dated , 1999 in
connection with the filing of such Statement with the Securities and Exchange
Commission. The address of PricewaterhouseCoopers LLP is 160 Federal Street,
Boston, Massachusetts 02110.
MISCELLANEOUS MATTERS
From time to time, the Fund may discuss or quote its current portfolio
manager or managers as well as other investment personnel, including such
person's or persons' views on the following matters: the economy; securities
markets; portfolio securities and their issuers; investment philosophies,
strategies, techniques and criteria used in the selection of securities to be
purchased or sold for the Fund; the Fund's portfolio holdings; the investment
research and analysis process, including the use of investment teams; the
formulation and evaluation of investment recommendations; and the assessment and
evaluation of credit, interest rate, market and economic risks and similar or
related matters.
The Fund may also quote evaluations mentioned in independent radio or
television broadcasts or print material, and use charts and graphs to illustrate
the effects of compounding and tax-deferral and to compare tax-exempt yields and
their taxable equivalent. The Fund may discuss current market conditions in
comparing the yields of municipal bonds and taxable bonds. The Fund may also
discuss the benefits of investing in insured bonds and the Fund's anticipated
initial portfolio composition, including using charts and graphs to illustrate
the percentages which the Fund expects to invest in bonds rates in certain
rating categories by one or more Rating Agencies.
From time to time, the Fund may also discuss or quote the views of its
investment advisor and other financial planning, legal, tax, accounting,
insurance, estate planning and other professionals, or from surveys, regarding
individual and family financial planning. Such views may include information
regarding the following matters: retirement planning; general investment
techniques (e.g., asset allocation and disciplined saving and investing);
business succession; issues with respect to insurance (e.g., disability and life
insurance and Medicare supplemental insurance); issues regarding financial and
health care management for elderly family members; and similar or related
matters.
B-29
<PAGE> 83
FINANCIAL STATEMENTS
Following are the audited financial statements for the initial
capitalization of the Fund and the report of PricewaterhouseCoopers LLP dated
October 26, 1999.
Colonial California Insured Municipal Fund
Statement of Net Assets
October 25, 1999
<TABLE>
<S> <C>
Assets:
Cash.............................................. $100,000
Capital:
Paid in Capital (net assets)...................... $100,000
Shares Outstanding (Unlimited number authorized)............ 6,667
Net Asset Value (Capital) Per Share......................... $ 15.00
</TABLE>
NOTES TO STATEMENT OF NET ASSETS
NOTE 1. ORGANIZATION: Colonial California Insured Municipal Fund (the "Fund")
is a newly organized closed-end, non-diversified management investment company.
The Fund's investment objective is to provide current income generally exempt
from regular federal income tax and California state personal income tax. The
Fund will invest its assets in a non-diversified portfolio of bonds and notes
that generally are issued by or on behalf of California state and local
government units whose interest is, in the opinion of the issuer's counsel (or
on the basis of other reliable authority), exempt from regular federal income
tax and California state personal income tax.
The Fund is inactive except for matters relating to its organization and
registration, as a closed-end investment company under the Investment Company
Act of 1940, and the sale of 6,667 shares of the Fund for $100,000 to Colonial
Management Associates, Inc. (the "Advisor"), a wholly-owned subsidiary of
Liberty Funds Group LLC, which is an indirect majority-owned subsidiary of
Liberty Mutual Insurance Company. The Advisor has agreed to pay (i) all
organizational expenses and (ii) offering costs (other than sales loads) that
exceed $0.03 per Common Share (0.2% of offering price).
NOTE 2. TRANSACTIONS WITH AFFILIATES: Upon commencement of investment
operations, the Advisor will receive an annual management fee from the Fund,
computed and accrued daily and paid monthly, in a maximum amount equal to 0.65%
of the Fund's average weekly total net assets. The Advisor also provides the
Fund with accounting, bookkeeping, pricing and other services. For the first ten
years of the Fund's operation, the Advisor has agreed to waive the following
amount of the Fund's fees: 0.30% for years ending through November 30, 2004,
0.25% for the year ended November 30, 2005, 0.20% for the year ended November
30, 2006, 0.15% for the year ended November 30, 2007, 0.10% for the year ended
November 30, 2008 and 0.05% for the year ended November 30, 2009. The Advisor
has not agreed to waive any portion of the Fund's fees and expenses beyond
November 30, 2009.
B-30
<PAGE> 84
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of
Colonial California Insured Municipal Fund
In our opinion, the accompanying statement of net assets presents fairly,
in all material respects, the financial position of Colonial California Insured
Municipal Fund (the "Fund") at October 25, 1999, in conformity with generally
accepted accounting principles. The statement of net assets is the
responsibility of the Fund's management; our responsibility is to express an
opinion on the statement of net assets based on our audit. We conducted our
audit of the statement of net assets in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of net assets is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement of net assets, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
October 26, 1999
B-31
<PAGE> 85
APPENDIX A
RATINGS OF INVESTMENTS
STANDARD & POOR'S CORPORATION -- A brief description of the applicable Standard
& Poor's Corporation ("S&P") rating symbols and their meanings (as published by
S&P) follows:
LONG TERM DEBT
An S&P corporate or municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.
The debt rating is not a recommendation to purchase, sell, or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable. S&P does not perform
an audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information, or based on other
circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of default-capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under the
laws of bankruptcy and other laws affecting creditors' rights.
INVESTMENT GRADE
<TABLE>
<S> <C>
AAA Debt rated "AAA" has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely
strong.
AA Debt rated "AA" has a very strong capacity to pay interest
and repay principal and differs from the highest rated
issues only in small degree.
A Debt rated "A" has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to
the adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity
to pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
</TABLE>
SPECULATIVE GRADE RATING
Debt rated "BB", "B", "CCC", "CC" and "C" is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. "BB" indicates the least degree of
B-32
<PAGE> 86
speculation and "C" the highest. While such debt will likely have some quality
and protective characteristics, these are outweighed by major uncertainties or
major exposures to adverse conditions.
<TABLE>
<S> <C>
BB Debt rated "BB" has less near-term vulnerability to default
than other speculative issues. However, it faces major
ongoing uncertainties or exposure to adverse business,
financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal
payments. The "BB" rating category is also used for debt
subordinated to senior debt that is assigned an actual or
implied "BBB-" rating.
B Debt rated "B" has a greater vulnerability to default but
currently has the capacity to meet interest payments and
principal repayments. Adverse business, financial, or
economic conditions will likely impair capacity or
willingness to pay interest and repay principal.
The "B" rating category is also used for debt subordinated
to senior debt that is assigned an actual or implied "BB" or
"BB -- " rating.
CCC Debt rated "CCC" has a currently identifiable vulnerability
to default, and is dependent upon favorable business,
financial, and economic conditions to meet timely payment of
interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not
likely to have the capacity to pay interest and repay
principal.
The "CCC" rating category is also used for debt subordinated
to senior debt that is assigned an actual or implied "B" or
"B-" rating.
CC The rating "CC" typically is applied to debt subordinated to
senior debt that is assigned an actual or implied "CCC" debt
rating.
C The rating "C" typically is applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC-"
debt rating. The "C" rating may be used to cover a situation
where a bankruptcy petition has been filed, but debt service
payments are continued.
CI The rating "CI" is reserved for income bonds on which no
interest is being paid.
D Debt rated "D" is in payment default. The "D" rating
category is used when interest payments or principal
payments are not made on the date due even if the applicable
grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The "D"
rating also will be used upon the filing of a bankruptcy
petition if debt service payments are jeopardized.
</TABLE>
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
PROVISIONAL RATINGS: The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project financed by
the debt being rated and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful and timely completion of the
project. This rating, however, while addressing credit quality subsequent to
completion of the project, makes no comment on the likelihood of, or the risk of
default upon failure of, such completion. The investor should exercise judgment
with respect to such likelihood and risk.
<TABLE>
<S> <C>
L The letter "L" indicates that the rating pertains to the
principal amount of those bonds to the extent that the
underlying deposit collateral is federally insured and
interest is adequately collateralized.* In the case of
certificates of deposit the letter "L" indicates that the
deposit, combined with other deposits being held in the same
right and capacity, will be honored for principal and
accrued pre-default interest up to the federal insurance
limits within 30 days after closing of the insured
institution or, in the event that the deposit is assumed by
a successor insured institution, upon maturity.
* Continuance of the rating is contingent upon S&P's receipt
of an executed copy of the escrow agreement or closing
documentation confirming investments and cash flow.
NR Indicates no rating has been requested, that there is
insufficient information on which to base a rating, or that
S&P does not rate a particular type of obligation as a
matter of policy.
</TABLE>
B-33
<PAGE> 87
MUNICIPAL NOTES
An S&P note rating reflects the liquidity concerns and market access risks
unique to notes. Notes due in 3 years or less will likely receive a note rating.
Notes maturing beyond 3 years will most likely receive a long-term debt rating.
The following criteria will be used in making that assessment:
-- Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
-- Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
NOTE RATING SYMBOLS ARE AS FOLLOWS:
<TABLE>
<S> <C>
SP-1 Very strong or strong capacity to pay principal and
interest. Those issues determined to possess overwhelming
safety characteristics will be given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
SP-3 Speculative capacity to pay principal and interest.
</TABLE>
A note rating is not a recommendation to purchase, sell, or hold a security
inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
COMMERCIAL PAPER
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from "A-1" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
<TABLE>
<S> <C>
A-1 This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined
to possess extremely strong safety characteristics are
denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation
is satisfactory. However, the relative degree of safety is
not as high as for issues designated "A-l."
A-3 Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the
adverse effects of changes in circumstances than obligations
carrying the higher designations.
B Issues rated "B" are regarded as having only speculative
capacity for timely payment.
C This rating is assigned to short-term debt obligations with
a doubtful capacity for payment.
D Debt rated "D" is in payment default. The "D" rating
category is used when interest payments or principal
payments are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period.
</TABLE>
A commercial paper rating is not a recommendation to purchase, sell, or
hold a security inasmuch as it does not comment as to market price or
suitability for a particular investor. The ratings are based on current
information furnished to S&P by the issuer or obtained by S&P from other sources
it considers reliable. S&P does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information or based on other circumstances.
B-34
<PAGE> 88
MOODY'S INVESTORS SERVICE, INC. -- A brief description of the applicable Moody's
Investors Service, Inc. ("Moody's") rating symbols and their meanings (as
published by Moody's) follows:
MUNICIPAL BONDS
<TABLE>
<S> <C>
Aaa Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk
and are generally referred to as "gilt edge." Interest
payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various
protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise
what are generally known as high grade bonds. They are rated
lower than the best bonds because margins of protection may
not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and
interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade
obligations, i.e. they are neither highly protected nor
poorly secured. Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may
be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of
the desirable investment. Assurance of interest and
principal payments or of maintenance of other terms of the
contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger
with respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
</TABLE>
Bonds for which the security depends upon the completion of some act or the
fulfillment of some condition are rated conditionally. These are bonds secured
by (a) earnings of projects under construction, (b) earnings of projects
unseasoned in operation experience, (c) rentals which begin when facilities are
completed, or (d) payments to which some other limiting condition attaches.
Parenthetical rating denotes probable credit stature upon completion of
construction or elimination of basis of condition.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols
Aal, Al, Baal, Bal and Bl.
B-35
<PAGE> 89
SHORT-TERM LOANS
<TABLE>
<S> <C>
MIG 1/VMIG 1 This designation denotes best quality. There is present
strong protection by established cash flows, superior
liquidity support or demonstrated broadbased access to the
market for refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
MIG 3/VMIG 3 This designation denotes favorable quality. All security
elements are accounted for but there is lacking the
undeniable strength of the preceding grades. Liquidity and
cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
MIG 4/VMIG 4 This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is
present and although not distinctly or predominantly
speculative, there is specific risk.
S.G. This designation denotes speculative quality. Debt
instruments in this category lack margins of protection.
</TABLE>
COMMERCIAL PAPER
Issuers rated PRIME-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics:
-- Leading market positions in well established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structures with moderate reliance on debt
and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
-- Well established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated PRIME-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated PRIME-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
Issuers rated NOT PRIME do not fall within any of the Prime rating
categories.
B-36
<PAGE> 90
APPENDIX B
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA
The Fund's concentration on municipal bonds issued by the State of
California (the "State"), its agencies, or its political subdivisions means that
investors are subject to risks of default or change in value of the securities
owned by the Fund deriving from certain unique factors affecting California
issuers. The information presented below has been derived from official
statements and other public reports of the State, but does not purport to be
comprehensive. In addition, the financial strength of local governments in
California is not directly related to the State's financial strength, and
factors not listed below may affect an individual local government.
During the early 1990's, the State experienced significant financial
difficulties, which reduced its credit standing. The State's finances have
improved significantly since 1994, with credit ratings increases since 1996. The
ratings of certain related debt of other issuers for which the State has an
outstanding lease purchase, guarantee or other contractual obligation (such as
for state-insured hospital bonds) are generally linked directly to the State's
credit rating. Should the State's financial condition deteriorate again, its
credit ratings could be reduced, and the market value and marketability of all
outstanding notes and bonds issued by the State, its agencies or its local
governments could be adversely affected.
ECONOMIC FACTORS
California's economy is the largest in the nation and one of the largest in
the world. The State's July 1, 1998, population of over 33.4 million represented
over 12% of the total United States population. Total personal income in
California, at an estimated $904 billion in 1998, accounts for almost 13% of all
personal income in the nation. Total employment is over 15 million, the majority
of which is in the service, trade and manufacturing sectors.
From mid-1990 to late 1993, the State suffered a recession with the worst
economic, fiscal and budget conditions since the 1930s. Construction,
manufacturing (especially aerospace), and financial services, among others, were
all severely affected, particularly in Southern California. Employment levels
stabilized by late 1993 and pre-recession job levels were reached in 1996.
Unemployment has come down to under six percent in June 1999. Economic
indicators show a steady and strong recovery underway in California since the
start of 1994. The Asian economic crisis starting in 1997 has dampened the
State's economic growth, particularly in high technology manufacturing. Several
key export industries, such as electronics and aerospace manufacturing,
agriculture, and motion picture production, are struggling, due in part to
weakness in foreign demand. Conversely, the demand for high technology services,
including software, internet applications, and biotechnology, is strong and
construction activity continues to surge. Current forecasts predict continued
strong growth of the State's economy in 1999, with a slowdown predicted in 2000
and beyond. Any delay or reversal of the recovery may create new shortfalls in
State revenues.
CONSTITUTIONAL LIMITATIONS ON TAXES, OTHER CHARGES AND APPROPRIATIONS
LIMITATION ON PROPERTY TAXES. Certain California municipal bonds may be
obligations of issuers which rely in whole or in part, directly or indirectly,
on ad valorem property taxes as a source of revenue. The taxing powers of
California local governments and districts are limited by Article XIII A of the
California Constitution, enacted by the voters in 1978 and commonly known as
"Proposition 13." Briefly, Article XIII A limits to one percent of "full cash
value" the rate of ad valorem property taxes on real property and generally
restricts the increase in the assessed value of real property to two percent per
year, except when new construction or a change in ownership occurs (subject to a
number of exemptions). Taxing entities may, however, increase the permissible ad
valorem tax rate above one percent to pay debt service on voter-approved bonded
indebtedness.
Under Article XIII A, the basic one percent tax rate applies to the
assessed value of property, determined as of the owner's date of acquisition (or
as of March 1, 1975, if acquired before that date), subject to certain
adjustments. This system has resulted in widely varying amounts of tax on
similarly situated properties.
B-37
<PAGE> 91
Although several lawsuits have been filed challenging Proposition 13's
acquisition value-based system, it was upheld by the U.S. Supreme Court in 1992.
Article XIII A also requires the voters of any city, county or special
district to approve any "special tax" by a two-thirds vote. Court decisions,
however, allowed a non-voter approved levy of "general taxes" which were not
dedicated to a specific use.
LIMITATIONS ON OTHER TAXES, FEES AND CHARGES. In November 1996, California
voters approved Proposition 218, which added Articles XIII C and XIII D to the
State Constitution. These provisions affect significantly the ability of local
governments (including special districts) to levy and collect existing and
future taxes, assessments, fees and charges.
Article XIII C requires that all new, extended or increased local taxes be
submitted to the electorate before they become effective; taxes for general
governmental purposes require a majority vote and taxes for specific purposes
require a two-thirds vote. Further, any general purpose tax which was imposed,
extended or increased, without voter approval, after 1994 and before Proposition
218's approval, must be approved by a majority vote within two years of the date
Proposition 218 was approved.
Article XIII D contains several provisions making it generally more
difficult for local governments (including special districts) to levy and
maintain "assessments" for municipal services and programs. Article XIII D also
contains several provisions affecting "fees" and "charges," defined to mean "any
levy other than an ad valorem tax, a special tax, or an assessment, imposed by a
[local government] upon a parcel or upon a person as an incident of property
ownership, including user fees or charges for a property related service." All
new, extended or increased property-related fees and charges must conform to
requirements prohibiting, among other things, the generation of revenues
exceeding the funds required to provide the property-related service, and the
use of the revenues for unrelated purposes. Notice, hearing and protest
procedures are provided for levying or increasing fees and charges and, except
for fees or charges for sewer, water and refuse collection services (or fees for
electrical and gas service, which are not treated as "property related" for
purposes of Article XIII D), no property related fee or charge may be imposed or
increased without majority approval by the property owners subject to the fee or
charge or, at the option of the local agency, two-thirds voter approval by the
electorate residing in the affected area.
In addition to the provisions described above, Article XIII C removes
limitations on the initiative power in matters of reducing or repealing local
taxes, assessments, fees and charges. Consequently, local voters could, by
future initiative, repeal, reduce or prohibit the future imposition or increase
of any local tax, assessment, fee or charge. It is unclear how this right of
local initiative may be used in cases where taxes or charges have been or will
be specifically pledged to secure debt issues.
The interpretation and application of Proposition 218 will ultimately be
determined by the courts with respect to a number of matters, and it is not
possible at this time to predict with certainty the outcome of such
determinations. Proposition 218 is generally viewed as restricting the fiscal
flexibility of local governments, and for this reason, some credit ratings of
California cities and counties have been, and others may be, reduced.
APPROPRIATIONS LIMITS. The State and its local governments are also
subject to an annual "appropriations limit" imposed by Article XIII B of the
California Constitution, enacted by the voters in 1979 and significantly amended
by Propositions 98 and 111 in 1988 and 1990, respectively. Article XIII B
prohibits the State or any covered local government from spending
"appropriations subject to limitation" in excess of the appropriations limit
imposed on that entity. "Appropriations subject to limitation" are
authorizations to spend "proceeds of taxes," which consist of tax revenues and
certain other funds (including proceeds from regulatory licenses, user charges
or other fees, to the extent that such proceeds exceed the cost of providing the
product or service), but "proceeds of taxes" exclude many State subventions to
local governments. Each entity's appropriations limit is adjusted annually to
reflect changes in cost of living and population, and transfers of service
responsibilities between governmental units.
Article XIII B does not limit appropriations of funds which are not
"proceeds of taxes," such as reasonable user charges or fees, and certain other
non-tax funds, including bond proceeds. Among the expenditures not included in
the Article XIII B appropriations limit are (1) the debt service cost of bonds
B-38
<PAGE> 92
issued or authorized prior to January 1, 1979, or subsequently authorized by the
voters, (2) appropriations arising from certain emergencies declared by the
Governor, and (3) appropriations for certain capital outlay projects.
A governmental entity that receives "excess" revenues, measured over a
two-year cycle, must dispose of the excess amount. Local governments must return
any excess to taxpayers by rate reductions. The State must refund to taxpayers
half of any excess, with the other half paid to schools and community colleges.
With more liberal annual adjustment factors since 1988, and depressed revenues
since 1990 because of the recession, few governments are currently operating
near their spending limits, but this condition may change over time. State
appropriations were $5 billion under the limit for fiscal year 1998-99. Local
governments may, by voter approval, exceed their spending limits for up to four
years.
Because of the complex nature of Articles XIII A through XIII D of the
California Constitution, the ambiguities and possible inconsistencies in their
terms, the impossibility of predicting future appropriations or changes in
population and cost of living, and the probability of continuing legal
challenges, it is not currently possible to determine fully the impact of these
Articles on California municipal bonds or on the ability of the State or local
governments to pay debt service on such California municipal bonds. It is not
possible, at the present time, to predict the outcome of any pending litigation
with respect to the ultimate scope, impact or constitutionality of these
Articles upon the State's or any local government's ability to pay debt service
on, or repay, their obligations. Future voter action may also affect the ability
of the State or local governments to repay their obligations.
OBLIGATIONS OF THE STATE OF CALIFORNIA
Under the California Constitution, debt service on outstanding general
obligation bonds is the second charge to the General Fund (the State's principal
operating fund) after support of the public school system and public
institutions of higher education. As of August 1, 1999, the State had
outstanding approximately $19.8 billion of long-term general obligation bonds,
$687 million of general obligation commercial paper, and $6.7 billion of
lease-purchase debt supported by the General Fund. The State also had about
$14.8 billion of authorized and unissued long-term general obligation bonds and
lease-purchase debt. In the 1998-99 fiscal year, debt service on general
obligation bonds and lease purchase debt was approximately 4.4% of General Fund
revenues.
RECENT FINANCIAL RESULTS
The principal sources of General Fund revenues are the California personal
income tax, the sales and use tax, bank and corporation taxes, and the gross
premium tax on insurance. The State also maintains a Special Fund for Economic
Uncertainties (the "SFEU"), derived from General Fund revenues, as a reserve to
meet cash needs of the General Fund, and which is required to be replenished as
soon as sufficient revenues are available. Year-end balances in the SFEU are
included for financial reporting purposes in the General Fund balance. Because
of the recession and an accumulated budget deficit, no reserve was budgeted in
the SFEU from 1992-93 to 1995-96. The California Department of Finance estimates
year-end balances in the SFEU of about $1.932 billion for 1998-99 and $880
million for 1999-00.
GENERAL. Throughout the 1980's, State spending increased rapidly as the
State's population and economy also grew rapidly, including increased spending
for many assistance programs to local governments, which were constrained by
Proposition 13 and other laws. The largest State program is assistance to local
public and community college school districts. In 1988, Proposition 98 was
enacted, which generally guarantees local school districts and community college
districts a minimum share of State General Fund revenues (currently about 35%).
RECENT BUDGETS. As a result of the severe economic recession from 1990-94
and other factors, the State experienced substantial revenue shortfalls and
greater than anticipated social service costs in the early and mid-1990's. The
State accumulated and sustained a budget deficit in the budget reserve, the
SFEU, approaching $2.8 billion at its peak on June 30, 1993. The Legislature and
Governor agreed on a number of
B-39
<PAGE> 93
different steps to respond to the adverse financial conditions and produce
Budget Acts in the fiscal years 1991-92 to 1994-95 (although not all of these
actions were taken in each year).
A consequence of the accumulated budget deficits in the early 1990's,
together with other factors such as disbursement of funds to local school
districts "borrowed" from future fiscal years and hence not shown in the annual
budget, was to significantly reduce the State's cash resources available to pay
its ongoing obligations. The State's cash condition became so serious that from
late spring 1992 until 1994, the State had to rely on issuance of short-term
notes which matured in a subsequent fiscal year to finance its ongoing deficit
and pay current obligations. For a two-month period beginning in the Summer of
1992, pending adoption of the annual Budget Act, the State was forced to issue
registered warrants (IOUs) to some of its suppliers, employees and other
creditors. The last of these deficit notes was repaid in April 1996.
The State's financial condition improved markedly during the 1995-96,
1996-97 and 1997-98 fiscal years, with a combination of better than expected
revenues, slowdown in growth of social welfare programs, and continued spending
restraint based on the actions taken in earlier years. The State's cash position
also improved, and no external deficit borrowing has occurred over the end of
these three fiscal years.
The State economy grew strongly during the fiscal years starting in
1995-96, and the General Fund took in substantially greater tax revenues (around
$2.2 billion in 1995-96, $1.6 billion in 1996-97, $2.4 billion in 1997-98 and $1
billion in 1998-99) than were initially planned when the budgets were enacted.
These additional funds were largely directed to school spending as mandated by
Proposition 98, to make up shortfalls from reduced federal health and welfare
aid in 1995-96 and 1996-97 and, particularly in 1998-99, to fund new program
incentives. The accumulated budget deficit from the recession years was finally
eliminated.
FY 1997-98 BUDGET. In May 1997, the California Supreme Court ruled that
the State acted illegally in 1993 and 1994 by using a deferral of payments to
the Public Employees Retirement Fund to help balance earlier budgets. In
response to this court decision, the Governor ordered an immediate repayment to
the Retirement Fund of about $1.228 billion, which substantially "used up" the
then-expected additional General Fund revenues for the fiscal year. The 1997-98
Budget Act provided another year of rapidly increasing funding for K-14 public
education. Support for higher education units in the State also increased by
about six percent. Because of the pension repayment, most other State programs
were funded at levels consistent with prior years, and several initiatives had
to be dropped. The final results for 1997-98 showed General Fund revenues and
transfers of $54.9 billion and expenditures of $52.9 billion.
Part of the 1997-98 Budget Act was completion of State welfare reform
legislation to implement the federal welfare reform law passed in 1996. The new
State program became effective January 1, 1998, and emphasizes programs to bring
aid recipients into the workforce. As required by federal law, new time limits
are placed on receipt of welfare aid.
FY 1998-99 BUDGET. The 1998-99 Budget Act was signed on August 21, 1998.
The Budget Act assumed General Fund revenues and transfers in 1998-99 of $57.0
billion. After giving effect to line-item vetoes made by the Governor, the
Budget Act authorized spending of about $57.3 billion from the General Fund and
$14.7 billion from Special Funds. After enactment of the Budget Act, a number of
additional fiscal bills were enacted, but the Administration also raised its
estimate of revenues from the 1997-98 fiscal year.
As has been the case in the last several years, spending on K-14 education
increased significantly, by a total of $1.7 billion over revised 1997-98 levels.
Funding to support higher education was also increased significantly (more than
15% for the University of California and more than 14% for the California State
University system). The Budget included some increases in health and welfare
programs, including the first increase in the monthly welfare grant in nine
years.
One of the most important elements of the 1998-99 Budget Act was agreement
on $1.4 billion of tax cuts. The largest of these is a cut in the Vehicle
License Fee (an annual tax on the value of cars registered in the State, the
"VLF"). Starting in 1999, the VLF is reduced by 25%, and then increasing to
67.5%. Because VLF funds are automatically transferred to cities and counties,
the new legislation provides for the General Fund to make up the reductions in
VLF funds. If State General Fund revenues continue to grow above certain
targeted levels in future years, the cut could reach as much as 67.5% by the
year 2003. The initial 25% VLF cut will be
B-40
<PAGE> 94
offset by about $500 million in General Fund money in 1998-99, and $1 billion
annually for future years. Other tax cuts in 1998-99 include an increase in the
dependent exemption credit for personal income tax filers, restoration of a
renter's tax credit for individual taxpayers, and a variety of business tax
relief measures.
New projections for the balance of 1998-99 were released on May 14, 1999 as
part of the May Revision to the Governor's Proposed Budget for 1999-00 (the "May
Revision"). The May Revision revealed that the State's economy was much stronger
in late 1998 and into 1999 than the Administration had thought when it made its
first 1999-00 Budget Proposal in January 1999. As a result, the May Revision
updates 1998-99 General Fund revenues to be about $57.9 billion, almost $1
billion above the 1998-99 Budget Act, and $1.6 billion above the
Administration's January 1999 estimate. This increase is from personal income
taxes, reflecting stronger wage employment than previously estimated, and
extraordinary growth in capital gain realizations resulting from the stock
market's rise. The May Revision projects the SFEU will have a balance of almost
$1.9 billion at June 30, 1999.
Although the Administration projects a budget reserve in the SFEU of about
$1.9 billion on June 30, 1999, the General Fund balance on that date also
reflects $1.76 billion of "loans" which the General Fund made to local schools
in the recession years, representing cash outlays above the mandatory minimum
funding level. A July 1996 settlement of litigation over these transactions
calls for repayment of these loans over an eight-year period ending in 2001-02,
about equally split between outlays from the General Fund and from schools'
entitlements. The 1998-99 Budget Act contained a $250 million appropriation from
the General Fund toward this settlement.
FY 1999-00 BUDGET. The Governor's proposed 1999-00 Budget was released in
January 1999. The proposed budget projected somewhat lower General Fund revenues
for 1999-00 than earlier projections. The May Revision sharply increased the
revenue estimates, by over $2.7 billion, to a total of almost $63.0 billion,
which would represent a nine percent increase above 1998-99. The January
Governor's Budget proposed $60.5 billion of expenditures in 1999-00, with a $415
million SFEU reserve at June 30, 2000.
The 1999-00 Budget Act was the first State budget since 1993 to be signed
into law by the June 30 deadline. The 1999-00 Budget Act projects General Fund
reserves and transfers of almost $63 billion and General Fund expenditures of
$63.7 billion. The 1999-00 Budget Act projects a June 30, 2000 balance in the
SFEU of approximately $880 million.
The principal features of the 1999-00 Budget Act include:
- A $1.6 billion increase over revised 1998-99 levels in Proposition 98
funding for K-12 schools, which is $108.6 million higher than the minimum
Proposition 98 guarantee;
- A substantial increase above the actual 1998-99 level in funding for
higher education;
- Increased funding of almost $600 million for health and human services;
- $800 million in expenditures for infrastructure costs;
- An additional one-year reduction in the VLF, at a cost of about $500
million; and
- More than $200 million in appropriations to cities and counties.
Although the State's strong economy is producing record revenues to the
State government, the State's budget continues to be under stress from mandated
spending on education, a rising prison population, and social needs of a growing
population with many immigrants. These factors which limit State spending growth
also put pressure on local governments. There can be no assurances that, if
economic conditions weaken, or other factors intercede, the State will not
experience budget gaps in the future.
BOND RATINGS
The ratings on the State's long-term general obligation bonds were reduced
in the early 1990's from the "AAA" levels which existed prior to the recession.
Beginning in 1996, the three major rating agencies raised
B-41
<PAGE> 95
their ratings of the State's general obligation bonds, which as of September
1999 were assigned ratings of "AA-" from Standard & Poor's, "Aa3" from Moody's
and "AA-" from Fitch.
There can be no assurance that such ratings will be maintained in the
future. It should be noted that the creditworthiness of obligations issued by
local California issuers may be unrelated to the creditworthiness of obligations
issued by the State, and that there is no obligation on the part of the State to
make payment on such local obligations in the event of default.
LEGAL PROCEEDINGS
The State is involved in certain legal proceedings (described in the
State's recent financial statements) that, if decided against the State, may
require the State to make significant future expenditures or may substantially
impair revenues. Trial courts have recently entered tentative decisions or
injunctions which would overturn several parts of the State's recent budget
compromises. The matters covered by these lawsuits also include reductions in
welfare payments, the use of certain cigarette tax funds for health costs, and
the State's liability for property damage incurred in 1997 floods in Northern
California. All of these cases are subject to further proceedings and appeals,
and if the State eventually loses, the final remedies may not have to be
implemented in one year.
YEAR 2000 PREPARATIONS
The State and California local governments, along with all other public and
private institutions in the nation, face a major challenge to ensure that their
computer systems, including microchips embedded into existing machinery, will
not fail prior to or at January 1, 2000, which date may not be recognized
properly by software utilizing only two digits to identify a year. The State
Department of Information Technology ("DOIT"), created in 1995, coordinates
activities, provides technical assistance to State agencies and local
governments, and reports on the status of remediation efforts by over 100 State
departments and agencies.
In July 1999 DOIT reported that 97% of about 556 "mission critical"
information technology systems in State government had been remediated. The DOIT
estimates total Y2K costs identified by those departments under the DOIT's
supervision at about $357 million. This amount is part of much larger overall
information technology costs incurred annually by the State, including costs
incurred by certain independent State entities, such as the judiciary, the
Legislature, the University of California and the California State University
System. Moreover, the DOIT's cost estimates for "embedded systems" apply only to
the embedded systems posing the highest risk to essential programs. For fiscal
year 1999-00, the Legislature created a fund of $33.5 million ($13.5 million
from the General Fund) for unanticipated Y2K costs, which fund can be increased
if necessary.
In addition to hardware and software changes, State agencies are preparing
business contingency plans in case of computer problems at January 1, 2000, and
are actively coordinated with outside agencies, vendors, contractors and others
with whom computer data is shared. The State Treasurer (responsible for bond
payments) and State Controller (responsible for State fiscal controls) have
reported that the systems for bond payments and the State fiscal and accounting
system, respectively, were fully remediated by December 31, 1998, and that they
will complete the final steps of testing during 1999.
The State has expended, and plans to spend, many hundreds of millions of
dollars on year 2000 projects. There is no survey of local government costs or
the overall status of their activities, however. It is likely that larger
government agencies are better prepared at this time than smaller ones. Both the
State and local governments are preparing emergency plans for year 2000 computer
difficulties similar to their normal planning for nature emergencies, such as
floods or earthquakes.
While substantial progress has been made by the State toward Y2K
compliance, the task is quite large and will likely encounter some unexpected
difficulties. The State cannot guarantee that all "mission critical" systems
will be ready and tested by late 1999, or what the impact failure of any
particular information technology system(s) or of outside interfaces with
information technology systems might have.
B-42
<PAGE> 96
OBLIGATIONS OF OTHER ISSUERS
OTHER ISSUERS OF CALIFORNIA MUNICIPAL OBLIGATIONS. There are a number of
State agencies, instrumentalities and political subdivisions that issue
municipal obligations, some of which may be conduit revenue obligations that
derive payments from private borrowers. These entities are subject to various
economic risks and uncertainties, and the credit quality of the securities
issued by them may vary considerable from the credit quality of obligations
backed by the full faith and credit of the State.
STATE ASSISTANCE. Property tax revenues received by local governments
declined substantially following passage of Proposition 13. Subsequently, to
assist municipal issuers the California Legislature enacted measures to provide
for the redistribution of the State's General Fund surplus to local agencies,
the reallocation of certain State revenues to local agencies, and the assumption
of certain governmental functions by the State, including the principal
responsibility for funding K-12 schools and community colleges. During the
recession, the State caused local governments to transfer some of their property
tax revenues to school districts, representing the loss of the post-Proposition
13 "bailout" aid. (Litigation has been brought against the State challenging the
legality of these property tax revenues shifts.) Local governments have in
return received greater revenues and greater flexibility to operate health and
welfare programs. However, except for agreement in 1997 on a new program for the
State to substantially take over funding for local trial courts (saving cities
and counties some $400 million annually), there has been no large-scale reversal
of the property tax shift to help local governments.
The 1999-00 Budget Act includes a $150 million one-time subvention to local
agencies for relief from 1992 and 1993 property tax shifts. Legislation has been
passed, subject to voter approval in November 2000, to provide a more permanent
payment to local governments to offset the property tax shift. In addition, the
Governor has proposed a review and "accounting" of State-local fiscal
relationships, with the goal of ultimately restoring local government finances
to a fiscal condition equivalent to the period prior to the recession-induced
tax shifts.
To the extent the State is constrained by its Article XIII B appropriations
limit (described above), or its obligation to conform to Proposition 98, or
other fiscal considerations, the absolute level, or the rate of growth, of State
assistance to local governments may continue to be reduced. Any such reductions
in State aid could compound the serious fiscal constraints already experienced
by many local governments, particularly counties. Orange County, which emerged
from Federal Bankruptcy Court protection in June 1996, has significantly reduced
county services and personnel, and faces strict financial conditions following
large investment fund losses in 1994 which resulted in bankruptcy. As described
above, Article XIII B and Proposition 218 affect significantly the ability of
local governments to raise revenue.
Counties and cities may face further budgetary pressures as a result of
changes in welfare and public assistance programs, which were enacted in August
1997 in order to comply with the federal welfare reform law. Generally, counties
play a large role in the new system, and are given substantial flexibility to
develop and administer programs to bring aid recipients into the workforce.
Counties are also given financial incentives if either at the county or
statewide level, the "Welfare-to-Work" programs exceed minimum targets; counties
are also subject to financial penalties for failure to meet such targets.
Counties remain responsible to provide "general assistance" to certain persons
who cannot obtain welfare from other programs. The long-term financial impact of
the new welfare system on local governments is still unknown.
ASSESSMENT BONDS. California municipal obligations which are assessment
bonds may be adversely affected by a general decline in real estate values or a
slowdown in real estate sales activity. In many cases, such bonds are secured by
land which is undeveloped at the time of issuance but which is anticipated to be
developed within a few years after issuance. In the event of such reduction or
slowdown, such development may not occur or may be delayed, thereby increasing
the risk of a default on the bonds. Because the special assessments or taxes
securing these bonds are not the personal liability of the owners of the
property assessed, the lien on the property is the only security for the bonds.
Moreover, in most cases the issuer of these bonds is not required to make
payments on the bonds in the event of delinquency in the payment of assessments
or taxes, except from amounts, if any, in a reserve fund established for the
bonds.
B-43
<PAGE> 97
CALIFORNIA LONG-TERM LEASE OBLIGATIONS. Based on a series of court
decisions, certain long-term lease obligations, though typically payable from
the general fund of the State or a municipality, are not considered
"indebtedness" requiring voter approval. Such leases, however, are subject to
"abatement" in the event the facility being leased is unavailable for beneficial
use and occupancy by the municipality during the term of the lease. Abatement is
not a default, and there may be no remedies available to the holders of the
certificates evidencing the lease obligation in the event abatement occurs. The
most common causes of abatement are failure to complete construction of the
facility before the end of the period during which lease payments have been
capitalized and uninsured casualty losses to the facility (e.g., due to
earthquake). If abatement occurs with respect to a lease obligation, lease
payments may be interrupted (if all available insurance proceeds and reserves
are exhausted) and the certificates may not be paid when due. Although
litigation is brought from time to time challenging the constitutionality of
such lease arrangements, the California Supreme Court issued a ruling in August
1998 which reconfirmed the legality of these financing methods.
OTHER CONSIDERATIONS
The repayment of industrial development bonds and other securities secured
by real property may be affected by California laws limiting foreclosure rights
of creditors. Securities backed by health care and hospital revenues may be
affected by changes in State regulations governing cost reimbursements to health
care providers under Medi-Cal (the State's Medicaid program), including the
risks related to the policy of awarding exclusive contracts to certain
hospitals.
Limitations on ad valorem property taxes may particularly affect "tax
allocation" bonds issued by California redevelopment agencies. Such bonds are
secured solely by the increase in assessed valuation of a redevelopment project
area after the start of redevelopment activity. In the event that assessed
values in the redevelopment project decline (e.g., because of a major
earthquake), the tax increment revenue may be insufficient to make principal and
interest payments on these bonds. Both Moody's and S&P suspended ratings on
California tax allocation bonds after the enactment of Articles XIII A and XIII
B, and only resumed such ratings on a selective basis.
The effect of these various constitutional and statutory changes upon the
ability of California municipal securities issuers to pay interest and principal
on their obligations remains unclear. Furthermore, other measures affecting the
taxing or spending authority of California or its political subdivisions may be
approved or enacted in the future. Legislation has been or may be introduced
which would modify existing taxes or other revenue-raising measures or which
either would further limit or, alternatively, would increase the abilities of
the state and local governments to impose new taxes or increase existing taxes.
It is not possible, at present, to predict the extent to which any such
legislation will be enacted. Nor is it possible, at present, to determine the
impact of any such legislation on California municipal obligations in which the
Fund may invest, future allocations of state revenues to local governments or
the abilities of the State or local governments to pay the interest on, or repay
the principal of, such California municipal obligations.
Most of California is within an active geologic region subject to major
seismic activity. Northern California in 1989 and Southern California in 1994
experienced major earthquakes causing billions of dollars in damages. The
federal government provided more than $13 million in aid after these
earthquakes, and neither earthquake is expected to have any long-term negative
economic impact. The value of any California municipal obligation held by the
Fund could be affected by an interruption of revenues because of damaged
facilities, or, consequently, income tax deductions for casualty losses or
property tax assessment reductions. Compensatory financial assistance could be
constrained by the inability of (i) an issuer to have obtained earthquake
insurance coverage rates; (ii) an insurer to perform on its contracts of
insurance in the event of widespread losses; or (iii) the federal or State
government to appropriate sufficient funds within their respective budget
limitations.
CALIFORNIA TAX MATTERS
The following is based upon the advice of Heller Ehrman White & McAuliffe,
special California counsel to the Fund.
B-44
<PAGE> 98
The following is a general, abbreviated summary of certain provisions of
the applicable California State tax law as presently in effect as it directly
governs the taxation of Common Shareholders of the Fund who are either
California resident individuals or corporations subject to the California
franchise tax. This summary does not address the taxation of other shareholders
nor does it discuss any local taxes that may be applicable. These provisions are
subject to change by legislative or administrative action, and any such change
may be retroactive with respect to transactions of the Fund.
The following is based on the assumptions that the Fund will qualify under
Subchapter M of the Code as a regulated investment company, that it will satisfy
the conditions which will cause distributions of the Fund (to the extent derived
by the Fund from interest on California Municipal Obligations) to qualify as
exempt-interest dividends to shareholders for federal and California purposes,
and that it will distribute all interest and dividends it receives to the
shareholders.
The Fund will be subject to the California corporate franchise and
corporation income tax only if it has a sufficient nexus with California. If it
is subject to the California franchise or corporation income tax, the Fund does
not expect to pay a material amount of such tax.
If at the close of each quarter of the Fund's taxable year at least 50% of
the value of its total assets consists of obligations that, when held by an
individual, pay interest that is exempt under California or federal law from tax
by California, then distributions by the Fund that are attributable to interest
on any such obligation will not be subject to the California personal income
tax. All other distributions, including distributions attributable to dividends
and capital gains, will be includable in gross income for purposes of the
California personal income tax.
Interest on "private activity bonds" is not included in an individual's
income for purposes of the California alternative minimum tax. In addition,
California does not impose personal income tax on Social Security or Railroad
Retirement benefits.
Interest on indebtedness incurred or continued for the purpose of acquiring
or maintaining an investment in the Common Shares will not be deductible for
purposes of the California personal income tax.
All distributions of the Fund, regardless of source, to corporate Common
Shareholders that are subject to the California corporate franchise tax will be
included in gross income for purposes of such tax.
Gain on the sale, exchange, or other disposition of Common Shares will be
subject to the California personal income and corporate franchise tax. Any loss
realized by a holder of Common Shares upon the sale of shares held for six
months or less may be disallowed to the extent of any exempt interest dividends
received with respect to such shares. Moreover, any loss realized upon the sale
of Common Shares within 30 days before or after the acquisition of other Common
Shares (including through a distribution from the Fund) may be disallowed under
the "wash sale" rules.
Common Shareholders are advised to consult with their own tax advisers for
more detailed information concerning California tax matters.
B-45
<PAGE> 99
TAX RATE COMPARISONS
The table below gives the approximate yield a taxable security must earn at
various income brackets to produce after-tax yields equivalent to those of
tax-exempt bonds yielding from 4.75% to 5.50% under the Code and the California
state personal income tax law, applying tax rates applicable to individuals for
1999.
<TABLE>
<CAPTION>
TAX EXEMPT
COMBINED ---------------------------------------------
(TAXABLE INCOME*) FEDERAL AND 4.75% 5.00% 5.25% 5.50%
- ----------------------------------------- CA STATE --------- --------- --------- ---------
SINGLE RETURN JOINT RETURN TAX BRACKET IS EQUIVALENT TO A FULLY TAXABLE YIELD OF:
- ------------------- ------------------- ----------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 0 - $ 5,264 $ 0 - $ 10,528 15.85% 5.64% 5.94% 6.24% 6.54%
$ 5,265 - $ 12,477 $ 10,529 - $ 24,954 16.70% 5.70% 6.00% 6.30% 6.60%
$ 12,478 - $ 19,692 $ 24,955 - $ 39,384 18.40% 5.82% 6.13% 6.43% 6.74%
$ 19,693 - $ 25,750 $ 39,385 - $ 43,050 20.10% 5.94% 6.26% 6.57% 6.88%
$ 25,751 - $ 27,337 $ 43,051 - $ 54,674 32.32% 7.02% 7.39% 7.76% 8.13%
$ 27,338 - $ 34,548 $ 54,675 - $ 69,096 33.76% 7.17% 7.55% 7.93% 8.30%
$ 34,549 - $ 62,450 $ 69,097 - $104,050 34.70% 7.27% 7.66% 8.04% 8.42%
$ 62,451 - $130,250 $104,051 - $158,550 37.42% 7.59% 7.99% 8.39% 8.79%
$130,251 - $283,150 $158,551 - $283,150 41.95% 8.18% 8.61% 9.04% 9.47%
over $283,150 over $283,150 45.22% 8.67% 9.13% 9.58% 10.04%
</TABLE>
- ---------------
* Net amount subject to federal and California personal income tax after
deductions and exemptions.
The above-indicated federal income tax brackets do not take into account
the effect of a reduction in the deductibility of itemized deductions for
individual taxpayers with adjusted gross income in excess of $126,600. The tax
brackets also do not show the effects of phaseout of personal exemptions for
single filers with adjusted gross income in excess of $126,600 and joint filers
with adjusted gross income in excess of $189,950. The effective tax brackets and
equivalent taxable yields of those taxpayers will be higher than those indicated
above.
The combined tax brackets assume that California taxes are itemized
deductions for federal income tax purposes. Investors who do not itemize
deductions on their federal income tax return will have a higher combined
bracket and higher taxable equivalent yield than those indicated above. The
applicable federal tax rates within the brackets are 15%, 28%, 31%, 36% and
39.6%.
Yields shown are for illustration purposes only and are not meant to
represent the Trust's actual yield. No assurance can be given that the Trust
will achieve any specific tax-exempt yield. While it is expected that the Trust
will invest principally in obligations the interest from which is exempt from
the regular federal income tax and California state personal income taxes, other
income received by the Trust may be taxable. It should also be noted that the
interest earned on certain "private activity bonds," while exempt from the
regular federal income tax, is treated as a tax preference item which could
subject the recipient to the federal alternative minimum tax ("AMT"). The
illustrations assume that the AMT is not applicable and do not take into account
any tax credits that may be available.
The information set forth above is as of the date of this Statement of
Additional Information. Subsequent tax law changes could result in prospective
or retroactive changes in the tax brackets, tax rates, and tax equivalent yields
set forth above. Investors should consult their tax adviser for additional
information.
B-46
<PAGE> 100
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(1) Financial Statements:
Included in Part A
None
Included in Part B
Financial Statements
Report of Independent Accountants
(2) Exhibits
(a)(1) Agreement and Declaration of Trust(1)
(a)(2) Amendment No. 1 to the Agreement and Declaration of Trust
(b) By-Laws
(c) Not applicable
(d)(1) Portions of the Agreement and Declaration of Trust, as
amended, included as Exhibit (a)(1) and (a)(2), and the
By-Laws of the Registrant, included as Exhibit (b) (see
Article III, Sections 1, 2, 4 and 5; Article V; Article
VIII, Section 4; and Article IX, Sections 4 and 7 of the
Agreement and Declaration of Trust, as amended, and Sections
2, 7 and 8 of the By-Laws).
(d)(2) Form of specimen certificate for the common shares
(e) Dividend Reinvestment Plan
(f) Not applicable
(g) Management Agreement with Colonial Management Associates,
Inc.
(h) Form of Underwriting Agreement
(i) Not applicable
(j)(1) Global Custody Agreement with The Chase Manhattan Bank
(incorporated herein by reference to Item 24, Exhibit No. 8
to Post-Effective Amendment No. 13 to the Registration
Statement of Colonial Trust VI, Registration Nos. 33-45117 &
811-6529, filed with the Commission on or about October 24,
1997)
(j)(2) Amendment No. 8 to Schedule A of Global Custody Agreement
with The Chase Manhattan Bank
C-1
<PAGE> 101
(k)(1) Stock Transfer Agent Services Agreement between the
Registrant and BankBoston, N.A.
(k)(2) Pricing and Bookkeeping Agreement with Colonial Management
Associates, Inc.
(k)(3) Fee Waiver Agreement with Colonial Management
Associates, Inc.
(l) Opinion and Consent of Ropes & Gray, counsel to Registrant
(m) Not applicable
(n) Consent of independent accountants
(o) Not applicable
(p) Not applicable
(q) Not applicable
(r) Power of Attorney for each of Robert J. Birnbaum, Tom
Bleasdale, John V. Carberry, Lora S. Collins, James E.
Grinnell, Richard W. Lowry, Salvatore Macera, William E.
Mayer, James L. Moody, Jr., John J. Neuhauser, Thomas E.
Stitzel, Robert L. Sullivan and Anne-Lee Verville.
- ----------------------------------
(1) Incorporated by reference to the Registration Statement filed with the
Commission via EDGAR on or about August 11, 1999.
Item 25. Marketing Arrangements.
See Sections 5(m), 5(n), 6(v) and 11 of Exhibit (h) of Item 24(2) of
this Registration Statement.
Item 26. Other Expenses of Issuance and Distribution.
The following table sets forth the expenses to be incurred in
connection with the Offer described in this Registration Statement:
Registration fees $ 14,595
American Stock Exchange listing fee 11,000
Printing 60,000
Accounting fees and expenses 5,000
Legal fees and expenses 88,000
Underwriters expense reimbursement 75,000
NASD fee 5,850
Miscellaneous 25,000
--------
Total $284,445
========
Item 27. Persons Controlled by or under Common Control with Registrant.
None.
Item 28. Number of Holders of Securities
<TABLE>
<CAPTION>
Title of Class Number of Record Holders
-------------- ------------------------
<S> <C>
Common Shares of Beneficial Interest -1-
</TABLE>
Item 29. Indemnification.
The Agreement and Declaration of Trust, as amended, filed as Exhibit
(a)(1) and (a)(2) to this Registration Statement provides for
indemnification to each of the Registrant's Trustees and officers
against all liabilities and expenses incurred in acting
C-2
<PAGE> 102
as Trustee or officer, except in the case of wilful misfeasance,
bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of such Trustees and officers. The
Underwriting Agreement filed as Exhibit (h) to this Registration
Statement provides for indemnification by the Registrant and
Colonial Management Associates, Inc. (the "Advisor") of Salomon
Smith Barney Inc. (the "Underwriter") and its controlling
persons and by the Underwriter of the Registrant, the Advisor
and their respective Trustees, directors, officers and
controlling persons against certain liabilities, including
liabilities under the Securities Act of 1933, as amended, under
certain circumstances.
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to trustees, officers
and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred
or paid by a trustee, officer or controlling person of the
Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer or controlling
person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
The Registrant, Colonial Management Associates, Inc. and their
respective trustees, directors and officers are insured by a
directors and officers/errors and omissions liability policy.
C-3
<PAGE> 103
Item 30. Business and Other Connections of Investment Adviser
The description of the business of Colonial Management Associates,
Inc., the Registrant's Investment Adviser, is set forth under the
caption "The Advisor" in the Prospectus forming part of this
Registration Statement. The following sets forth business and other
connections of each director and officer of Colonial Management
Associates, Inc.
Registrant's investment adviser/administrator, Colonial Management Associates,
Inc. ("Colonial"), is registered as an investment adviser under the Investment
Advisers Act of 1940 ("Advisers Act"). Colonial Advisory Services, Inc.
("CASI"), an affiliate of Colonial, is also registered as an investment adviser
under the Advisers Act. As of the end of the fiscal year, December 31, 1998,
CASI had four institutional, corporate or other accounts under management
C-4
<PAGE> 104
or supervision, the market value of which was approximately $227 million. As of
the end of the fiscal year, December 31, 1998, Colonial was the investment
adviser, sub-adviser and/or administrator to 57 mutual funds, including funds
sub-advised by Colonial, the total market value of which investment companies
was approximately $18,950.90 million. Liberty Funds Distributor, Inc., a
subsidiary of Colonial Management Associates, Inc., is the principal underwriter
and the national distributor of all of the open-end funds in the Liberty Mutual
Funds complex.
The following sets forth the business and other connections of each director and
officer of Colonial Management Associates, Inc.:
<TABLE>
<CAPTION>
(1) (2) (3) (4)
Name and principal
business
addresses* Affiliation
of officers and with Period is through 06/30/99. Other
directors of investment business, profession, vocation or
investment adviser adviser employment connection Affiliation
- ------------------ ---------- -------------------------------- -----------
<S> <C> <C> <C>
Allard, Laurie V.P.
Archer, Joseph A. V.P.
Ballou, William J. V.P., Liberty Funds Trusts I through IX Asst. Sec.
Asst. Colonial High Income
Sec., Municipal Trust Asst. Sec.
Counsel Colonial InterMarket Income
Trust I Asst. Sec.
Colonial Intermediate High
</TABLE>
C-5
<PAGE> 105
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Income Fund Asst. Sec.
Colonial Investment Grade
Municipal Trust Asst. Sec.
Colonial Municipal Income
Trust Asst. Sec.
AlphaTrade Inc. Asst. Clerk
Liberty Funds Distributor,
Inc. Asst. Clerk
Liberty Financial Advisers,
Inc. Asst. Sec.
Liberty Funds Group LLC Asst. Sec.
Liberty Variable Investment
Trust Asst. Sec.
Liberty All-Star Equity Fund Asst. Sec.
Liberty All-Star Growth Fund,
Inc. Asst. Sec.
Barron, Suzan M. V.P., Liberty Funds Trusts I through IX Asst. Sec.
Asst. Colonial High Income
Sec., Municipal Trust Asst. Sec.
Counsel Colonial InterMarket Income
Trust I Asst. Sec.
Colonial Intermediate High
Income Fund Asst. Sec.
Colonial Investment Grade
Municipal Trust Asst. Sec.
Colonial Municipal Income
Trust Asst. Sec.
AlphaTrade Inc. Asst. Clerk
Liberty Funds Distributor,
Inc. Asst. Clerk
Liberty Financial Advisers,
Inc. Asst. Sec.
Liberty Funds Group LLC Asst. Sec.
Liberty Variable Investment
Trust Asst. Sec.
Liberty All-Star Equity Fund Asst. Sec.
Liberty All-Star Growth Fund,
Inc. Asst. Sec.
</TABLE>
C-6
<PAGE> 106
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Barsketis, Ophelia Sr.V.P. Stein Roe & Farnham Incorporated Snr. V.P.
Berliant, Allan V.P.
Bissonnette, Michael Sr.V.P.
Boatman, Bonny E. Sr.V.P.; Colonial Advisory Services,
IPC Mbr. Inc. Exec. V.P.
Stein Roe & Farnham Incorporated Exec. V.P.
Bunten, Walter V.P.
Campbell, Kimberly V.P.
Carnabucci,
Dominick V.P.
Carome, Kevin M. Sr.V.P.; Liberty Funds Distributor,
IPC Mbr. Inc. Assistant Clerk
Liberty Funds Group LLC Sr. V.P.; General
Stein Roe & Farnham Counsel
Incorporated General Counsel;
Secretary
Stein Roe Services, Inc. Asst. Clerk
Carroll, Sheila A. Sr.V.P.
Citrone, Frank, Jr. Sr.V.P.
Conlin, Nancy L. Sr. V.P.; Liberty Funds Trusts I through IX Secretary
Sec.; Clerk Colonial High Income
IPC Mbr.; Municipal Trust Secretary
Dir; Gen. Colonial InterMarket Income
Counsel Trust I Secretary
Colonial Intermediate High
Income Fund Secretary
Colonial Investment Grade
Municipal Trust Secretary
Colonial Municipal Income
Trust Secretary
Liberty Funds Distributor,
Inc. Dir.; Clerk
Liberty Funds Services, Inc. Clerk; Dir.
Liberty Funds Group LLC V.P.; Gen.
Counsel and
Secretary
Liberty Variable Investment
Trust Secretary
</TABLE>
C-7
<PAGE> 107
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Colonial Advisory Services,
Inc. Dir.; Clerk
AlphaTrade Inc. Dir.; Clerk
Liberty Financial Advisors,
Inc. Dir.; Sec.
Liberty All-Star Equity Fund Secretary
Liberty All-Star Growth Fund,
Inc. Secretary
Connaughton, V.P. Liberty Funds Trusts I through VIII CAO; Controller
J. Kevin Liberty Variable Investment
Trust CAO; Controller
Colonial High Income
Municipal Trust CAO; Controller
Colonial Intermarket Income
Trust I CAO; Controller
Colonial Intermediate High
Income Fund CAO; Controller
Colonial Investment Grade
Municipal Trust CAO; Controller
Colonial Municipal Income
Trust CAO; Controller
Liberty All-Star Equity Fund Controller
Liberty All-Star Growth Fund,
Inc. Controller
Liberty Trust IX Controller
Daniszewski, V.P.
Joseph J.
Dearborn, James V.P.
Desilets, Marian H. V.P. Liberty Funds Distributor,
Inc. V.P.
Liberty Funds Trusts I through IX Asst. Sec.
Colonial High Income
Municipal Trust Asst. Sec.
Colonial Intermarket Income
Trust I Asst. Sec.
Colonial Intermediate High
Income Fund Asst. Sec.
Colonial Investment Grade
</TABLE>
C-8
<PAGE> 108
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Municipal Trust Asst. Sec.
Colonial Municipal Income
Trust Asst. Sec.
Liberty Variable Investment
Trust Asst. Sec.
Liberty All-Star Equity Fund Asst. Sec.
Liberty All-Star Growth Fund,
Inc. Asst. Sec.
DiSilva-Begley, V.P. Colonial Advisory Services, Compliance
Linda IPC Mbr. Inc. Officer
Eckelman, Marilyn Sr.V.P.
Ericson, Carl C. Sr.V.P. Colonial Intermediate High
IPC Mbr. Income Fund V.P.
Colonial Advisory Services, Pres.; CEO
Inc. and CIO
Evans, C. Frazier Sr.V.P. Liberty Funds Distributor,
Inc. Mng. Director
Feloney, Joseph L. V.P. Colonial Advisory Services,
Asst. Treas. Inc. Asst. Treas.
Liberty Funds Group LLC Asst. Treas.
Finnemore, Sr.V.P. Colonial Advisory Services,
Leslie W. Inc. Sr. V.P.
Franklin, Sr. V.P. AlphaTrade Inc. President
Fred J. IPC Mbr. Liberty Financial Companies, Chief
Inc. Compliance
Officer; V.P.
Garrison,
William M. V.P. Stein Roe & Farnham
Incorporated V.P.
Gibson, Stephen E. Dir.; Pres.; Liberty Funds Group LLC Dir.;
CEO; Pres.; CEO;
Chairman of Exec. Cmte.
the Board; Mbr.; Chm.
IPC Mbr. Liberty Funds Distributor,
Inc. Dir.; Chm.
Colonial Advisory Services,
Inc. Dir.; Chm.
</TABLE>
C-9
<PAGE> 109
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Liberty Funds Services, Inc. Dir.; Chm.
AlphaTrade Inc. Dir.
Liberty Funds Trusts I
through VIII President
Colonial High Income
Municipal Trust President
Colonial InterMarket Income
Trust I President
Colonial Intermediate High
Income Fund President
Colonial Investment Grade
Municipal Trust President
Colonial Municipal Income
Trust President
Liberty Financial Advisors,
Inc. Director
Stein Roe & Farnham
Incorporated Asst. Chairman;
Exec. V.P.
Liberty Variable Investment
Trust President
Hansen, Loren Sr. V.P.;
IPC Mbr.
Harasimowicz, V.P.
Stephen
Hartford, Brian Sr.V.P.
Haynie, James P. Sr.V.P. Colonial Advisory Services,
Inc. Sr. V.P.
Stein Roe & Farnham
Incorporated Sr. V.P.
Held, Dorothy V.P.
Hernon, Mary V.P.
Hounsell, Clare F. V.P. Stein Roe & Farnham
Incorporated V.P.
Iudice, V.P.; Liberty Funds Group LLC Controller,
Philip J., Jr. Controller CAO, Asst.
</TABLE>
C-10
<PAGE> 110
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Asst. Treas.
Treasurer Liberty Funds Distributor, CFO,
Inc. Treasurer
Colonial Advisory Services, Controller;
Inc. Asst. Treas.
AlphaTrade Inc. CFO, Treas.
Liberty Financial Advisors,
Inc. Asst. Treas.
Jacoby, Timothy J. Sr. V.P.; Liberty Funds Group LLC V.P., Treasr.,
CFO; CFO
Treasurer Liberty Funds Trusts I
through VIII Treasr.,CFO
Colonial High Income
Municipal Trust Treasr.,CFO
Colonial InterMarket Income
Trust I Treasr.,CFO
Colonial Intermediate High
Income Fund Treasr.,CFO
Colonial Investment Grade
Municipal Trust Treasr.,CFO
Colonial Municipal Income
Trust Treasr.,CFO
Colonial Advisory Services,
Inc. CFO, Treasr.
Liberty Financial Advisors,
Inc. Treasurer
Stein Roe & Farnham
Incorporated Snr. V.P.
Liberty Variable Investment
Trust Treasurer, CFO
Liberty All-Star Equity Fund Treasurer
Liberty All-Star Growth Fund,
Inc. Treasurer
Liberty Funds Trust IX Treasurer
Jansen, Deborah Sr.V.P. Stein Roe & Farnham
Incorporated Sr. V.P.
Jersild, North T. V.P. Stein Roe & Farnham
Incorporated V.P.
</TABLE>
C-11
<PAGE> 111
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Johnson, Gordon V.P.
Knudsen, Gail E. V.P. Liberty Funds Trusts I
through IX Asst. Treas.
Colonial High Income
Municipal Trust Asst. Treas.
Colonial InterMarket Income
Trust I Asst. Treas.
Colonial Intermediate High
Income Fund Asst. Treas.
Colonial Investment Grade
Municipal Trust Asst. Treas.
Colonial Municipal Income
Trust Asst. Treas.
Liberty Variable Investment
Trust Asst. Treas.
Liberty All-Star Equity Fund Asst. Treas.
Liberty All-Star Growth Fund,
Inc. Asst. Treas.
Lapointe, Thomas V.P.
Lasman, Gary V.P.
Lennon, John E. Sr.V.P. Colonial Advisory Services,
Inc. V.P.
Lenzi, Sharon V.P.
Lessard, Kristen V.P.
Loring, William
C., Jr. Sr.V.P.
MacKinnon,
Donald S. Sr.V.P.
Marcus, Harold V.P.
Muldoon, Robert V.P.
Newman, Maureen Sr.V.P.
O'Brien, David Sr.V.P.
Ostrander, Laura Sr.V.P. Colonial Advisory Services,
Inc. V.P.
Palombo, Joseph R. Dir.; Colonial Advisory Services,
Exe.V.P.; Inc. Dir.
IPC Mbr.; Colonial High Income
</TABLE>
C-12
<PAGE> 112
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Municipal Trust V.P.
Colonial InterMarket
Income Trust I V.P.
Colonial Intermediate High
Income Fund V.P.
Colonial Investment Grade
Municipal Trust V.P.
Colonial Municipal Income
Trust V.P.
Liberty Funds Trusts I through IX V.P.
Liberty Funds Services, Inc. Director
Liberty Funds Group LLC CAO; Ex. V.P.
Liberty Funds Distributor,
Inc. Director
AlphaTrade Inc. Director
Liberty Financial Advisors,
Inc. Director
Stein Roe & Farnham
Incorporated Exec. V.P.
Liberty Variable Investment
Trust V.P.
Liberty All-Star Equity Fund V.P.
Liberty All-Star Growth Fund,
Inc. V.P.
Peishoff, William V.P.
Peterson, Ann T. V.P. Colonial Advisory Services,
Inc. V.P
Pielech, Mitchell V.P.
Pope, David V.P.
Reading, John V.P.; Liberty Funds Services, Inc. Asst. Clerk
Asst. Liberty Funds Group LLC Asst. Sec.
Sec.; Colonial Advisory Services,
Asst. Inc. Asst. Clerk
Clerk and Liberty Funds Distributor,
Counsel Inc. Asst. Clerk
AlphaTrade Inc. Asst. Clerk
Liberty Funds Trusts I through IX Asst. Sec.
Colonial High Income
Municipal Trust Asst. Sec.
Colonial InterMarket Income
Trust I Asst. Sec.
</TABLE>
C-13
<PAGE> 113
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Colonial Intermediate High
Income Fund Asst. Sec.
Colonial Investment Grade
Municipal Trust Asst. Sec.
Colonial Municipal Income
Trust Asst. Sec.
Liberty Financial Advisors,
Inc. Asst. Sec.
Liberty Variable Investment
Trust Asst. Sec.
Liberty All-Star Equity Fund Asst. Sec.
Liberty All-Star Growth Fund,
Inc. Asst. Sec.
Rega, Michael V.P. Colonial Advisory Services, Inc. V.P.
Richards, Scott B. Sr.V.P. Colonial Advisory Services, Inc. Senior V.P.
Schermerhorn, Scott Sr. V.P.
Seibel, Sandra L. V.P. Colonial Advisory Services, Inc. V.P.
Shields, Yvonne B. V.P. Stein Roe & Farnham
Incorporated V.P.
Smalley, Gregg V.P.
Spanos, Gregory J. Sr. V.P. Colonial Advisory Services, Inc. Exec. V.P.
Stevens, Richard V.P. Colonial Advisory Services, Inc. V.P.
Stoeckle, Mark Sr.V.P. Colonial Advisory Services, Inc. V.P.
Swayze, Gary Sr.V.P.
Thomas, Ronald V.P.
Turcotte,
Frederick J. V.P. Liberty Funds Services, Inc. V.P.
Liberty Funds Distributor, Inc. V.P.
Colonial Advisory Services, Inc. V.P.
AlphaTrade Inc. V.P.
Liberty Funds Group LLC V.P.
Liberty Financial Services, Inc. V.P.
Liberty Financial Companies, Inc. V.P. and
Managing Dir.
of Taxation
LREG, Inc. V.P.
Liberty Newport Holdings, Limited V.P.
Newport Pacific Management, Inc. V.P.
Newport Fund Management, Inc. V.P.
Newport Private Equity Asia, Inc. V.P.
Independent Holdings, Inc. V.P.
IFS Agencies, Inc. V.P.
IFMG Agencies of Maine, Inc. V.P.
IFMG Agencies of Oklahoma, Inc. V.P.
IFS Agencies of Alabama, Inc. V.P.
IFS Agencies of New Mexico, Inc. V.P.
IFS Insurance Agencies of Ohio, Inc. V.P.
IFS Insurance Agencies of Texas, Inc. V.P.
Liberty Securities Corporation V.P.
Stein Roe Services, Inc. V.P.
Stein Roe & Farnham Incorporated V.P.
Stein Roe Futures, Inc. V.P.
Progress Investment Management
Company V.P.
Crabbe Huson Group, Inc. V.P.
Wallace, John R. V.P. Colonial Advisory Services,
Asst.Treas. Inc. Asst. Treas.
Liberty Funds Group LLC Asst. Treas.
Ware, Elizabeth M. V.P.
Wiley, Christine V.P.
</TABLE>
C-14
<PAGE> 114
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Wiley, Peter V.P.
</TABLE>
- -----------------------------------------------
*The Principal address of all of the officers and directors of the investment
adviser is One Financial Center, Boston, MA 02111.
Item 31. Location of Accounts and Records
Registrant: Colonial California Insured Municipal Fund
One Financial Center
Boston, Massachusetts 02111-2621
Investment Advisor: Colonial Management Associates, Inc.
One Financial Center
Boston, Massachusetts 02111-2621
Custodian: The Chase Manhattan Bank
270 Park Avenue
New York, New York 10017-2070
Transfer Agent: EquiServe
150 Royall Street
Canton, Massachusetts 02021
Item 32. Management Services
Not Applicable
Item 33. Undertakings
The Registrant hereby undertakes:
(1) To suspend the offering of its common shares of beneficial
interest until it amends its prospectus if (i) subsequent to the
effective date of this Registration Statement, the net asset
value per share of beneficial interest declines more than 10
percent from its net asset value per share of beneficial
interest as of the effective date of this Registration Statement
or, (ii) its net asset value per share of beneficial interest
increases to an amount greater than its net proceeds as stated in
the prospectus contained herein.
(2) Not Applicable
(3) Not Applicable
(4) Not Applicable
(5) (a) That for the purpose of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as a part of this Registration Statement in
reliance upon Rule 430A and contained in a form of prospectus
filed by the Registrant under Rule 497(h) under the Securities Act
of 1933 shall be deemed to be part of this Registration Statement
as of the time it was declared effective; and
(b) That for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein,
and the offering of the securities at that time shall be deemed to
be the initial bona fide offering thereof.
(6) To send by first class mail or other means designed to ensure
equally prompt delivery, within two business days of receipt of a
written or oral request, any Statement of Additional Information.
C-15
<PAGE> 115
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, the Registrant has duly caused this
Amendment to its Registration Statement on Form N-2 to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Boston and the
Commonwealth of Massachusetts on the 26th day of October, 1999.
COLONIAL CALIFORNIA INSURED MUNICIPAL FUND
By: /s/ STEPHEN E. GIBSON
---------------------
Stephen E. Gibson
President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in their capacities and
on the date indicated.
SIGNATURES TITLE DATE
- ---------- ----- ----
/s/ STEPHEN E. GIBSON President (chief October 26, 1999
- ---------------------- executive officer)
Stephen E. Gibson
/s/ J. KEVIN CONNAUGHTON Controller and Chief October 26, 1999
- ------------------------ Accounting Officer
J. Kevin Connaughton
/s/ TIMOTHY J. JACOBY Treasurer and Chief October 26, 1999
- ------------------------ Financial Officer
Timothy J. Jacoby
C-16
<PAGE> 116
<TABLE>
<S> <C> <C>
ROBERT J. BIRNBAUM* Trustee
- -------------------
Robert J. Birnbaum
TOM BLEASDALE* Trustee
- --------------
Tom Bleasdale
JOHN CARBERRY* Trustee
- --------------
John Carberry
LORA S. COLLINS* Trustee
- ----------------
Lora S. Collins
JAMES E. GRINNELL* Trustee
- ------------------
James E. Grinnell
RICHARD W. LOWRY* Trustee By:*/s/ WILLIAM J. BALLOU
- ----------------- --------------------------
Richard W. Lowry William J. Ballou
Attorney-in-fact
For each Trustee
October 26, 1999
SALVATORE MACERA* Trustee
- -----------------
Salvatore Macera
WILLIAM E. MAYER* Trustee
- -----------------
William E. Mayer
JAMES L. MOODY, JR.* Trustee
- ---------------------
James L. Moody, Jr.
JOHN J. NEUHAUSER* Trustee
- ------------------
John J. Neuhauser
THOMAS E. STITZEL* Trustee
- ------------------
Thomas E. Stitzel
ROBERT L. SULLIVAN* Trustee
- -------------------
Robert L. Sullivan
ANNE-LEE VERVILLE* Trustee
- ------------------
Anne-Lee Verville
</TABLE>
C-17
<PAGE> 117
EXHIBIT INDEX
(a)(2) Amendment No. 1 to the Agreement and Declaration of Trust
(b) By-Laws
(d)(2) Form of specimen certificate for the common shares
(e) Dividend Reinvestment Plan
(g) Management Agreement with Colonial Management Associates, Inc.
(h) Form of Underwriting Agreement
(j)(2) Amendment No. 8 to Schedule A of Global Custody Agreement with The
Chase Manhattan Bank
(k)(1) Stock Transfer Agent Services Agreement between the Registrant and
BankBoston, N.A.
(k)(2) Pricing and Bookkeeping Agreement with Colonial Management Associates,
Inc.
(k)(3) Fee Waiver Agreement with Colonial Management
Associates, Inc.
(l) Opinion and Consent of Ropes & Gray, counsel to Registrant
(n) Consent of independent accountants
(r) Power of attorney
-5-
<PAGE> 1
Exhibit (a)(2)
AMENDMENT NO. 1
TO THE
AGREEMENT AND DECLARATION OF TRUST
OF
PREMIER CALIFORNIA MUNICIPAL INCOME FUND
WHEREAS, Section 1 of Article 1 of the Agreement and Declaration of Trust
(the "Declaration of Trust") dated August 10, 1999 of Premier California
Municipal Income Fund (the "Trust"), a copy of which is on file in the Office of
the Secretary of The Commonwealth of Massachusetts authorizes the Trustees of
the Trust to amend the Declaration of Trust to change the name of the Trust
without authorization by vote of shareholders of the Trust.
I, being the sole Trustee of Premier California Municipal Income Fund, do
hereby certify that the undersigned has determined to conduct the business of
the Trust under the name "Colonial California Insured Municipal Fund" and has
authorized the following amendment to said Declaration of Trust:
Section 1 of Article 1 is hereby amended to read in its entirety as
follows:
SECTION 1. This Trust shall be known as "Colonial California Insured
Municipal Fund" and the Trustees shall conduct the business of the Trust under
that name or any other name as they may from time to time determine.
The foregoing Amendment shall become effective as of August 16, 1999.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand in the City
of Boston, Massachusetts, for himself and his assigns, as of this August 16,
1999.
/s/ John V. Carberry
-----------------------------------
John V. Carberry
Commonwealth of Massachusetts )
)ss.
County of Suffolk )
Then personally appeared the above-named Trustee and executed Amendment No.
1 to the Agreement and Declaration of Trust of Premier California Municipal
Income Fund as his free act and deed, before me, this August 16, 1999.
/s/ Mary P. Mahoney
-----------------------------------
Notary Public
My Commission Expires: 2/22/2002
------------
<PAGE> 1
Exhibit (b)
BY-LAWS
OF
COLONIAL CALIFORNIA INSURED MUNICIPAL FUND
SECTION 1
AGREEMENT AND DECLARATION OF TRUST AND PRINCIPAL OFFICE
1.1 AGREEMENT AND DECLARATION OF TRUST. These By-Laws shall be subject to
the Agreement and Declaration of Trust, as from time to time in effect (the
"Declaration of Trust"), of Colonial California Insured Municipal Fund (the
"Trust"), a Massachusetts business trust established by the Declaration of Trust
of the Trust.
1.2 PRINCIPAL OFFICE OF THE TRUST. The principal office of the Trust shall
be located in Boston, Massachusetts.
SECTION 2
SHAREHOLDERS
2.1 SHAREHOLDER MEETINGS. The annual meeting of the shareholders of the
Trust shall be held between April 1 and May 31 in each year, beginning in 2000,
on a date and at a time within that period set by the Trustees. A special
meeting of the shareholders of the Trust may be called at any time by the
Trustees, by the president or, if the Trustees and the president shall fail to
call any meeting of shareholders for a period of 30 days after written
application of one or more shareholders who hold at least 10% of all outstanding
shares of the Trust, then such shareholders may call such meeting. Each call of
a meeting shall state the place, date, hour and purposes of the meeting.
2.2 PLACE OF MEETINGS. All meetings of the shareholders shall be held at
the principal office of the Trust, or, to the extent permitted by the
Declaration of Trust, at such other place within the United States as shall be
designated by the Trustees or the president of the Trust.
2.3 NOTICE OF MEETINGS. A written notice of each meeting of shareholders,
stating the place, date and hour and the purposes of the meeting, shall be given
at least seven days before the meeting to each shareholder entitled to vote
thereat by leaving such notice with him or at his residence or usual place of
business or by mailing it, postage prepaid, and addressed to such shareholder at
his address as it appears in the records of the Trust. Such notice shall be
given by the secretary or an assistant secretary or by an officer designated by
the Trustees. No notice of any meeting of shareholders need be given to a
shareholder if a written waiver of notice, executed before or after the meeting
by such shareholder or his attorney thereunto duly authorized, is filed with the
records of the meeting.
<PAGE> 2
2.4 BALLOTS. No ballot shall be required for any election unless requested
by a shareholder present or represented at the meeting and entitled to vote in
the election.
2.5 PROXIES. Shareholders entitled to vote may vote either in person or by
proxy in writing dated no more than six months before the meeting named therein,
which proxies shall be filed with the secretary or other person responsible to
record the proceedings of the meeting before being voted. Unless otherwise
specifically limited by their terms, such proxies shall entitle the holders
thereof to vote at any adjournment of such meeting but shall not be valid after
the final adjournment of such meeting. The placing of a shareholder's name on a
proxy pursuant to telephonic or electronically transmitted instructions obtained
pursuant to procedures reasonably designed to verify that such instructions have
been authorized by such shareholder shall constitute execution of such proxy by
or on behalf of such shareholder.
SECTION 3
TRUSTEES
3.1 COMMITTEES AND ADVISORY BOARD. The Trustees may appoint from their
number an executive committee and other committees. Except as the Trustees may
otherwise determine, any such committee may make rules for the conduct of its
business. The Trustees may appoint an advisory board to consist of not less than
two nor more than five members. The members of the advisory board shall be
compensated in such manner as the Trustees may determine and shall confer with
and advise the Trustees regarding the investments and other affairs of the
Trust. Each member of the advisory board shall hold office until the first
meeting of the Trustees following the next meeting of the shareholders and until
his successor is elected and qualified, or until he sooner dies, resigns, is
removed, or becomes disqualified, or until the advisory board is sooner
abolished by the Trustees.
In addition, the Trustees may appoint a dividend committee of not less than
three persons, at least one of whom shall be a Trustee of the Trust.
No special compensation shall be payable to members of the Dividend
Committee. Each member of the Dividend Committee will hold office until his or
her successor is elected and qualified or until the member dies, resigns, is
removed, becomes disqualified or until the Committee is abolished by the
Trustees.
3.2 REGULAR MEETINGS. Regular meetings of the Trustees may be held without
call or notice at such places and at such times as the Trustees may from time to
time determine, provided that notice of the first regular meeting following any
such determination shall be given to absent Trustees.
3.3 SPECIAL MEETINGS. Special meetings of the Trustees may be held at any
time and at any place designated in the call of the meeting, when called by the
president or the treasurer or
-2-
<PAGE> 3
by two or more Trustees, sufficient notice thereof being given to each Trustee
by the secretary or an assistant secretary or by the officer or one of the
Trustees calling the meeting.
3.4 NOTICE. It shall be sufficient notice of a special meeting to a
Trustee to send notice by mail at least forty-eight hours or by telegram or
telecopier at least twenty-four hours before the meeting addressed to the
Trustee at his or her usual or last known business or residence address or to
give notice to him or her in person or by telephone at least twenty-four hours
before the meeting. Notice of a meeting need not be given to any Trustee if a
written waiver of notice, executed by him or her before or after the meeting, is
filed with the records of the meeting, or to any Trustee who attends the meeting
without protesting prior thereto or at its commencement the lack of notice to
him or her. Neither notice of a meeting nor a waiver of a notice need specify
the purposes of the meeting.
3.5 QUORUM. At any meeting of the Trustees one-third of the Trustees then
in office shall constitute a quorum; provided, however, a quorum shall not be
less than two unless the number of Trustees then in office shall be one. Any
meeting may be adjourned from time to time by a majority of the votes cast upon
the question, whether or not a quorum is present, and the meeting may be held as
adjourned without further notice.
SECTION 4
OFFICERS AND AGENTS
4.1 ENUMERATION; QUALIFICATION. The officers of the Trust shall be a
president, a treasurer, a secretary and such other officers, if any, as the
Trustees from time to time may in their discretion elect or appoint or as the
elected officers may appoint pursuant to section 4.3 of these By-Laws. The Trust
may also have such agents, if any, as the Trustees from time to time may in
their discretion appoint. Any officer may be, but none need be, a Trustee or
shareholder. Any two or more offices may be held by the same person.
4.2 POWERS. Subject to the other provisions of these By-Laws, each officer
shall have, in addition to the duties and powers herein and in the Declaration
of Trust set forth, such duties and powers as are commonly incident to his or
her office as if the Trust were organized as a Massachusetts business
corporation and such other duties and powers as the Trustees may from time to
time designate, including without limitation the power to make purchases and
sales of portfolio securities of the Trust pursuant to recommendations of the
Trust's investment adviser in accordance with the policies and objectives of the
Trust set forth in its prospectus and with such general or specific instructions
as the Trustees may from time to time have issued.
4.3 ELECTION. The president, the treasurer and the secretary shall be
elected annually by the Trustees at their first meeting following the annual
meeting of the shareholders. Other elected officers, if any, may be elected or
appointed by the Trustees at said meeting or at any other time. Assistant
officers may be appointed by the elected officers.
-3-
<PAGE> 4
4.4 TENURE. The president, the treasurer and the secretary shall hold
office until their respective successors are chosen and qualified, or in each
case until he or she sooner dies, resigns, is removed or becomes disqualified.
Each other officer shall hold office at the pleasure of the Trustees. Each agent
shall retain his or her authority at the pleasure of the Trustees.
4.5 PRESIDENT AND VICE PRESIDENTS. The president shall be the chief
executive officer of the Trust. The president shall preside at all meetings of
the shareholders and of the Trustees at which he or she is present, except as
otherwise voted by the Trustees. Any vice president shall have such duties and
powers as shall be designated from time to time by the Trustees.
4.6 TREASURER AND CONTROLLER. The treasurer shall be the chief financial
officer of the Trust and, subject to any arrangement made by the Trustees with a
bank or trust company or other organization as custodian or transfer or
shareholder services agent, shall be in charge of its valuable papers and shall
have such duties and powers as shall be designated from time to time by the
Trustees or by the president. Any assistant treasurer shall have such duties and
powers as shall be designated from time to time by the Trustees.
The Controller shall be the chief accounting officer of the Trust and shall
be in charge of its books of account and accounting records. The Controller
shall be responsible for preparation of financial statements of the Trust and
shall have such other duties and powers as may be designated from time to time
by the Trustees or the President.
4.7 SECRETARY AND ASSISTANT SECRETARIES. The secretary shall record all
proceedings of the shareholders and the Trustees in books to be kept therefor,
which books shall be kept at the principal office of the Trust. In the absence
of the secretary from any meeting of shareholders of trustees, an assistant
secretary, or if there be none or he or she is absent, a temporary clerk chosen
at the meeting shall record the proceedings thereof in the aforesaid books.
SECTION 5
RESIGNATIONS AND REMOVALS
Any Trustee, officer or advisory board member may resign at any time by
delivering his or her resignation in writing to the president, the treasurer or
the secretary or to a meeting of the Trustees. The Trustees may remove any
officer elected by them with or without cause by the vote of a majority of the
Trustees then in office. Except to the extent expressly provided in a written
agreement with the Trust, no Trustee, officer, or advisory board member
resigning, and no officer or advisory board member removed, shall have any right
to any compensation for any period following his or her resignation or removal,
nor any right to damages on account of such removal.
-4-
<PAGE> 5
SECTION 6
VACANCIES
A vacancy in any office may be filled at any time. Each successor shall
hold office for the unexpired term, and in the case of the president, the
treasurer and the secretary, until his or her successor is chosen and qualified,
or in each case until he or she sooner dies, resigns, is removed or becomes
disqualified.
SECTION 7
SHARES OF BENEFICIAL INTEREST
7.1 SHARE CERTIFICATES. Each shareholder shall be entitled to a
certificate stating the number of shares owned by him or her, in such form as
shall be prescribed from time to time by the Trustees. Such certificate shall be
signed by the president or a vice president and by the treasurer or an assistant
treasurer. Such signatures may be facsimiles if the certificate is signed by a
transfer agent or by a registrar who is not a Trustee, officer or employee of
the Trust. In case any officer who has signed or whose facsimile signature has
been placed on such certificate shall have ceased to be such officer before such
certificate is issued, it may be issued by the Trust with the same effect as if
he or she were such officer at the time of its issue.
In lieu of issuing certificates for shares, the Trustees or the transfer
agent may either issue receipts therefor or may keep accounts upon the books of
the Trust for the record holders of such shares, who shall in either case be
deemed, for all purposes hereunder, to be the holders of certificates for such
shares as if they had accepted such certificates and shall be held to have
expressly assented and agreed to the terms hereof.
7.2 LOSS OF CERTIFICATES. In the case of the alleged loss or destruction
or the mutilation of a share certificate, a duplicate certificate may be issued
in place thereof, upon such terms as the Trustee may prescribe.
7.3 DISCONTINUANCE OF ISSUANCE OF CERTIFICATES. The Trustees may at any
time discontinue the issuance of share certificates and may, be written notice
to each shareholder, require the surrender of share certificates to the Trust
for cancellation. Such surrender and cancellation shall not affect the ownership
of shares in the Trust.
SECTION 8
RECORD DATE AND CLOSING TRANSFER BOOKS
The Trustees may fix in advance a time, which shall not be more than 90
days before the date of any meeting of shareholders or the date for the payment
of any dividend or making of any other distribution to shareholders, as the
record date for determining the shareholders having the right to notice and to
vote at such meeting and any adjournment thereof or the right to receive
-5-
<PAGE> 6
such dividend or distribution, and in such case only shareholders of record on
such record date shall have such right, notwithstanding any transfer of shares
on the books of the Trust after the record date; or without fixing such record
date the Trustees may for any of such purposes close the transfer books for all
or any part of such period.
SECTION 9
SEAL
The seal of the Trust shall, subject to alteration by the Trustees, consist
of a flat-faced circular die with the word "Massachusetts" together with the
name of the Trust and the year of its organization, cut or engraved thereon;
but, unless otherwise required by the Trustees, the seal shall not be necessary
to be placed on, and its absence shall not impair the validity of, any document,
instrument or other paper executed and delivered by or on behalf of the Trust.
SECTION 10
EXECUTION OF PAPERS
Except as the Trustees may generally or in particular cases authorize the
execution thereof in some other manner, all deeds, leases, transfers, contracts,
bonds, notes, checks, drafts and other obligations made, accepted or endorsed by
the Trust shall be signed, and all transfers of securities standing in the name
of the Trust shall be executed, by the president or by one of the vice
presidents or by the treasurer or by whomsoever else shall be designated for
that purpose by the vote of the Trustees and need not bear the seal of the
Trust.
SECTION 11
FISCAL YEAR
Except as from time to time otherwise provided by the Trustees, the fiscal
year of the Trust shall end on November 30.
SECTION 12
AMENDMENTS
These By-Laws may be amended or replaced, in whole or in part, by a
majority of the Trustees then in office at any meeting of the Trustees, or by
one or more writings signed by such a majority.
-6-
<PAGE> 1
Exhibit (d)(2)
NUMBER SHARES
T
TEMPORARY CERTIFICATE - Exchangeable for Definitive
Engraved Certificate When Ready for Delivery.
COLONIAL CALIFORNIA INSURED MUNICIPAL FUND
SHARE CERTIFICATE
THIS CERTIFICATE IS TRANSFERABLE IN BOSTON, MA OR NEW YORK, NY
SHARE(S) OF BENEFICIAL INTEREST CUSIP 195598 10 7
NO PAR VALUE SEE REVERSE FOR CERTAIN DEFINITIONS
THIS CERTIFIES that
is the owner of
COLONIAL CALIFORNIA INSURED MUNICIPAL FUND, the said shares being issued,
received and held under and subject to the terms and provisions of the Agreement
and Declaration of Trust dated August 10, 1999, establishing Colonial California
Insured Municipal Fund, and all amendments thereto, copies of which are on file
with the Secretary of the Commonwealth of Massachusetts. The said owner by
accepting this certificate agrees to and is bound by all of the said terms and
provisions. The shares represented hereby are transferable in writing by the
owner thereof in person or by attorney upon surrender of this certificate to the
Fund properly endorsed for transfer. This certificate is executed on behalf of
the Trustees of the Fund as Trustees and not individually and the obligations
hereof are not binding upon any of the Trustees, officers or shareholders of the
Trust individually but are binding only upon the assets and property of the
Trust. This certificate is not valid until countersigned and registered by the
Transfer Agent and Registrar.
WITNESS the facsimile seal of the Trust and the facsimile signatures of its duly
authorized officers.
Dated:
[SEAL] /s/ Timothy J. Jacoby /s/ Stephen E. Gibson
Treasurer President
Countersigned and Registered:
BankBoston, N.A.
Transfer Agent
and Registrar,
By
Authorized Signature.
<PAGE> 2
EXPLANATION OF ABBREVIATIONS
The following abbreviations when used in the form of ownership on the face
of this certificate shall be construed as though they were written out in full
according to applicable laws or regulations. Abbreviations in addition to those
appearing below, may be used.
<TABLE>
<CAPTION>
Abbreviation Equivalent Abbreviation Equivalent
- ------------ ---------- ------------ ----------
<S> <C> <C> <C>
JT TEN As joint tenants, with right of TEN IN COM As tenants in common
survivorship and not as tenants in TEN BY ENT As tenants by the entireties
common UNIF TRANSFERS MIN ACT Uniform Transfers to Minors
</TABLE>
<TABLE>
<CAPTION>
Abbreviation Equivalent Abbreviation Equivalent
- ------------ ---------- ------------ ----------
<S> <C> <C> <C>
ADM Administrator(s) FDN Foundation
Administratrix PL Public Law
AGMT Agreement TR (As) trustee(s), for, of
CUST Custodian for UA Under Agreement
EST Estate, Of estate of UW Under will of, Of will of,
EX Executor(s), Executrix Under last will & Testament
FBO For the benefit of
</TABLE>
- --------------------------------------------------------------------------------
TRANSFER FOR
FOR VALUE RECEIVED, ______________________ hereby sell, assign and transfer unto
(I/We)
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------------------------------------------------
________________________________________________________________________________
Please print or typewrite name and address (including postal zip code of
assignee)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
represented by this Certificate and do hereby irrevocably constitute and appoint
______________________________________________________________________ Attorney,
to transfer said shares on the books of the Fund with full power of substitution
in the premises.
Dated: ________________________________________
SIGNATURE GUARANTEED BY Signature(s)____________________________
(The signature to this assignment must
correspond with the name as written upon
the face of this Certificate in every
particular, without alteration or
enlargement or any change whatsoever. If
more then one owner, all must sign).
____________________________________
(Signature must be guaranteed by a
commercial bank or trust company or
member firm of any national stock
exchange).
IMPORTANT NOTICE:
When you sign your name to the Transfer Form without filling in the name of
your "Assignee" this certificate becomes fully negotiable, similar to a check
endorsed in blank. Therefore, to safeguard a signed certificate, it is
recommended that you fill in the name of the new owner in the "Assignee" space.
Alternatively, instead of using this Transfer Form, you may sign a separate
"stock power" form and then mail the unsigned certificate and the signed "stock
power" in separate envelopes. For added protection, use registered mail for a
certificate.
<PAGE> 1
Exhibit (e)
COLONIAL INSURED MUNICIPAL FUND
COLONIAL CALIFORNIA INSURED MUNICIPAL FUND
COLONIAL NEW YORK INSURED MUNICIPAL FUND
TERMS AND CONDITIONS OF DIVIDEND REINVESTMENT PLAN
1) You, The First National Bank of Boston, will act as Agent for me, and will
open an account for me under the Dividend Reinvestment Plan with the same
registration as my shares of Fund are currently registered. You will effect
the dividend reinvestment option on my behalf as of the first record date
for an income dividend or capital gain distribution ("distribution"),
separately or collectively, after you receive the Authorization duly
executed by me.
2) Whenever the Fund declares a distribution payable in the Fund's shares of
beneficial interest ("shares") or cash at the option of the shareholder, I
hereby elect to take such distribution entirely in shares, subject to the
terms of this Plan. If on the valuation date the Fund's net asset value per
share is less than the market price (including estimated brokerage
commissions), you shall on the payable date automatically receive for my
account from the Fund that number of newly-issued shares that the cash
otherwise receivable by me would purchase if the purchase price per share
equaled the higher of: (a) net asset value per share on the valuation date,
or (b) 95% of market price (not including estimated brokerage commission)
on the payable date; except if the market price (not including estimated
brokerage commissions) on the payable date is less than 95% of the net
asset value per share on the valuation date, you shall receive a
distribution of cash from the Fund and shall apply the amount of such
distribution to the purchase in the open market of shares of my account,
commencing on the business day after the payable date, subject to the
condition that such purchases must be made at a "discount" during the
remainder of the "buying period." "Discount" is defined as a market price
per share (including estimated brokerage commissions) which is lower than
the most recently determined net asset value per share (as calculated from
time to time). "Buying period" shall mean the period commencing the first
business day after the valuation date and ending at the close of business
on the business day preceding the "ex" date for the next distribution. The
valuation date will be the last business day of the week preceding the week
of the payable date.
3) Should the Fund's net asset value per share exceed the market price
(including estimated brokerage commissions) on the valuation date for a
distribution, you shall receive for my account a distribution in cash from
the Fund and shall apply the amount of such distribution on my shares to
the purchase in the open market of shares for my account commencing on the
first business day after the valuation date, subject to the condition that
such purchases must be made at a discount during the buying period.
4) In the event you are instructed to purchase shares in the open market
pursuant to paragraph 2 or 3 hereof, and you are unable for any reason to
invest the full amount of the distribution in shares acquired in
open-market purchases at a discount during the buying period, you will
invest the uninvested portion of such distribution in newly-issued shares
at the close of business at the end of such buying period at the higher of:
(a) net asset value determined at such close, and (b) 95% of the market
price (not including estimated brokerage commissions) at such close.
<PAGE> 2
5) You may not acquire newly-issued shares after the valuation date unless you
have received a legal opinion that registration of such shares is not
required under the Securities Act of 1993, as amended, or unless the shares
to be issued are registered under such Act.
6) For all purposes of the Plan: (a) the market price of the shares on a
particular date shall be the last sales price on the New York Stock
Exchange on that date, or if there is no sale on such Exchange on that
date, then the mean between the closing bid and asked quotations for such
shares on such Exchange on such date (in either case including or not
including estimated brokerage commissions as provided above) and (b) net
asset value per share of the shares on a particular date shall be as
determined by or on behalf of the Fund.
7) Open-market purchases provided for above may be made on any securities
exchange where the shares are traded, in the over-the-counter market or in
negotiated transactions and may be on such terms as to price, delivery and
otherwise as you shall determine. My cash funds held by you uninvested will
not bear interest, and it is understood that, in any event, you shall have
no liability in connection with any inability to purchase shares within 30
days after the initial date of such purchase as herein provided, or with
the timing of any purchases effected. You shall have no responsibility as
to the value of the shares acquired for my account. For the purposes of
open-market purchases with respect to the Plan you may commingle my funds
with those of other shareholders of the Fund for whom you similarly act as
Agent, and the average price (including brokerage commissions) of all
shares purchased by you as Agent shall be the price per share allocated to
me in connection therewith.
8) You may hold my shares acquired pursuant to my authorization, together with
the shares of other shareholders of the Fund acquired pursuant to similar
authorizations, in non-certificate form in your name or that of you
nominee. You will forward to me any proxy solicitation material and will
vote any shares so held for me only in accordance with the proxy returned
by me to the Fund. Upon my written request, you will deliver to me, without
charge, a certificate or certificates for the full shares.
9) You will confirm to me each investment made for my account as soon as
practicable but not later than 60 days after the date thereof. Although I
may from time to time have an undivided fractional interest (computed to
four decimal places) in a share, no certificates for a fractional share
will be issued. However, distributions on fractional shares will be
credited to my account. In the event of termination of my account under the
Plan, you will sell such undivided fractional interests at the market value
of the shares at the time of termination and send the net proceeds to me.
10) Any stock dividends or split shares distributed by the Fund on shares held
by you for me will be credited to my account. In the event that the Fund
makes available to its shareholders rights to purchase additional shares or
other securities, the shares held for me under the Plan will be added to
other shares held by me in calculating the number of rights to be issued to
me.
11) Your fee for service described in this Plan will be paid by the Fund. I
will be charged a pro rata share of brokerage commission on all open-market
purchases
12) I may terminate my account under the Plan by notifying you in writing. Such
termination will be effective immediately if my notice is received by you
prior to any subsequent distribution. The Plan may be terminated by you or
the Fund upon notice in writing mailed to me at least 30 days prior to any
record date for the payment of any distribution of the Fund. Upon any
<PAGE> 3
termination you will cause a certificate or certificates for the full
shares held for me under the Plan and the proceeds from the sales of any
fractional shares to be delivered to me without charge. If I elect by
notice to you in writing in advance of such termination to have you sell
part or all of my shares and remit the proceeds to me, you are authorized
to deduct brokerage commission for this transaction from the proceeds.
If I decide to terminate my account under the Plan, I may request that all
my Plan shares, both full and fractional, be sold. The per share price may
fall during the period between my request for sale and the sale in the open
market which will be made within ten trading days after the Agent receives
my request. The proceeds of the sale less a $2.50 service fee, plus any
brokerage commission will be mailed to me after the settlement of funds
from the brokerage firm. The settlement is five business days after the
sale of shares
13) These Terms and Conditions may be amended or supplemented by you or the
Fund at any time or times but, except when necessary or appropriate to
comply with applicable law or the rules or policies of Securities and
Exchange Commission or any other regulatory authority, only by mailing to
me appropriate written notice at least 30 days prior to the effective date
thereof. The amendment or supplement shall be deemed to be accepted by me
unless, prior to the effective date thereof, you receive written notice of
the termination of my account under the Plan. Any such amendment may
include an appointment by you in your place and stead of successor Agent
under these Terms and Conditions, with full power and authority to perform
all or any of the acts to be performed by the Agent under these Terms and
Conditions. Upon any such appointment of any Agent for the purpose of
receiving distributions, the Fund will be authorized to pay to such
successor Agent, for my account, all distributions payable on shares held
in my name or under the Plan for retention or application by such successor
Agent as provided in these Terms and Conditions.
14) You shall at all times act in good faith and agree to use your best efforts
within reasonable limits to insure the accuracy of all services performed
under this Agreement and to comply with applicable law, but assume no
responsibility and shall not be liable for loss or damage due to errors
unless such error is caused by your negligence, bad faith, or willful
misconduct or that of your employees.
15) These Terms and Conditions shall be governed by the laws of the
Commonwealth of Massachusetts.
<PAGE> 1
Exhibit (g)
MANAGEMENT AGREEMENT
AGREEMENT dated as of October 25, 1999, between COLONIAL CALIFORNIA INSURED
MUNICIPAL FUND, a Massachusetts business trust (Fund), and COLONIAL MANAGEMENT
ASSOCIATES, INC., a Massachusetts corporation (Advisor).
In consideration of the promises and covenants herein, the parties agree as
follows:
1. The Advisor will manage the investment of the assets of the Fund in
accordance with its investment policies and will perform the other
services herein set forth, subject to the supervision of the Board of
Trustees of the Fund.
2. In carrying out its investment management obligations, the Advisor
shall:
(a) evaluate such economic, statistical and financial information and
undertake such investment research as it shall believe advisable; (b)
purchase and sell securities and other investments for the Fund in
accordance with the procedures approved by the Board of Trustees; and
(c) report results to the Board of Trustees.
3. The Advisor shall furnish at its expense the following:
(a) office space, supplies, facilities and equipment; (b) executive and
other personnel for managing the affairs of the Fund (including
preparing financial information of the Fund and reports and tax returns
required to be filed with public authorities, but exclusive of those
related to custodial, transfer, dividend and plan agency services,
determination of net asset value and maintenance of records required by
Section 31(a) of the Investment Company Act of 1940, as amended, and the
rules thereunder (1940 Act)); and (c) compensation of Trustees who are
directors, officers, partners or employees of the Advisor or its
affiliated persons (other than a registered investment company).
4. The Advisor shall be free to render similar services to others so long
as its services hereunder are not impaired thereby.
5. The Fund shall pay the Advisor monthly a fee at the annual rate of 0.65%
of the average weekly net assets of the Fund.
6. If the operating expenses of the Fund for any fiscal year exceed the
most restrictive applicable expense limitation for any state in which
shares are sold, the Advisor's fee shall be reduced by the
Page 1
<PAGE> 2
excess but not to less than zero.
Operating expenses shall not include brokerage, interest, taxes,
deferred organization expenses and extraordinary expenses, if any. The
Advisor may waive its compensation (and, bear expenses of the Fund) to
the extent that expenses of the Fund exceed any expense limitation the
Advisor declares to be effective.
7. This Agreement shall become effective as of the date of its execution,
and
(a) unless otherwise terminated, shall continue until two years from its
date of execution and from year to year thereafter so long as approved
annually in accordance with the 1940 Act; (b) may be terminated without
penalty on sixty days' written notice to the Advisor either by vote of
the Board of Trustees of the Fund or by vote of a majority of the
outstanding voting securities of the Fund; (c) shall automatically
terminate in the event of its assignment; and (d) may be terminated
without penalty by the Advisor on sixty days' written notice to the
Fund.
8. This Agreement may be amended in accordance with the 1940 Act.
9. For the purpose of the Agreement, the terms "vote of a majority of the
outstanding voting securities", "affiliated person" and "assignment"
shall have their respective meanings defined in the 1940 Act and
exemptions and interpretations issued by the Securities and Exchange
Commission under the 1940 Act.
Page 2
<PAGE> 3
10. In the absence of willful misfeasance, bad faith or gross negligence on
the part of the Advisor, or reckless disregard of its obligations and
duties hereunder, the Advisor shall not be subject to any liability to
the Fund, to any shareholder of the Fund or to any other person, firm or
organization, for any act or omission in the course of, or connected
with, rendering services hereunder.
COLONIAL CALIFORNIA INSURED MUNICIPAL FUND
By: /s/ J. Kevin Connaughton
--------------------------------------
Title: Controller
-----------------------------
COLONIAL MANAGEMENT ASSOCIATES, INC.
By: /s/ Nancy L. Conlin
--------------------------------------
Title: Senior Vice President
-------------------------------
A copy of the document establishing the Fund is filed with the Secretary of The
Commonwealth of Massachusetts. This Agreement is executed by officers not as
individuals and is not binding upon any of the Trustees, officers or
shareholders of the Fund individually but only upon the assets of the Fund.
Page 3
<PAGE> 1
Exhibit (h)
COLONIAL CALIFORNIA INSURED MUNICIPAL FUND
_________ Shares
Common Shares of Beneficial Interest
UNDERWRITING AGREEMENT
October __, 1999
SALOMON SMITH BARNEY INC.
[ ]
As Representatives of the
several Underwriters listed in
Schedule I hereto
c/o SALOMON SMITH BARNEY INC.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
Colonial California Insured Municipal Fund, a Massachusetts
business trust (the "Trust"), proposes, upon the terms and conditions set forth
herein, to issue and sell an aggregate of ______ shares (the "Firm Shares") of
its common shares of beneficial interest, no par value per share (the "Common
Shares"). The Trust also proposes to grant to the Underwriters (as defined
below), upon the terms and subject to the conditions set forth herein, an option
to purchase up to _________ additional shares (the "Option Shares" and together
with the Firm Shares, the "Shares") of its Common Shares. The Shares will be
authorized by, and subject to the terms and conditions of, the Agreement and
Declaration of Trust of the Trust, as amended (the "Declaration"), in the form
filed as an exhibit to the Registration Statement referred to in Section 1 of
this agreement. The Trust and its investment adviser, Colonial Management
Associates, Inc. ("CMA" or the "Advisor"), wish to confirm as follows their
agreement with Salomon Smith Barney Inc. [and [ ]] (the "Representatives"),
as representatives of the several Underwriters listed in Schedule I hereto (the
"Underwriters"), in connection with the purchase of the Shares by the
Underwriters.
Collectively, the Management Agreement dated as of _____, 1999
between the Trust and CMA (the "Management Agreement"), the Custodian Agreement
dated as of August 17, 1997 between the Trust and The Chase Manhattan Bank (the
"Custodian Agreement"), and the [Transfer Agency and Dividend Paying Agency
Agreement] dated as of _____, 1999 between
<PAGE> 2
2
the Trust and ______ (the "Transfer Agency Agreement") are hereinafter referred
to as the "Trust Agreements." This Underwriting Agreement is hereinafter
referred to as the "Agreement."
1. Registration Statement and Prospectus. The Trust has prepared in
conformity with the provisions of the Securities Act of 1933, as amended (the
"1933 Act"), the Investment Company Act of 1940, as amended (the "1940 Act"),
and the rules and regulations of the Securities and Exchange Commission (the
"Commission") promulgated under the 1933 Act (the "1933 Act Rules and
Regulations") and the 1940 Act (the "1940 Act Rules and Regulations" and,
together with the 1933 Act Rules and Regulations, the "Rules and Regulations") a
registration statement on Form N-2, as amended (File Nos. 333-84993 and
811-09537), under the 1933 Act and the 1940 Act (the "registration
statement"), including a prospectus relating to the Shares, and has filed the
registration statement and prospectus in accordance with the 1933 Act and the
1940 Act. The Trust also has filed a notification of registration of the Trust
as an investment company under the 1940 Act on Form N-8A (the "1940 Act
Notification"). The term "Registration Statement" as used in this Agreement
means the registration statement (including all financial schedules and
exhibits), as amended at the time it becomes effective under the 1933 Act or, if
the registration statement became effective under the 1933 Act prior to the
execution of this Agreement, as amended or supplemented at the time it became
effective, prior to the execution of this Agreement. If it is contemplated, at
the time this Agreement is executed, that a post-effective amendment to the
registration statement will be filed under the 1933 Act and must be declared
effective before the offering of the Shares may commence, the term "Registration
Statement" as used in this Agreement means the registration statement as amended
by said post-effective amendment. If the Trust has filed an abbreviated
registration statement to register an additional amount of Shares pursuant to
Rule 462(b) under the 1933 Act (the "Rule 462 Registration Statement"), then any
reference herein to the term "Registration Statement" shall include such Rule
462 Registration Statement. The term "Prospectus" as used in this Agreement
means the prospectus and statement of additional information in the forms
included in the Registration Statement or, if the prospectus and statement of
additional information included in the Registration Statement omit information
in reliance on Rule 430A under the 1933 Act Rules and Regulations and such
information is included in a prospectus and statement of additional information
filed with the Commission pursuant to Rule 497(h) under the 1933 Act, the term
"Prospectus" as used in this Agreement means the prospectus and statement of
additional information in the forms included in the Registration Statement as
supplemented by the addition of the information contained in the prospectus
filed with the Commission pursuant to Rule 497(h). The term "Prepricing
Prospectus" as used in this Agreement means the prospectus and statement of
additional information subject to completion in the forms included in the
registration statement at the time of filing of amendment no. 2 to the
registration statement with the Commission on September 27, 1999, and as such
prospectus and statement of additional information shall have been amended from
time to time prior to the date of the Prospectus, together with any other
prospectus and statement of additional information relating to the Trust other
than the Prospectus approved in writing by or directly or indirectly prepared by
the Trust or the Advisor; it being understood that the definition of Prepricing
Prospectus above shall not include any Prepricing Prospectus prepared by the
Underwriters unless approved in writing by the Trust or the Advisor. The terms
<PAGE> 3
3
"Registration Statement," "Prospectus" and "Prepricing Prospectus" shall also
include any financial statements and other information incorporated by reference
therein.
The Trust has furnished you with copies of such registration
statement, each amendment to such registration statement filed with the
Commission and each Prepricing Prospectus.
2. Agreements to Sell and Purchase. (a) The Trust hereby agrees,
subject to all the terms and conditions set forth herein, to issue and sell to
the Underwriters and, upon the basis of the representations, warranties and
agreements of the Trust and the Advisor herein contained and subject to all the
terms and conditions set forth herein, each Underwriter agrees severally and not
jointly to purchase from the Trust, at a purchase price of $_______ per share,
the number of Firm Shares set forth opposite the name of such Underwriter in
Schedule I hereto.
(b) The Trust also agrees, subject to all the terms and conditions
set forth herein, to sell to the Underwriters, and, upon the basis of the
representations, warranties and agreements of the Trust herein contained and
subject to all the terms and conditions set forth herein, the Underwriters shall
have the right to purchase from the Trust, at the same purchase price per share
as the Underwriters shall pay for the Firm Shares, pursuant to an option (the
"over-allotment option") which may be exercised at any time and from time to
time prior to 9:00 P.M., New York City time, on the 45th day after the date of
the Prospectus (or, if such 45th day shall be a Saturday or Sunday or a holiday,
on the next business day thereafter when the New York Stock Exchange is open for
trading), up to an aggregate of _______ Option Shares. Option Shares may be
purchased only for the purpose of covering over-allotments made in connection
with the offering of the Firm Shares. Upon any exercise of the over-allotment
option, each Underwriter, severally and not jointly, agrees to purchase from the
Trust the number of Option Shares (subject to such adjustments as you may
determine in order to avoid fractional shares) which bears the same proportion
to the number of Option Shares to be purchased by the Underwriters as the number
of Firm Shares set forth opposite the name of such Underwriter in Schedule I
hereto (or such number of Firm Shares increased as set forth in Section 11
hereof) bears to the aggregate number of Firm Shares.
(c) The Trust also agrees, subject to all the terms and conditions
set forth herein, to sell to the Advisor, and, upon the basis of the
representations, warranties and agreements of the Trust herein contained and
subject to all the terms and conditions set forth herein, the Advisor shall have
the right to purchase from the Trust, at the same purchase price per share as
the Underwriters shall pay for the Option Shares, pursuant to an option (the
"Advisor Option") which may be exercised at any time and from time to time prior
to 9:00 P.M., New York City time, on the 45th day after the date of the
Prospectus (or, if such 45th day shall be a Saturday or Sunday or a holiday, on
the next business day thereafter when the New York Stock Exchange is open for
trading), up to an aggregate of _____ shares of beneficial interest of the Trust
(the "Advisor Shares").
3. Terms of Public Offering. The Trust and the Advisor have been
advised by you that the Underwriters propose to make a public offering of their
respective Shares as soon
<PAGE> 4
4
after the Registration Statement and this Agreement have become effective as in
your judgment is advisable and initially to offer the Shares upon the terms set
forth in the Prospectus.
4. Delivery of the Shares and Payment Therefor. Delivery to the
Underwriters of and payment for the Firm Shares and the Option Shares (if the
option provided for in Section 2(b) hereof shall have been exercised on or
before the third business day prior to the Closing Date (as defined below))
shall be made at the office of Simpson Thacher & Bartlett, 425 Lexington Avenue,
New York, NY 10017, at 9:30 A.M., New York City time, on ________ __, 1999 (the
"Closing Date"). The place of closing for the Firm Shares and the Closing Date
may be varied by agreement between you and the Trust.
Delivery to the Underwriters of and payment for any Option Shares to
be purchased by the Underwriters shall be made at the aforementioned office of
Simpson Thacher & Bartlett at such time on such date (the "Option Closing
Date"), which may be the same as the Closing Date but shall in no event be
earlier than the Closing Date nor earlier than two nor later than ten business
days after the giving of the notice hereinafter referred to, as shall be
specified in a written notice from you on behalf of the Underwriters to the
Trust of the Underwriters' determination to purchase a number, specified in such
notice, of Option Shares. The place of closing for any Option Shares and the
Option Closing Date for such Shares may be varied by agreement between you and
the Trust.
The place and time for the closing of the Advisor Shares shall be as
agreed upon by the Advisor and the Trust, except that the date of such closing
for the Advisor Shares shall in no event be earlier than the Closing Date.
Certificates for the Firm Shares and for any Option Shares to be
purchased hereunder shall be registered in such names and in such denominations
as you shall request prior to 9:30 A.M., New York City time, on the second
business day preceding the Closing Date or any Option Closing Date, as the case
may be. Such certificates shall be made available to you in New York City for
inspection and packaging not later than 9:30 A.M., New York City time, on the
business day next preceding the Closing Date or the Option Closing Date, as the
case may be. The certificates evidencing the Firm Shares and any Option Shares
to be purchased hereunder shall be delivered to you on the Closing Date or the
Option Closing Date, as the case may be, through the facilities of The
Depository Trust Company, against payment of the purchase price therefor in
immediately available funds.
5. Agreements of the Trust and the Advisor. The Trust and the
Advisor, jointly and severally, agree with the several Underwriters as follows:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the Registration Statement or a post-effective amendment thereto
to be declared effective under the 1933 Act before the offering of the Shares
may commence, the Trust will endeavor to cause the Registration Statement or
such post-effective amendment to become effective under the 1933 Act as soon as
possible and will advise you promptly and, if requested by you, will confirm
such
<PAGE> 5
5
advice in writing when the Registration Statement or such post-effective
amendment has become effective.
(b) The Trust will advise you promptly and, if requested by you,
will confirm such advice in writing: (i) of any request made by the Commission
for amendment of or a supplement to the Registration Statement, any Prepricing
Prospectus or the Prospectus (or any amendment or supplement to any of the
foregoing) or for additional information, (ii) of the issuance by the
Commission, the National Association of Securities Dealers, Inc. (the "NASD"),
any state securities commission, any national securities exchange, any
arbitrator, any court or any other governmental, regulatory, self-regulatory or
administrative agency or any official of any order suspending the effectiveness
of the Registration Statement, prohibiting or suspending the use of the
Prospectus or any Prepricing Prospectus, or any sales material (as hereinafter
defined), of any notice pursuant to Section 8(e) of the 1940 Act, of the
suspension of qualification of the Shares for offering or sale in any
jurisdiction, or the initiation of any proceeding for any such purposes, (iii)
of receipt by the Trust, the Advisor, any affiliate of the Trust or the Advisor
or any representative or attorney of the Trust or the Advisor of any other
material communication from the Commission, the NASD, any state securities
commission, any national securities exchange, any arbitrator, any court or any
other governmental, regulatory, self-regulatory or administrative agency or any
official relating to the Trust (if such communication relating to the Trust is
received by such person within three years after the date of this Agreement),
the Registration Statement, the 1940 Act Notification, the Prospectus, any
Prepricing Prospectus, any sales material (as herein defined) (or any amendment
or supplement to any of the foregoing) or this Agreement or any of the Trust
Agreements and (iv) within the period of time referred to in paragraph (f)
below, of any material adverse change in the condition (financial or other),
business, prospects, properties, net assets or results of operations of the
Trust or the Advisor or of the happening of any other event which makes any
statement of a material fact made in the Registration Statement or the
Prospectus, or any Prepricing Prospectus or any sales materials (as herein
defined) (or any amendment or supplement to any of the foregoing) untrue or
which requires the making of any additions to or changes in the Registration
Statement or the Prospectus, or any Prepricing Prospectus or any sales materials
(as herein defined) (or any amendment or supplement to any of the foregoing) in
order to state a material fact required by the 1933 Act, the 1940 Act or the
Rules and Regulations to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading, or of the necessity to amend or supplement the Registration
Statement, the Prospectus, or any Prepricing Prospectus or any sales material
(as herein defined) (or any amendment or supplement to any of the foregoing) to
comply with the 1933 Act, the 1940 Act, the Rules and Regulations or any other
law or order of any court or regulatory body. If at any time the Commission, the
NASD, any state securities commission, any national securities exchange, any
arbitrator, any court or any other governmental, regulatory, self-regulatory or
administrative agency or any official shall issue any order suspending the
effectiveness of the Registration Statement, prohibiting or suspending the use
of the Prospectus or any sales material (as herein defined) (or any amendment or
supplement to any of the foregoing) or suspending the qualification of the
Shares for offering or sale in any jurisdiction, the Trust will make every
reasonable effort to obtain the withdrawal of such order at the earliest
possible time.
<PAGE> 6
6
(c) The Trust will furnish to you, without charge, three signed
copies of the Registration Statement as originally filed with the Commission and
of each amendment thereto, including financial statements and all exhibits
thereto, and will also furnish to you, without charge, such number of conformed
copies of the Registration Statement as originally filed and of each amendment
thereto, but without exhibits, as you may request.
(d) The Trust will not (i) file any amendment to the Registration
Statement or make any amendment or supplement to the Prospectus, or any sales
material (as herein defined), of which you shall not previously have been
advised or to which you shall reasonably object after being so advised or (ii)
so long as, in the opinion of counsel for the Underwriters, a Prospectus is
required by the 1933 Act to be delivered in connection with sales by any
Underwriter or any dealer, file any information, documents or reports pursuant
to the Securities Exchange Act of 1934, as amended (the "1934 Act"), without
delivering a copy of such information, documents or reports to you, as
Representatives of the several Underwriters, prior to or concurrently with such
filing.
(e) Prior to the execution and delivery of this Agreement, the Trust
has delivered to you, without charge, in such quantities as you have requested,
copies of each form of the Prepricing Prospectus. The Trust consents to the use,
in accordance with the provisions of the 1933 Act and with the state securities
or blue sky laws of the jurisdictions in which the Shares are offered by the
several Underwriters and by dealers, prior to the date of the Prospectus, of
each Prepricing Prospectus so furnished by the Trust.
(f) As soon after the execution and delivery of this Agreement as
possible and thereafter from time to time for such period as in the opinion of
counsel for the Underwriters a prospectus is required by the 1933 Act to be
delivered in connection with sales by any Underwriter or any dealer, the Trust
will expeditiously deliver to each Underwriter and each dealer, without charge,
as many copies of the Prospectus (and of any amendment or supplement thereto) as
you may reasonably request. The Trust consents to the use of the Prospectus (and
of any amendment or supplement thereto) in accordance with the provisions of the
1933 Act and with the state securities or blue sky laws of the jurisdictions in
which the Shares are offered by the several Underwriters and by all dealers to
whom Shares may be sold, both in connection with the offering and sale of the
Shares and for such period of time thereafter as the Prospectus is required by
the 1933 Act to be delivered in connection with sales by any Underwriter or any
dealer. If during such period of time any event shall occur that in the judgment
of the Trust or in the opinion of counsel for the Underwriters is required to be
set forth in the Registration Statement or the Prospectus (as then amended or
supplemented) or should be set forth therein in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, or if it is necessary to supplement or amend the Registration
Statement or the Prospectus to comply with the 1933 Act, the 1940 Act, the Rules
and Regulations or any other federal law, rule or regulation, or any state
securities or blue sky disclosure laws, rules or regulations, the Trust will
forthwith prepare and, subject to the provisions of paragraph (d) above,
promptly file with the Commission an appropriate supplement or amendment
thereto, and will expeditiously furnish to the Underwriters and dealers, without
charge, a reasonable number of copies thereof; provided that, if the supplement
or amendment is required exclusively as a
<PAGE> 7
7
result of a misstatement in or omission from the information provided to the
Trust in writing by the Underwriters expressly for use in the Prospectus, the
Trust may deliver such supplement or amendment to the Underwriters and dealers
at a reasonable charge not to exceed the actual cost thereof to the Trust. In
the event that the Trust and you, as Representatives of the several
Underwriters, agree that the Registration Statement or the Prospectus should be
amended or supplemented, the Trust, if requested by you, will promptly issue a
press release announcing or disclosing the matters to be covered by the proposed
amendment or supplement.
(g) The Trust will cooperate with you and with counsel for the
Underwriters in connection with the registration or qualification of the Shares
for offering and sale by the several Underwriters and by dealers under the
securities or blue sky laws of such jurisdictions as you may designate and will
file such consents to service of process or other documents necessary or
appropriate in order to effect such registration or qualification; provided that
in no event shall the Trust be obligated to qualify to do business or as a
dealer in securities in any jurisdiction where it is not now so qualified or to
take any action which would subject it to service of process in suits, other
than those arising out of the offering or sale of the Shares, in any
jurisdiction where it is not now so subject nor will the Trust be obligated to
execute a general consent to service of process.
(h) The Trust will make generally available to its security holders
an earnings statement, which need not be audited, covering a twelve-month period
ending not later than 15 months after the effective date of the Registration
Statement as soon as practicable after the end of such period, which earnings
statement shall satisfy the provisions of Section 11(a) of the 1933 Act and Rule
158 of the 1933 Act Rules and Regulations.
(i) During the period of five years hereafter, the Trust will
furnish to you (i) as soon as available, a copy of each report of the Trust
mailed to shareholders or filed with the Commission or furnished to the American
Stock Exchange (the "AMEX") other than reports on Form N-SAR, and (ii) from time
to time such other information concerning the Trust as you may reasonably
request.
(j) If this Agreement shall terminate or shall be terminated after
execution pursuant to any provisions hereof (otherwise than by notice given by
you terminating this Agreement pursuant to Section 12 hereof) or if this
Agreement shall be terminated by the Underwriters because of any failure or
refusal on the part of the Trust or the Advisor to comply with the terms or
fulfill any of the conditions of this Agreement, the Trust and the Advisor,
jointly and severally, agree to reimburse the Representatives for all
out-of-pocket expenses (including reasonable fees and expenses of counsel for
the Underwriters) incurred by the Underwriters in connection herewith.
(k) The Trust will apply the net proceeds from the sale of the Firm
Shares, and of the Option Shares, if any, substantially in accordance with the
description set forth in the Prospectus and in such a manner as to comply with
the investment objectives, policies and restrictions of the Trust as described
in the Prospectus.
<PAGE> 8
8
(l) The Trust will timely file the requisite copies of the
Prospectus with the Commission pursuant to Rule 497(c) or Rule 497(h) of the
1933 Act Rules and Regulations, whichever is applicable or, if applicable, will
timely file the certification permitted by Rule 497(j) of the 1933 Act Rules and
Regulations and will advise you of the time and manner of such filing.
(m) Except as provided in this Agreement, the Trust will not sell,
contract to sell or otherwise dispose of any Common Shares or any securities
convertible into or exercisable or exchangeable for Common Shares, or grant any
options or warrants to purchase Common Shares, for a period of 180 days after
the date of the Prospectus, without the prior written consent of Salomon Smith
Barney Inc.; provided, however, that the Trust may issue and make open market
purchases of Common Shares pursuant to any dividend reinvestment plan of the
Trust in effect as of the Closing Date.
(n) Except as stated in this Agreement and in the Prepricing
Prospectus and Prospectus, and except for share repurchases, tender offers or
purchases of Shares in the open market pursuant to the Trust's dividend
reinvestment plan, neither the Trust nor the Advisor has taken, nor will it
take, directly or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization or manipulation of the price of the
Shares or any other securities issued by the Trust to facilitate the sale or
resale of the Shares.
(o) The Trust will use its best efforts to cause the Shares to be
duly authorized for listing by the AMEX prior to the date the Shares are issued.
(p) [Proposed language to come from Ropes & Gray]
(q) The Trust and the Advisor will each use its best efforts to
perform all of the agreements required of it and discharge all conditions to
closing as set forth in this Agreement.
6. Representations and Warranties of the Trust and the Advisor. The
Trust and the Advisor, jointly and severally, represent and warrant to each
Underwriter that:
(a) Each Prepricing Prospectus included as part of the registration
statement as originally filed or as part of any amendment or supplement thereto,
or filed pursuant to Rule 497 of the 1933 Act Rules and Regulations, complied
when so filed in all material respects with the provisions of the 1933 Act, the
1940 Act and the Rules and Regulations. The Commission has not issued any order
preventing or suspending the use of any Prepricing Prospectus.
(b) The registration statement in the form in which it became or
becomes effective and also in such form as it may be when any post-effective
amendment thereto shall become effective and the Prospectus and any supplement
or amendment thereto when filed with the Commission under Rule 497 of the 1933
Act Rules and Regulations and the 1940 Act Notification when originally filed
with the Commission and any amendment or supplement thereto when filed with the
Commission, complied or will comply in all material respects with the
requirements of the 1933 Act, the 1940 Act and the Rules and Regulations, as
applicable, and
<PAGE> 9
9
did not or will not at any such times contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances in which they were
made, not misleading, except that this representation and warranty does not
apply to (i) statements in or omissions from the registration statement or the
Prospectus made in reliance upon and in conformity with information relating to
any Underwriter furnished to the Trust in writing by or on behalf of any
Underwriter expressly for use therein or (ii) with respect to the
representations of the Trust, the description of the Advisor contained in the
Prospectus under the heading "Management of the Fund."
(c) All the outstanding shares of beneficial interest of the Trust
have been duly authorized and validly issued, are fully paid and, except as set
forth in the Statement of Additional Information of the Trust under "Shareholder
Liability," nonassessable and are free of any preemptive or similar rights; the
Shares have been duly authorized and, when issued and delivered to the
Underwriters against payment therefor in accordance with the terms hereof, will
be validly issued, fully paid and, except as set forth in the Statement of
Additional Information of the Trust under "Shareholder Liability," nonassessable
and free of any preemptive or similar rights that entitle or will entitle any
person to acquire any Shares upon the issuance thereof by the Trust, and will
conform to the description thereof in the Registration Statement and the
Prospectus (and any amendment or supplement to either of them); and the
capitalization of the Trust conforms to the description thereof in the
Registration Statement and the Prospectus (and any amendment or supplement to
either of them).
(d) Except for the Option Shares and the Advisor Shares and as
otherwise described in the Prospectus, there are no outstanding options,
warrants or other rights calling for the issuance of, or any commitment, plan or
arrangement to issue, any shares of capital stock of the Trust or any security
convertible into or exchangeable or exercisable for capital stock of the Trust.
(e) The Trust is a business trust duly organized and validly
existing in good standing under the laws of the Commonwealth of Massachusetts
with full business trust power and authority to own, lease and operate its
properties and to conduct its business as described in the Registration
Statement and the Prospectus (and any amendment or supplement to either of
them), and is duly registered and qualified to conduct its business and is in
good standing in each jurisdiction or place where the nature of its properties
or the conduct of its business requires such registration or qualification,
except where the failure so to register or qualify does not have a material
adverse effect on the condition (financial or other), business, prospects,
properties, net assets or results of operations of the Trust; and the Trust has
no subsidiaries.
(f) There are no legal or governmental proceedings pending or, to
the knowledge of the Trust, threatened, against the Trust, or to which the Trust
or any of its properties is subject, that are required to be described in the
Registration Statement or the Prospectus (and any amendment or supplement to
either of them) but are not described as required, and there are no agreements,
contracts, indentures, leases or other instruments that are required to be
described in the Registration Statement or the Prospectus (and any amendment or
supplement to either of
<PAGE> 10
10
them) or to be filed as an exhibit to the Registration Statement that are not
described or filed as required by the 1933 Act, the 1940 Act or the Rules and
Regulations.
(g) The Trust is not in violation of the Declaration or its bylaws
(the "Bylaws"), or other organizational documents of the Trust (together with
the Declaration and the Bylaws, the "Organizational Documents") or of any law,
ordinance, administrative or governmental rule or regulation applicable to the
Trust or of any decree of the Commission, the NASD, any state securities
commission, any national securities exchange, any arbitrator, any court or
governmental agency, body or official having jurisdiction over the Trust, or in
default in the performance of any material obligation, agreement or condition
contained in any bond, debenture, note or any other evidence of indebtedness or
in any material agreement, indenture, lease or other instrument to which the
Trust is a party or by which it or any of its properties may be bound, except
where such violation does not have a material adverse effect on the condition
(financial or other), business, prospects, properties, net assets or results of
operations of the Trust.
(h) Neither the issuance and sale of the Shares, the execution,
delivery or performance of this Agreement or any of the Trust Agreements by the
Trust, nor the consummation by the Trust of the transactions contemplated hereby
or thereby (A) requires any consent, approval, authorization or other order of,
or registration or filing with, the Commission, the NASD, any state securities
commission, any national securities exchange, any arbitrator, any court,
regulatory body, administrative agency or other governmental body, agency or
official (except such as may have been obtained prior to the date hereof and
such as may be required for compliance with the state securities or blue sky
laws of various jurisdictions which have been or will be effected in accordance
with this Agreement) or conflicts or will conflict with or constitutes or will
constitute a breach of, or a default under, the Organizational Documents or (B)
conflicts or will conflict with or constitutes or will constitute a breach of,
or a default under, any agreement, indenture, lease or other instrument to which
the Trust is a party or by which it or any of its properties may be bound, or
violates or will violate any statute, law, regulation or judgment, injunction,
order or decree applicable to the Trust or any of its properties, or will result
in the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Trust pursuant to the terms of any agreement or
instrument to which it is a party or by which it may be bound or to which any of
its property or assets is subject. The Trust is not subject to any order of any
court or of any arbitrator, governmental authority or administrative agency.
(i) The accountants, PricewaterhouseCoopers LLP, who have certified
or shall certify the financial statements included or incorporated by reference
in the Registration Statement and the Prospectus (or any amendment or supplement
to either of them) are independent public accountants as required by the 1933
Act, the 1940 Act and the Rules and Regulations.
(j) The financial statements, together with related schedules and
notes, included or incorporated by reference in the Registration Statement and
the Prospectus (and any amendment or supplement to either of them), present
fairly the financial position, results of operations and changes in financial
position of the Trust on the basis stated or incorporated by
<PAGE> 11
11
reference in the Registration Statement at the respective dates or for the
respective periods to which they apply; such statements and related schedules
and notes have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods involved, except as
disclosed therein; and the other financial and statistical information and data
included in the Registration Statement and the Prospectus (and any amendment or
supplement to either of them) are accurately presented and prepared on a basis
consistent with such financial statements and the books and records of the
Trust.
(k) The execution and delivery of, and the performance by the Trust
of its obligations under, this Agreement and the Trust Agreements have been duly
and validly authorized by the Trust, and this Agreement and the Trust Agreements
have been duly executed and delivered by the Trust and assuming due
authorization, execution and delivery by the other parties thereto, constitute
the valid and legally binding agreements of the Trust, enforceable against the
Trust in accordance with their terms (subject to the qualification that the
enforceability of the Trust's obligations thereunder may be limited by
bankruptcy, insolvency, reorganization, moratorium, and similar laws of general
applicability relating to or affecting creditors' rights, and to general
principles of equity regardless of whether enforceability is considered in a
proceeding in equity or at law), except as rights to indemnity and contribution
hereunder and thereunder may be limited by federal or state securities laws.
(l) Except as disclosed in the Registration Statement and the
Prospectus (or any amendment or supplement to either of them), subsequent to the
respective dates as of which such information is given in the Registration
Statement and the Prospectus (or any amendment or supplement to either of them),
the Trust has not incurred any liability or obligation, direct or contingent, or
entered into any transaction, not in the ordinary course of business, that is
material to the Trust, and there has not been any change in the capitalization,
or material increase in the short-term debt or long-term debt, of the Trust, or
any material adverse change, or any development involving or which may
reasonably be expected to involve, a prospective material adverse change, in the
condition (financial or other), business, prospects, properties, net assets or
results of operations of the Trust, whether or not arising in the ordinary
course of business (a "Material Adverse Effect").
(m) The Trust has not distributed and, prior to the later to occur
of (i) the Closing Date and (ii) completion of the distribution of the Shares,
will not distribute any offering material in connection with the offering and
sale of the Shares other than the Registration Statement, the Prepricing
Prospectus, the Prospectus or other materials, if any, permitted by the 1933
Act, the 1940 Act or the Rules and Regulations.
(n) (i) The Trust has such permits, licenses, franchises and
authorizations of governmental or regulatory authorities ("permits") as are
necessary to own its properties and to conduct its business in the manner
described in the Prospectus (and any amendment or supplement thereto), subject
to such qualifications as may be set forth in the Prospectus; (ii) the Trust has
fulfilled and performed all its material obligations with respect to such
permits and no event has occurred which allows, or after notice or lapse of time
would allow, revocation or termination thereof or results in any other material
impairment of the rights of the Trust under
<PAGE> 12
12
any such permit, subject in each case to such qualification as may be set forth
in the Prospectus (and any amendment or supplement thereto); and (iii) except as
described in the Prospectus (and any amendment or supplement thereto), none of
such permits contains any restriction that is materially burdensome to the
Trust, except where the failure of (i), (ii) or (iii) to be accurate would not,
individually or in the aggregate, have a Material Adverse Effect on the Trust.
(o) The Trust maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorization and with the
applicable requirements of the 1940 Act, the 1940 Act Rules and Regulations and
the [Internal Revenue] Code [of 1986, as amended (the "Code")]; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets and to maintain compliance with the books and
records requirements under the 1940 Act and the 1940 Act Rules and Regulations;
(iii) access to assets is permitted only in accordance with management's general
or specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(p) To the Trust's knowledge, neither the Trust nor any employee or
agent of the Trust has made any payment of funds of the Trust or received or
retained any funds, which payment, receipt or retention of funds is of a
character required to be disclosed in the Prospectus, except for the issuance of
up to 6,667 shares of beneficial interest of the Trust to the Advisor to comply
with the net worth requirements of Section 14(a) of the 1940 Act.
(q) The Trust has filed all tax returns required to be filed, if
any, which returns are complete and correct in all material respects, and the
Trust is not in default in the payment of any taxes which were payable pursuant
to said returns or any assessments with respect thereto.
(r) No holder of any security of the Trust has any right to require
registration of any security of the Trust because of the filing of the
registration statement or consummation of the transactions contemplated by this
Agreement.
(s) The Trust, subject to the registration statement having been
declared effective and the filing of the Prospectus under Rule 497 under the
1933 Act Rules and Regulations, has taken all required action under the 1933
Act, the 1940 Act and the Rules and Regulations to make the public offering and
consummate the sale of the Shares as contemplated by this Agreement.
(t) The conduct by the Trust of its business (as described in the
Prospectus) does not require it to be the owner, possessor or licensee of any
patents, patent licenses, trademarks, service marks or trade names which it does
not own, possess or license.
(u) The Trust is registered under the 1940 Act as a closed-end,
non-diversified management investment company and the 1940 Act Notification has
been duly filed with the Commission and, at the time of filing thereof and any
amendment or supplement thereto,
<PAGE> 13
13
conformed in all material respects with all applicable provisions of the 1940
Act and the 1940 Act Rules and Regulations. The Trust has not received any
notice from the Commission pursuant to Section 8(e) of the 1940 Act with respect
to the 1940 Act Notification. The Trust is, and at all times through the
completion of the transactions contemplated hereby, will be, in compliance in
all material respects with the terms and conditions of the 1933 Act and the 1940
Act. No person is serving or acting as an officer, director or investment
adviser of the Trust except in accordance with the provisions of the 1940 Act
and the 1940 Act Rules and Regulations and the Investment Advisers Act of 1940,
as amended (the "Advisers Act"), and the rules and regulations of the Commission
promulgated under the Advisers Act (the "Advisers Act Rules and Regulations").
(v) Except as stated in this Agreement and in the Prospectus (and
any amendment or supplement thereto), the Trust has not taken, nor will it take,
directly or indirectly, any action designed to or which might reasonably be
expected to cause or result in stabilization or manipulation of the price of any
securities issued by the Trust to facilitate the sale or resale of the Shares,
and the Trust is not aware of any such action taken or to be taken by any
affiliates of the Trust.
(w) All advertising and other sales literature (including
"prospectus wrappers") authorized in writing by or prepared by the Trust or the
Advisor for use in connection with the offering and sale of the Shares
(collectively, "sales material") complied and comply in all material respects
with the applicable requirements of the 1933 Act, the 1940 Act, the Rules and
Regulations and the rules and interpretations of the NASD and no such sales
material contained or contains an untrue statement of a material fact or omitted
or omits to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
The "broker kits" prepared by or approved by the Trust or the
Advisor for distribution to and use internally by brokers and dealers
participating in the offering of the Shares accurately and fairly presents the
information contained therein in all material respects for purposes of such
internal use and contains only information the substance of which is included in
the Prospectus or the Statement of Additional Information of the Trust. Any road
show slides and road show scripts prepared or approved in writing by the Trust
or the Advisor for use in presentations to brokers and dealers participating in
the offering of the Shares accurately and fairly present the information
contained therein in all material respects for purposes of such use.
(x) Each of the Trust Agreements and the Trust's obligations under
this Agreement and each of the Trust Agreements comply in all material respects
with all applicable provisions of the 1933 Act, the 1940 Act, the Rules and
Regulations, the Advisers Act and the Advisers Act Rules and Regulations.
(y) Except as disclosed in the Registration Statement and the
Prospectus (or any amendment or supplement to either of them), no director of
the Trust is an "interested person" (as defined in the 1940 Act) of the Trust or
an "affiliated person" (as defined in the 1940 Act) of any Underwriter.
<PAGE> 14
14
(z) The Shares have been duly authorized for listing, subject to
official notice of issuance, on the AMEX.
(aa) The Advisor has considered, and is taking actions to address,
the possible adverse effects of the Year 2000 on the critical computer systems
used by the Advisor and its affiliates on behalf of the Trust. Testing and
remediation of those systems is complete and the Advisor has determined that
recognition and execution of date-sensitive functions involving certain dates
prior to and after December 31, 1999 (the "Year 2000 Problem") will not pose
significant problems for the computer systems used by the Advisor on behalf of
the Trust. The Advisor believes, after reasonable inquiry, that suppliers,
vendors, or financial service organizations used in the operation of the Trust
have remedied or will remedy the Year 2000 Problem and that those suppliers,
vendors or financial service organizations believe that their modifications will
be completed on a timely basis, except to the extent that a failure to remedy by
any such supplier, vendor, or financial service organization would not have a
material adverse effect on the operations of the Trust. The Trust is in
compliance with the Commission's Release No. 33-7558 related to Year 2000
compliance, as amended to date.
7. Representations and Warranties of the Advisor. CMA represents and
warrants to each Underwriter that:
(a) The Advisor is a corporation duly incorporated and validly
existing in good standing under the laws of the Commonwealth of Massachusetts,
with full corporate power and authority to own, lease and operate its properties
and to conduct its business as described in the Registration Statement and the
Prospectus (and any amendment or supplement to either of them), and is duly
registered and qualified to conduct its business and is in good standing in each
jurisdiction or place where the nature of its properties or the conduct of its
business requires such registration or qualification, except where the failure
so to register or to qualify does not have a material adverse effect on the
condition (financial or other), business, prospects, properties, net assets or
results of operations of the Advisor or on the ability of the Advisor to perform
its obligations under this Agreement and the Management Agreement.
(b) The Advisor is duly registered with the Commission as an
investment adviser under the Advisers Act and is not prohibited by the Advisers
Act, the Advisers Act Rules and Regulations, the 1940 Act or the 1940 Act Rules
and Regulations from acting under the Management Agreement for the Trust as
contemplated by the Prospectus (or any amendment or supplement thereto). There
does not exist any proceeding or any facts or circumstances the existence of
which could lead to any proceeding which might adversely affect the registration
of the Advisor with the Commission.
(c) There are no legal or governmental proceedings pending or, to
the knowledge of the Advisor, threatened against the Advisor, or to which the
Advisor or any of its properties is subject, that are required to be described
in the Registration Statement or the Prospectus (or any amendment or supplement
to either of them) but are not described as required or that may reasonably be
expected to involve a prospective material adverse change, in the condition
(financial or other), business, prospects, properties, net assets or results of
<PAGE> 15
15
operations of the Advisor or on the ability of the Advisor to perform its
obligations under this Agreement and the Management Agreement.
(d) Neither the execution, delivery or performance of this Agreement
or the performance of the Management Agreement by the Advisor, nor the
consummation by the Advisor of the transactions contemplated hereby or thereby
(A) requires the Advisor to obtain any consent, approval, authorization or other
order of or registration or filing with, the Commission, the NASD, any state
securities commission, any national securities exchange, any arbitrator, any
court, regulatory body, administrative agency or other governmental body, agency
or official or conflicts or will conflict with or constitutes or will constitute
a breach of or a default under, the certificate of incorporation or by-laws, or
other organizational documents, of the Advisor or (B) conflicts or will conflict
with or constitutes or will constitute a breach of or a default under, any
agreement, indenture, lease or other instrument to which the Advisor is a party
or by which it or any of its properties may be bound, or violates or will
violate any statute, law, regulation or filing or judgment, injunction, order or
decree applicable to the Advisor or any of its properties or will result in the
creation or imposition of any lien, charge or encumbrance upon any property or
assets of the Advisor pursuant to the terms of any agreement or instrument to
which it is a party or by which it may be bound or to which any of the property
or assets of the Advisor is subject. The Advisor is not subject to any order of
any court or of any arbitrator, governmental authority or administrative agency.
(e) The execution and delivery of, and the performance by the
Advisor of its obligations under, this Agreement and the Management Agreement
have been duly and validly authorized by the Advisor, and this Agreement and the
Management Agreement have been duly executed and delivered by the Advisor and,
assuming due authorization, execution and delivery by the other parties thereto,
each constitutes the valid and legally binding agreement of the Advisor,
enforceable against the Advisor in accordance with its terms (subject to the
qualification that the enforceability of the Advisor's obligations thereunder
may be limited by bankruptcy, insolvency, reorganization, moratorium and similar
laws of general applicability relating to or affecting creditors' rights, and to
general principles of equity regardless of whether enforceability is considered
in a proceeding in equity or at law), except as rights to indemnity and
contribution hereunder may be limited by federal or state securities laws.
(f) The Advisor has the financial resources available to it
necessary for the performance of its services and obligations as contemplated in
the Prospectus (or any amendment or supplement thereto) and under this Agreement
and the Management Agreement.
(g) The description of the Advisor in the Registration Statement and
the Prospectus (and any amendment or supplement thereto) complied and comply in
all material respects with the provisions of the 1933 Act, the 1940 Act, the
Advisers Act, the Rules and Regulations and the Advisers Act Rules and
Regulations and did not and will not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading.
<PAGE> 16
16
(h) Except as disclosed in the Registration Statement and the
Prospectus (or any amendment or supplement to either of them), subsequent to the
respective dates as of which such information is given in the Registration
Statement and the Prospectus (or any amendment or supplement to either of them),
the Advisor has not incurred any liability or obligation, direct or contingent,
or entered into any transaction, not in the ordinary course of business, that is
material to the Advisor or the Trust and that is required to be disclosed in the
Registration Statement or the Prospectus and there has not been any material
adverse change, or any development involving or which may reasonably be expected
to involve, a prospective material adverse change, in the condition (financial
or other), business, prospects, properties, net assets or results of operations
of the Advisor, whether or not arising in the ordinary course of business, or
which, in each case, could have a material adverse effect on the ability of the
Advisor to perform its obligations under this Agreement and the Management
Agreement.
(i) (i) The Advisor has such permits, licenses, franchises and
authorizations of governmental or regulatory authorities ("permits") as are
necessary to own its properties and to conduct its business in the manner
described in the Prospectus (and any amendment thereto); (ii) the Advisor has
fulfilled and performed all its material obligations with respect to such
permits and no event has occurred which allows, or after notice or lapse of time
would allow, revocation or termination thereof or results in any other material
impairment of the rights of the Advisor under any such permit; and (iii) except
as described in the Prospectus (and any amendment or supplement thereto), none
of such permits contains any restriction that is materially burdensome to the
Advisor, except where the failure of (i), (ii), or (iii) to be accurate would
not, individually or in the aggregate, have a Material Adverse Effect on the
Advisor.
(j) Except as stated in this Agreement and in the Prospectus (and in
any amendment or supplement thereto), the Advisor has not taken, nor will it
take, directly or indirectly, any action designed to or which might reasonably
be expected to cause or result in stabilization or manipulation of the price of
any securities issued by the Trust to facilitate the sale or resale of the
Shares, and the Advisor is not aware of any such action taken or to be taken by
any affiliates of the Advisor.
8. Indemnification and Contribution. (a) The Trust and the Advisor,
jointly and severally, agree to indemnify and hold harmless you and each other
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act from and
against any and all losses, claims, damages, liabilities and expenses (including
reasonable costs of investigation), joint or several, arising out of or based
upon any untrue statement or alleged untrue statement of a material fact
contained in any Prepricing Prospectus or in the Registration Statement or the
Prospectus or in any amendment or supplement thereto, or arising out of or based
upon any omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances in which such statements were made, not misleading, except
insofar as such losses, claims, damages, liabilities or expenses arise out of or
are based upon any untrue statement or omission or alleged untrue statement or
omission which has been made therein or omitted therefrom in reliance upon and
in conformity with the information relating to any Underwriter furnished in
writing to the Trust by or on behalf of any Underwriter expressly for
<PAGE> 17
17
use in connection therewith; provided, however, that the indemnification
contained in this paragraph (a) with respect to any Prepricing Prospectus shall
not inure to the benefit of any Underwriter (or to the benefit of any person
controlling such Underwriter) on account of any such loss, claim, damage,
liability or expense arising from the sale of the Shares by such Underwriter to
any person if a copy of the Prospectus shall not have been delivered or sent to
such person within the time required by the 1933 Act and the 1933 Act Rules and
Regulations, and the untrue statement or alleged untrue statement or omission or
alleged omission of a material fact contained in such Prepricing Prospectus was
corrected in the Prospectus, provided that the Trust has delivered the
Prospectus to the several Underwriters in requisite quantity on a timely basis
to permit such delivery or sending. The foregoing indemnity agreement shall be
in addition to any liability which the Trust or the Advisor may otherwise have.
(b) Any party that proposes to assert the right to be indemnified
under this Section 8 will, promptly after receipt of notice of commencement of
any action against such party in respect of which a claim is to be made against
an indemnifying party or parties under this Section 8, notify each such
indemnifying party of the commencement of such action, enclosing a copy of all
papers served, but the omission to so notify such indemnifying party (i) will
not relieve it from any liability that it may have to any indemnified party
under the foregoing provision of this Section 8 unless, and only to the extent
that, such omission results in the forfeiture of substantive rights or defenses
by the indemnifying party and (ii) will not, in any event, relieve such
indemnifying party from any other obligation (other than pursuant to the
foregoing provision of this Section 8) it may have under this Agreement. If any
action, suit or proceeding shall be brought against any Underwriter or any
person controlling any Underwriter in respect of which indemnity may be sought
against the Trust or the Advisor, such Underwriter or such controlling person
shall promptly notify the Trust or the Advisor, and the Trust or the Advisor
shall assume the defense thereof, including the employment of counsel and
payment of all fees and expenses. Such Underwriter or any such controlling
person shall have the right to employ separate counsel in any such action, suit
or proceeding and to participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of such Underwriter or such
controlling person unless (i) the Trust or the Advisor have agreed in writing to
pay such fees and expenses, (ii) the Trust and the Advisor have failed to assume
the defense and employ counsel, or (iii) the named parties to any such action,
suit or proceeding (including any impleaded parties) include both such
Underwriter or such controlling person and the Trust or the Advisor and such
Underwriter or such controlling person shall have been advised by its counsel
that representation of such indemnified party and the Trust or the Advisor by
the same counsel would be inappropriate under applicable standards of
professional conduct (whether or not such representation by the same counsel has
been proposed) due to actual or potential differing interests between them (in
which case the Trust and the Advisor shall not have the right to assume the
defense of such action, suit or proceeding on behalf of such Underwriter or such
controlling person). It is understood, however, that the Trust and the Advisor
shall, in connection with any one such action, suit or proceeding or separate
but substantially similar or related actions, suits or proceedings in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the reasonable fees and expenses of only one separate firm of
attorneys (in addition to any local counsel) at any time for all such
Underwriters and controlling persons not having actual or potential differing
interests with you or among
<PAGE> 18
18
themselves, which firm shall be designated in writing by the Representatives,
and that all such fees and expenses shall be reimbursed as they are incurred.
The Trust and the Advisor shall not be liable for any settlement of any such
action, suit or proceeding effected without their written consent (which consent
shall not be unreasonably withheld), but if settled with such written consent,
or if there be a final judgment for the plaintiff in any such action, suit or
proceeding, the Trust and the Advisor agree to indemnify and hold harmless any
Underwriter, to the extent provided in the preceding paragraph, and any such
controlling person from and against any loss, claim, damage, liability or
expense by reason of such settlement or judgment.
(c) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Trust and the Advisor, their trustees, directors, any
officers who sign the Registration Statement, and any person who controls the
Trust or the Advisor within the meaning of Section 15 of the 1933 Act or Section
20 of the 1934 Act, to the same extent as the foregoing indemnity from the Trust
and the Advisor to each Underwriter, but only with respect to information
relating to such Underwriter furnished in writing by or on behalf of such
Underwriter expressly for use in the Registration Statement, the Prospectus or
any Prepricing Prospectus, or any amendment or supplement thereto. If any
action, suit or proceeding shall be brought against the Trust or the Advisor,
any of their trustees or directors, any such officer, or any such controlling
person based on the Registration Statement, the Prospectus or any Prepricing
Prospectus, or any amendment or supplement thereto, and in respect of which
indemnity may be sought against any Underwriter pursuant to this paragraph (c),
such Underwriter shall have the rights and duties given to the Trust and the
Advisor by paragraph (b) above (except that if the Trust or the Advisor shall
have assumed the defense thereof such Underwriter shall not be required to do
so, but may employ separate counsel therein and participate in the defense
thereof, but the fees and expenses of such counsel shall be at such
Underwriter's expense), and the Trust and the Advisor, their trustees and
directors, any such officer, and any such controlling person shall have the
rights and duties given to the Underwriters by paragraph (b) above. The
foregoing indemnity agreement shall be in addition to any liability which the
Underwriters may otherwise have.
(d) If the indemnification provided for in this Section 8 is
unavailable to an indemnified party under paragraphs (a) or (c) hereof in
respect of any losses, claims, damages, liabilities or expenses referred to
therein, then an indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities or expenses (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Trust and the Advisor on the one hand (treated jointly for this purpose as one
person) and the Underwriters on the other hand from the offering of the Shares,
or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Trust and the Advisor on the one hand (treated jointly for this purpose as
one person) and the Underwriters on the other in connection with the statements
or omissions that resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The relative
benefits received by the Trust and the Advisor on the one hand (treated jointly
for this purpose as one person) and the Underwriters on the other hand shall be
deemed to be in the same proportion
<PAGE> 19
19
as the total net proceeds from the offering (before deducting expenses) received
by the Trust bear to the total underwriting discounts and commissions received
by the Underwriters, in each case as set forth in the table on the cover page of
the Prospectus. The relative fault of the Trust and the Advisor on the one hand
(treated jointly for this purpose as one person) and the Underwriters on the
other hand shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Trust
and the Advisor on the one hand (treated jointly for this purpose as one person)
or by the Underwriters on the other hand and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. Any party entitled to contribution will, promptly after
receipt of notice of commencement of any action against such party in respect of
which a claim for contribution may be made under this Section 8(d), notify such
party or parties from whom contribution may be sought, but the omission so to
notify (i) will not relieve the party or parties from whom contribution may be
sought from any other obligation it or they may have under this Section 8(d),
unless such omission results in the forfeiture of substantive rights or defenses
by the party or parties from whom contribution is being sought and (ii) will
not, in any event, relieve the party or parties from whom contribution may be
sought from any other obligation (other than pursuant to this Section 8(d)) it
or they may have under this Agreement. Except for a settlement entered into
pursuant to the last sentence of Section 8(b) hereof, no party will be liable
for contribution with respect to any action or claim settled without its written
consent (which consent shall not be unreasonably withheld).
(e) The Trust, the Advisor and the Underwriters agree that it would
not be just and equitable if contribution pursuant to this Section 8 were
determined by a pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation that does not
take account of the equitable considerations referred to in paragraph (d) above.
The amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities and expenses referred to in paragraph (d) above
shall be deemed to include, subject to the limitations set forth above, any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating any claim or defending any such action, suit or
proceeding. Notwithstanding the provisions of this Section 8, no Underwriter
shall be required to contribute any amount in excess of the amount by which such
total price of the Shares underwritten by it and distributed to the public
exceeds the amount of any damages which such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution
from any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute pursuant to this Section 8 are several
in proportion to the respective numbers of Firm Shares set forth opposite their
names in Schedule I hereto (or such numbers of Firm Shares increased as set
forth in Section 11 hereof) and not joint.
(f) No indemnifying party shall, without the prior written consent
of the indemnified party, effect any settlement of any pending or threatened
action, suit or proceeding in respect of which any indemnified party is or could
have been a party and indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an
<PAGE> 20
20
unconditional release of such indemnified party from all liability on claims
that are the subject matter of such action, suit or proceeding.
(g) Notwithstanding any other provisions in this Section 8, no party
shall be entitled to the benefit of any provision under this Agreement which
protects or purports to protect such person against any liability to the Trust
or its security holders to which such person would otherwise be subject by
reason of such person's willful misfeasance, bad faith, or gross negligence, in
the performance of such person's duties hereunder, or by reason of such person's
reckless disregard of such person's obligations and duties hereunder.
(h) Any losses, claims, damages, liabilities or expenses for which
an indemnified party is entitled to indemnification or contribution under this
Section 8 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Trust and the Advisor set forth in this
Agreement shall remain operative and in full force and effect, regardless of (i)
any investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter, the Trust, the Advisor, their trustees, directors
or officers, or any person controlling the Trust or the Advisor, (ii) acceptance
of any Shares and payment therefor hereunder, and (iii) any termination of this
Agreement. A successor to any Underwriter or any person controlling any
Underwriter, or to the Trust, the Advisor, their trustees, directors or
officers, or any person controlling the Trust or the Advisor, shall be entitled
to the benefits of the indemnity, contribution, and reimbursement agreements
contained in this Section 8.
9. Conditions of Underwriters' Obligations. The several obligations
of the Underwriters to purchase the Firm Shares and the Option Shares, as the
case may be, hereunder are subject to the following conditions:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the registration statement or a post-effective amendment thereto
to be declared effective before the offering of the Shares may commence, the
registration statement or such post-effective amendment shall have become
effective not later than 5:30 P.M., New York City time, on the date hereof, or
at such later date and time as shall be consented to in writing by you, and all
filings, if any, required by Rules 497 and 430A under the 1933 Act and the 1933
Act Rules and Regulations shall have been timely made; no stop order suspending
the effectiveness of the Registration Statement or order pursuant to Section
8(e) of the 1940 Act shall have been issued and no proceeding for those purposes
shall have been instituted or, to the knowledge of the Trust, the Advisor or any
Underwriter, threatened by the Commission, and any request of the Commission for
additional information (to be included in the registration statement or the
prospectus or otherwise) shall have been complied with to your satisfaction.
(b) Subsequent to the effective date of this Agreement, there shall
not have occurred (i) any change or any development involving a prospective
change in or affecting the condition (financial or other), business, prospects,
properties, net assets, or results of operations of the Trust or the Advisor not
contemplated by the Prospectus, which in your opinion, as
<PAGE> 21
21
Representatives of the several Underwriters, would materially adversely affect
the market for the Shares, or (ii) any event or development relating to or
involving the Trust or the Advisor or any officer or director of the Trust or
the Advisor which makes any statement made in the Prospectus untrue or which, in
the opinion of the Trust and its counsel or the Underwriters and their counsel,
requires the making of any addition to or change in the Prospectus in order to
state a material fact required by the 1933 Act, the 1940 Act or the Rules and
Regulations or any other law to be stated therein or necessary in order to make
the statements therein not misleading, if amending or supplementing the
Prospectus to reflect such event or development would, in your opinion, as
Representatives of the several Underwriters, materially adversely affect the
market for the Shares.
(c) You shall have received on the Closing Date an opinion of Ropes
& Gray, counsel for the Trust, dated the Closing Date and addressed to you, as
Representatives of the several Underwriters, in form and substance satisfactory
to you and to the effect that:
(i) The Trust has been duly organized and is validly existing
and in good standing as an unincorporated voluntary association
(commonly known as a Massachusetts business trust) under the laws of
the Commonwealth of Massachusetts and has full power and authority
to own, lease and operate its properties and to conduct its business
as described in the Registration Statement and the Prospectus and to
issue and sell the Shares as contemplated by the Underwriting
Agreement;
(ii) The Shares have been duly authorized and, when issued and
delivered to the Underwriter against payment therefor in accordance
with the terms of the Underwriting Agreement, will be validly
issued, fully paid and, except as set forth in the Statement of
Additional Information under "Shareholder Liability," nonassessable
and free of any preemptive or similar rights and will conform in all
material respects to the description thereof in the Registration
Statement and the Prospectus; the form of certificates evidencing
the Shares complies with all requirements of Massachusetts law; and
the relative rights, interests, powers and preferences of the
Shares, and the obligation of the Trust to redeem such Shares upon
the terms and conditions set forth in the By-Laws, are legal, valid,
binding and enforceable under Massachusetts law;
(iii) The Shares conform in all material respects with the
statements relating thereto contained in the Prospectus; and the
Trust's authorized and outstanding capitalization is as set forth in
the Prospectus;
(iv) The Registration Statement is effective under the
Securities Act and the Investment Company Act; the filing of the
Prospectus pursuant to Rule 497(h) under the Securities Act has been
made within the time required by Rule 497(h); and, to the best of
our knowledge, no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceeding for any
such purpose is pending or threatened by the Commission;
<PAGE> 22
22
(v) The Trust is duly registered with the Commission under the
Investment Company Act as a closed-end, non-diversified management
investment company and, to our knowledge, no order of suspension or
revocation of such registration pursuant to Section 8(e) of the
Investment Company Act has been issued or proceedings therefor
initiated or threatened by the Commission;
(vi) The Registration Statement, the Prospectus and each
amendment thereof or supplement thereto (other than the financial
statements and schedules, the notes thereto and any schedules and
other financial data contained or incorporated by reference therein
or omitted therefrom, as to which we express no opinion) comply as
to form in all material respects with the applicable requirements of
the Securities Act and the Investment Company Act and the rules and
regulations thereunder;
(vii) The statements made in the Prospectus (including the
Statement of Additional Information) under the caption "Description
of Shares", insofar as they purport to summarize the provisions of
the Bylaws or other documents or agreements specifically referred to
therein, constitute accurate summaries of the terms of any such
documents in all material respects;
(viii) The statements made in the Prospectus (including the
Statement of Additional Information) under the caption "Tax
Matters", insofar as they constitute matters of law or legal
conclusions, have been reviewed by such counsel and constitute
accurate statements of any such matters of law or legal conclusions
in all material respects, and fairly present the information called
for with respect thereto by Form N-2 under the Investment Company
Act;
(ix) To our knowledge, there are no legal or governmental
proceedings pending or threatened against the Trust, or to which the
Trust or any of its properties is subject, that are required to be
described in the Registration Statement or the Prospectus but are
not described as required;
(x) To the best of our knowledge after reasonable inquiry,
there are no agreements, contracts, indentures, leases or other
instruments that are required to be described in the Registration
Statement or the Prospectus or to be filed as an exhibit to the
Registration Statement by the Securities Act or the Investment
Company Act or by the rules and regulations thereunder which have
not been so described or filed as an exhibit or incorporated therein
by reference as permitted by the Securities Act, the Investment
Company Act or the rules and regulations thereunder;
(xi) Neither the issuance and sale of the Shares as described
in the Prospectus, the execution, delivery or performance of the
Underwriting Agreement, the Management Agreement, any of the Trust
Agreements, the Custodian Agreement and the [Transfer Agency and
Dividend Paying Agency
<PAGE> 23
23
Agreement] by the Trust, nor the consummation by the Trust of the
transactions contemplated thereby (i) requires any consent,
approval, authorization or other order of or registration or filing
by the Trust with the Commission, the NASD, any national securities
exchange, any arbitrator, any court, regulatory body, administrative
agency or other governmental body, agency or official (except such
as may have been obtained or made on or prior to the date hereof and
such as may be required for compliance with state securities or Blue
Sky laws) or conflicts or will conflict with or constitutes or will
constitute a breach of, or a default under, the Declaration of
Trust, the By-Laws or other organizational documents of the Trust or
(ii) (a) conflicts or will conflict with or constitutes or will
constitute a breach of, or a default under, any agreement,
indenture, lease or other instrument to which the Trust is a party
or by which it or any of its properties may be bound and that is
identified, in an officer's certificate of the Trust, as material to
the business, financial condition, operations, properties or
prospects of the Trust (the "Agreements and Instruments"), (b)
violates or will violate any statute, law or regulation (assuming
compliance with state securities and Blue Sky laws), (c) violates or
will violate any judgment, injunction, order or decree that is
applicable to the Trust or any of its properties and that is known
to us or, or (d) will result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Trust
pursuant to the terms of the Agreements and Instruments;
(xii) The Underwriting Agreement, the Management Agreement,
the Trust Agreements, the Custodian Agreement and the [Transfer
Agency and Dividend Paying Agency Agreement] have been duly
authorized, executed and delivered by the Trust and each complies
with all applicable provisions of the Investment Company Act (except
that we express no opinion as to the reasonableness or fairness of
compensation paid under such agreements); the Management Agreement
complies with all applicable provisions of the Investment Advisers
Act of 1940, as amended; assuming due authorization, execution and
delivery by the other parties thereto, the Underwriting Agreement,
the Management Agreement, each Trust Agreement, the Custodian
Agreement and the [Transfer Agency and Dividend Paying Agency
Agreement] constitutes the valid and binding obligation of the Trust
enforceable in accordance with its terms (except as rights to
indemnity and contribution in each such agreement may be limited by
Federal or state securities laws), subject as to enforcement to
bankruptcy, insolvency, moratorium, reorganization and other laws of
general applicability relating to or affecting creditors' rights and
to general equity principles (regardless of whether enforceability
is considered in a proceeding in equity or at law);
(xiii) The provisions of the Declaration of Trust, as amended
and ByLaws of the Trust and the investment policies and restrictions
described in the Prospectus (including the Statement of Additional
Information) under the captions "Investment Objectives and Policies"
and "Miscellaneous Investment Practices"
<PAGE> 24
24
comply with the requirements of the Investment Company Act and the
rules and regulations thereunder; and
(xiv) The Shares have been duly authorized for listing,
subject to official notice of issuance, on the AMEX.
Such counsel may also state, in substantially the same form, that:
They have not independently verified the accuracy, completeness or
fairness of the statements made or the information contained in the Registration
Statement or the Prospectus, and, except for the statements referred to in
paragraphs (vii) and (viii) above and the information referred to in paragraph
(xiii) above, they are not passing upon and do not assume any responsibility
therefor. In the course of the preparation by the Trust of the Registration
Statement and the Prospectus, they have participated in discussions with the
Representatives and employees and officers of the Trust and the Advisor and in
discussions with the Trust's independent accountants, in which the business and
the affairs of the Trust and the Advisor and the contents of the Registration
Statement and the Prospectus were discussed. On the basis of information that
they have gained in the course of their representation of the Trust in
connection with its preparation of the Registration Statement and the Prospectus
and their participation in the discussions referred to above, no facts have come
to their attention that would lead them to believe that as of October __, 1999,
the Registration Statement or the Prospectus contained any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary in order to make the statements therein not misleading, or
that as of the date hereof the Prospectus contained an untrue statement of
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading (in each case other than the financial
statements and schedules, the notes thereto and any schedules and other
financial data contained or incorporated by reference therein or omitted
therefrom, as to which we express no opinion).
(d) You shall have received on the Closing Date an opinion of the
General Counsel, counsel for the Advisor, dated the Closing Date and
addressed to you, as Representatives of the several Underwriters, in form
and substance satisfactory to you and to the effect that:
(i) The Advisor is a corporation duly incorporated and validly
existing and in good standing under the laws of The Commonwealth of
Massachusetts and has full power and authority to own, lease and
operate its properties and to conduct its business as described in
the Registration Statement and the Prospectus;
(ii) The Advisor is duly registered with the Commission as an
investment adviser under the Advisers Act of 1940, as amended (the
"Advisers Act"), and is not prohibited by the Investment Company
Act, the Advisers Act or the rules and regulations thereunder from
acting as the investment advisor to the Trust pursuant to the
Management Agreement as described in the Prospectus;
<PAGE> 25
25
(iii) To the best of such counsel's knowledge after reasonable
inquiry, there are no legal or governmental proceedings pending or
threatened against the Advisor, or to which the Advisor or any of
its properties is subject, that are required to be described in the
Registration Statement or the Prospectus but are not described as
required;
(iv) To the best of such counsel's knowledge after reasonable
inquiry, the Adviser is not in violation of the Articles or By-Laws,
nor is the Advisor in default under any material agreement,
indenture or instrument or in breach or violation of any judgment,
decree, order, rule or regulation of any court or governmental or
self-regulatory agency or body;
(v) Neither the execution, delivery or performance of the
Underwriting Agreement, nor the consummation by the Advisor of the
transactions contemplated hereby or thereby, (i) requires any
consent, approval, authorization or other order of or registration
or filing by the Advisor with, the Commission, the NASD, any
national securities exchange, any arbitrator, any court, regulatory
body, administrative agency or other governmental body, agency or
official (except such as may have been obtained or made on or prior
to the date hereof and such as may be required for compliance with
state securities or Blue Sky laws) or conflicts or will conflict
with or constitutes or will constitute a breach of, or a default
under, the Articles, the By-Laws or other organizational documents
of the Advisor or (ii) (a) conflicts or will conflict with or
constitutes or will constitute a breach of, or a default under, any
agreement, indenture, lease or other instrument to which the Advisor
is a party or by which it or any of its properties may be bound (the
"Agreements and Instruments"), (b) violates or will violate any
statute, law or regulation (assuming compliance with state
securities and Blue Sky laws), (c) violates or will violate any
judgment, injunction, order or decree that is applicable to the
Advisor or any of its properties and that is known to me or (d) will
result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Advisor pursuant to
the terms of the Agreements and Instruments;
(vi) The Underwriting Agreement and the Management Agreement
have been duly authorized, executed and delivered by the Advisor;
assuming due authorization, execution and delivery by the other
parties thereto, the Underwriting Agreement and the Management
Agreement each constitutes the valid and binding obligation of the
Advisor enforceable in accordance with its terms (except as rights
to indemnity and contribution in the Underwriting Agreement and the
Management Agreement may be limited by Federal or state securities
laws), subject as to enforcement to bankruptcy, insolvency,
moratorium, reorganization and other laws of general applicability
relating to or affecting creditors' rights and to general equity
principles (regardless of whether enforceability is considered in a
proceeding in equity or at law); and
<PAGE> 26
26
(vii) The description of the Advisor (other than statements as
to the Advisor's investment decisions, beliefs and strategies
regarding the Trust's portfolio as to which I express no opinion) in
the Registration Statement and the Prospectus (including the
Statement of Additional Information) does not contain an untrue
statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made,
not misleading.
Such counsel may also state, in substantially the same form, that:
She has not independently verified the accuracy, completeness or fairness
of the statements made or the information contained in the Registration
Statement or the Prospectus, and, except for the information referred to in
paragraph (vii) above, she is not passing upon and does not assume any
responsibility therefor.
(e) You shall have received on the Closing Date an opinion of Heller
Ehrman White & McAuliffe, special California counsel for the Trust, dated the
Closing Date and addressed to you, as Representatives of the several
Underwriters, in form and substance satisfactory to you and to the effect that:
(i) The statements in the Prospectus under the caption
"Additional Risk Considerations -- Certain Risks Associated with
Investments in California Municipal Obligations" and in the
Statement of Additional Information under the caption "Appendix B --
Special Considerations Relating to California," insofar as they
refer to statements of law or legal conclusions, are accurate and
present fairly the information required to be shown; and
(ii) Such counsel shall also state that they have participated
in the preparation and review of the statements set forth in the
Registration Statement under the captions "Additional Risk
Considerations -- Certain Risks Associated with Investments in
California Municipal Obligations" and "Appendix B --Special
Considerations Relating to California," the statements set forth in
the Prospectus under the caption "Additional Risk Considerations --
Certain Risks Associated with Investments in California Municipal
Obligations," and the statements set forth in the Statement of
Additional Information under the caption "Appendix B -- Special
Considerations Relating to California," and that based upon the
foregoing, no facts have come to their attention which cause them to
believe that the statements contained in the Registration Statement
or any amendment or supplement thereto under such captions (except
as to any financial statements or other financial data included in
the Registration Statement or any such amendment or supplement, as
to which they express no belief), as of its effective date,
contained an untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make
the statements contained therein not misleading or that the
statements contained in the Prospectus and Statement of Additional
Information or any amendment or
<PAGE> 27
27
supplement thereto under such captions (except as to any financial
statements or other financial data included in the Prospectus or any
such amendment or supplement, as to which they express no belief),
as of its issue date and as of the Closing Date or the Option
Closing Date, as the case may be, contained an untrue statement of a
material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements contained
therein, in the light of the circumstances under which they were
made, not misleading.
(f) You shall have received on the Closing Date an opinion of
Simpson Thacher & Bartlett, counsel for the Underwriters, dated the Closing Date
and addressed to you, with respect to such matters as you may reasonably
request.
(g) You shall have received letters addressed to you and dated the
date hereof and the Closing Date from PricewaterhouseCoopers LLP, independent
certified public accountants, substantially in the forms heretofore approved by
the Representatives.
(h) (i) No order suspending the effectiveness of the Registration
Statement or prohibiting or suspending the use of the Prospectus (or any
amendment or supplement thereto) or any Prepricing Prospectus or any sales
material shall have been issued and no proceedings for such purpose or for the
purpose of commencing an enforcement action against the Trust, the Advisor or,
with respect to the transactions contemplated by the Prospectus (or any
amendment or supplement thereto) and this Agreement, any Underwriter, may be
pending before or, to the knowledge of the Trust, the Advisor or any Underwriter
or in the reasonable view of counsel to the Underwriters, shall be threatened or
contemplated by the Commission at or prior to the Closing Date and that any
request for additional information on the part of the Commission (to be included
in the Registration Statement, the Prospectus or otherwise) be complied with to
the satisfaction of the Underwriters; (ii) there shall not have been any change
in the capitalization of the Trust nor any material increase in the short-term
or long-term debt of the Trust (other than in the ordinary course of business)
from that set forth or contemplated in this Agreement, the Registration
Statement or the Prospectus (or any amendment or supplement thereto); (iii)
there shall not have been, subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus (or any
amendment or supplement to either of them), except as may otherwise be stated in
the Registration Statement and Prospectus (or any amendment or supplement to
either of them), any material adverse change in the condition (financial or
other), business, prospects, properties, net assets or results of operations of
the Trust or the Advisor; (iv) the Trust shall not have any liabilities or
obligations, direct or contingent (whether or not in the ordinary course of
business), that are material to the Trust, other than those reflected in the
Registration Statement or the Prospectus (or any amendment or supplement to
either of them); and (v) all the representations and warranties of the Trust and
the Advisor contained in this Agreement shall be true and correct on and as of
the date hereof and on and as of the Closing Date as if made on and as of the
Closing Date, and you shall have received a certificate of the Trust and the
Advisor, dated the Closing Date and signed by the chief executive officer and
the chief financial officer of each of the Trust and the Advisor (or such other
officers as are acceptable to you), to the effect set forth in this Section 9(h)
and in Section 9(i) hereof.
<PAGE> 28
28
(i) Neither the Trust nor the Advisor shall have failed at or prior
to the Closing Date to have performed or complied in all material respects with
any of its agreements herein contained and required to be performed or complied
with by it hereunder at or prior to the Closing Date.
(j) The Shares have been duly authorized for listing, subject to
official notice of issuance, on the AMEX.
(k) The Trust and the Advisor shall have furnished or caused to be
furnished to you such further certificates and documents as you shall have
reasonably requested.
All such opinions, certificates, letters and other documents will be
in compliance with the provisions hereof only if they are reasonably
satisfactory in form and substance to you and your counsel.
Any certificate or document signed by any officer of the Trust or
the Advisor and delivered to you, or to your counsel, shall be deemed a
representation and warranty by the Trust or the Advisor, as applicable, to each
Underwriter as to the statements made therein.
10. Expenses. The Trust agrees to pay the following costs and
expenses and all other costs and expenses incident to the performance by it of
its obligations hereunder: (i) the preparation, printing or reproduction, and
filing with the Commission of the registration statement (including financial
statements and exhibits thereto), each Prepricing Prospectus, the 1940 Act
Notification, the Prospectus and each amendment or supplement to any of them
(including, without limitation, the filing fees prescribed by the 1933 Act, the
1940 Act and the Rules and Regulations); (ii) the printing (or reproduction) and
delivery (including postage, air freight charges and charges for counting and
packaging) of such copies of the Registration Statement, each Prepricing
Prospectus, the Prospectus, any sales material and all amendments or supplements
to any of them as may be reasonably requested for use in connection with the
offering and sale of the Shares; (iii) the preparation, printing,
authentication, issuance and delivery of certificates for the Shares, including
any stamp taxes in connection with the original issuance and sale of the Shares;
(iv) the reproduction and delivery of this Agreement, any dealer agreements and
all other agreements or documents reproduced and delivered in connection with
the offering of the Shares; (v) the registration of the Shares under the 1934
Act and the listing of the Shares on the NYSE; (vi) the registration or
qualification of the Shares for offer and sale under the securities or blue sky
laws of the several states as provided in Section 5(g) hereof (including the
reasonable fees, expenses and disbursements of counsel for the Underwriters
relating to the preparation, printing or reproduction, and delivery of the
preliminary and supplemental blue sky memoranda and such registration and
qualification); (vii) the filing fees and the fees and expenses of counsel for
the Underwriters in connection with any filings required to be made with the
NASD; (viii) the transportation and other expenses incurred by or on behalf of
Trust representatives in connection with presentations to prospective purchasers
of the Shares; and (ix) the fees and expenses of the Trust's accountants and the
fees and expenses of counsel (including local and special counsel) for the
Trust. The Advisor and not the Trust agrees to pay
<PAGE> 29
29
an amount not greater than $75,000 in reimbursement of certain expenses of the
Underwriter in connection with this Agreement.
11. Effective Date of Agreement. This Agreement shall become
effective: (i) upon the execution and delivery hereof by the parties hereto; or
(ii) if, at the time this Agreement is executed and delivered, it is necessary
for the registration statement or a post-effective amendment thereto to be
declared effective before the offering of the Shares may commence, when
notification of the effectiveness of the registration statement or such
post-effective amendment has been released by the Commission. Until such time as
this Agreement shall have become effective, it may be terminated by the Trust,
by notifying you, or by you, as Representatives of the several Underwriters, by
notifying the Trust.
If any one or more of the Underwriters shall fail or refuse to
purchase Shares which it or they are obligated to purchase hereunder on the
Closing Date, and the aggregate number of Shares which such defaulting
Underwriter or Underwriters are obligated but fail or refuse to purchase is not
more than one-tenth of the aggregate number of Shares which the Underwriters are
obligated to purchase on the Closing Date, each non-defaulting Underwriter shall
be obligated, severally, in the proportion which the number of Firm Shares set
forth opposite its name in Schedule I hereto bears to the aggregate number of
Firm Shares set forth opposite the names of all non-defaulting Underwriters or
in such other proportion as you may specify, to purchase the Shares which such
defaulting Underwriter or Underwriters are obligated, but fail or refuse, to
purchase. If any one or more of the Underwriters shall fail or refuse to
purchase Shares which it or they are obligated to purchase on the Closing Date
and the aggregate number of Shares with respect to which such default occurs is
more than one-tenth of the aggregate number of Shares which the Underwriters are
obligated to purchase on the Closing Date and arrangements satisfactory to you
and the Trust for the purchase of such Shares by one or more non-defaulting
Underwriters or other party or parties approved by you and the Trust are not
made within 36 hours after such default, this Agreement will terminate without
liability on the part of any non-defaulting Underwriter or the Trust. In any
such case which does not result in termination of this Agreement, either you or
the Trust shall have the right to postpone the Closing Date, but in no event for
longer than seven days, in order that the required changes, if any, in the
Registration Statement and the Prospectus or any other documents or arrangements
may be effected. Any action taken under this paragraph shall not relieve any
defaulting Underwriter from liability in respect of any such default of any such
Underwriter under this Agreement. The term "Underwriter" as used in this
Agreement includes, for all purposes of this Agreement, any party not listed in
Schedule I hereto who, with your approval and the approval of the Trust,
purchases Shares which a defaulting Underwriter is obligated, but fails or
refuses, to purchase.
Any notice under this Section 11 may be given by telegram, telecopy
or telephone but shall be subsequently confirmed by letter.
12. Termination of Agreement. This Agreement shall be subject to
termination in your absolute discretion, without liability on the part of any
Underwriter to the Trust or the Advisor, by notice to the Trust or the Advisor,
if prior to the Closing Date or any Option Closing
<PAGE> 30
30
Date (if different from the Closing Date and then only as to the Option Shares),
as the case may be, (i) trading in securities generally on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market shall have
been suspended or materially limited, (ii) a general moratorium on commercial
banking activities in New York shall have been declared by either federal or
state authorities, or (iii) there shall have occurred any outbreak or escalation
of hostilities or other international or domestic calamity, crisis or change in
political, financial or economic conditions, the effect of which on the
financial markets of the United States is to make it, in your judgment,
impracticable or inadvisable to commence or continue the offering of the Shares
at the offering price to the public set forth on the cover page of the
Prospectus or to enforce contracts for the resale of the Shares by the
Underwriters. Notice of such termination may be given to the Trust by telegram,
telecopy or telephone and shall be subsequently confirmed by letter.
13. Information Furnished by the Underwriters. The statements set
forth in the last paragraph on the cover page, and the statements in the first
and third paragraphs under the caption "Underwriting" in any Prepricing
Prospectus and in the Prospectus, constitute the only information furnished by
or on behalf of the Underwriters through you as such information is referred to
in Sections 6(b) and 8 hereof.
14. Miscellaneous. Except as otherwise provided in Sections 5, 11
and 12 hereof, notice given pursuant to any provision of this Agreement shall be
in writing and shall be delivered (i) if to the Trust or the Advisor, at the
office of the Trust at One Financial Center, Boston, MA 02111, Attention:
Secretary; or (ii) if to you, as Representatives of the several Underwriters, to
Salomon Smith Barney Inc., 388 Greenwich Street, New York, New York 10013,
Attention: Manager, Investment Banking Division.
This Agreement has been and is made solely for the benefit of the
several Underwriters, the Trust, the Advisor, their directors and officers, and
the other controlling persons referred to in Section 8 hereof and their
respective successors and assigns, to the extent provided herein, and no other
person shall acquire or have any right under or by virtue of this Agreement.
Neither the term "successor" nor the term "successors and assigns" as used in
this Agreement shall include a purchaser from any Underwriter of any of the
Shares in his status as such purchaser.
15. Notice. A copy of the Agreement and Declaration of Trust of the
Trust is on file with the Secretary of State of the Commonwealth of
Massachusetts, and notice is hereby given that this Agreement is executed on
behalf of the Trust by an officer or Trustee of the Trust in his or her capacity
as an officer or Trustee of the Trust and not individually and that the
obligations of or arising out of this instrument are not binding upon any of the
Trustees, officers or shareholders individually but are binding only upon the
assets and property of the Trust.
16. Applicable Law; Counterparts. This Agreement shall be governed
by and construed in accordance with the laws of the State of New York.
<PAGE> 31
31
This Agreement may be signed in various counterparts which together
constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
[End of text]
<PAGE> 32
32
Please confirm that the foregoing correctly sets forth the agreement among
the Trust, the Advisor and the several Underwriters.
Very truly yours,
COLONIAL CALIFORNIA INSURED
MUNICIPAL FUND
By:______________________________
COLONIAL MANAGEMENT ASSOCIATES,
INC.
By:______________________________
Confirmed as of the date first
above mentioned on behalf of [itself] [themselves] and the
other several Underwriters named in Schedule I hereto.
SALOMON SMITH BARNEY INC.
[ ]
As Representatives of the Several Underwriters
By: SALOMON SMITH BARNEY INC.
By:______________________________
Managing Director
<PAGE> 33
1
SCHEDULE I
COLONIAL CALIFORNIA INSURED MUNICIPAL FUND
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ------
<S> <C>
Salomon Smith Barney Inc. ..................
------
[Others..................................... ]
------
Total.......................................
------
</TABLE>
<PAGE> 1
Exhibit (j)(2)
AMENDMENT NO. 8 TO SCHEDULE A
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first-above written.
CUSTOMER
Trust Series
Liberty Funds Trust I Colonial High Yield Securities Fund
Colonial Income Fund
Colonial Strategic Income Fund
Stein Roe Advisor Tax-Managed Growth Fund
Stein Roe Advisor Tax-Managed Value Fund
Liberty Funds Trust II Colonial Money Market Fund
Colonial Intermediate U.S. Government Fund
Colonial Short Duration U.S. Government Fund
Newport Tiger Cub Fund
Newport Japan Opportunities Fund
Newport Greater China Fund
Liberty Funds Trust III Colonial Select Value Fund
The Colonial Fund
Colonial Federal Securities Fund
Colonial Global Equity Fund
Colonial International Horizons Fund
Colonial Global Utilities Fund
Colonial Strategic Balanced Fund
The Crabbe Huson Special Fund
Crabbe Huson Small Cap Fund
Crabbe Huson Real Estate Investment Fund
Crabbe Huson Equity Fund
Crabbe Huson Managed Income & Equity Fund
Crabbe Huson Oregon Tax-Free Fund
Crabbe Huson Contrarian Income Fund
Crabbe Huson Contrarian Fund
Liberty Funds Trust IV Colonial Tax-Exempt Fund
Colonial Tax-Exempt Insured Fund
Colonial Municipal Money Market Fund
Colonial High Yield Municipal Fund
Colonial Utilities Fund
Colonial Intermediate Tax-Exempt Fund
Colonial Counselor Select Income Portfolio
Colonial Counselor Select Balanced Portfolio
Colonial Counselor Select Growth Portfolio
Liberty Funds Trust V Colonial Massachusetts Tax-Exempt Fund
Colonial Minnesota Tax-Exempt Fund
Colonial Michigan Tax-Exempt Fund
Colonial New York Tax-Exempt Fund
Colonial Ohio Tax-Exempt Fund
Colonial California Tax-Exempt Fund
Colonial Connecticut Tax-Exempt Fund
Colonial Florida Tax-Exempt Fund
Colonial North Carolina Tax-Exempt Fund
Liberty Funds Trust VI Colonial U.S. Growth & Income Fund
Colonial Small Cap Value Fund
Colonial Value Fund
Newport Asia Pacific Fund
Liberty Funds Trust VII Newport Tiger Fund
Newport Europe Fund
Colonial Intermediate High Income Fund
Colonial InterMarket Income Trust I
Page 1
<PAGE> 2
Colonial Municipal Income Trust
Colonial High Income Municipal Trust
Colonial Investment Grade Municipal Trust
Colonial Insured Municipal Fund
Colonial California Insured Municipal Fund
Colonial Massachusetts Insured Municipal Fund
Colonial New York Insured Municipal Fund
Liberty All-Star Growth Fund, Inc.
Liberty All-Star Equity Fund
Liberty Variable Investment Trust
Colonial Growth and Income Fund,
Variable Series Stein Roe Global Utilities Fund,
Variable Series Colonial International Fund for Growth,
Variable Series Colonial U.S. Growth & Income Fund,
Variable Series Colonial Strategic Income Fund,
Variable Series Newport Tiger Fund,
Variable Series Liberty All-Star Equity Fund,
Variable Series Colonial High Yield Securities Fund,
Variable Series Colonial Small Cap Value Fund,
Variable Series Colonial International Horizons Fund,
Variable Series Colonial Global Equity Fund,
Variable Series Crabbe Huson Real Estate Investment Fund,
Variable Series
By: /s/ Nancy L. Conlin
---------------------------------
Nancy L. Conlin
October 25, 1999
THE CHASE MANHATTAN BANK
/s/ Rosemary M. Stidmon
By: ---------------------------------
Rosemary M. Stidmon
October 25, 1999
Page 2 of 2
<PAGE> 1
Exhibit (k(1)
BANKBOSTON, N.A.
STOCK TRANSFER AGENT SERVICES AGREEMENT FOR:
COLONIAL CALIFORNIA INSURED MUNICIPAL FUND
This Agreement sets forth the terms and conditions under which BankBoston, N.A.
(hereinafter referred to as "BankBoston") will serve as sole Transfer Agent,
Registrar, Dividend Disbursement and Dividend Reinvestment Agent for the Common
Stock of Colonial California Insured Municipal Fund (hereinafter referred to as
"CCIMF").
A. TERM
The term of this Agreement shall be for a period of three (3) years,
commencing from the effective date of this Agreement, October 25, 1999.
B. FEE FOR STANDARD SERVICES
For the standard services as stated in Section C provided by BankBoston
under this Agreement, CCIMF will be charged as follows:
$2,000.00 Monthly Administrative Fee
$2,500.00 One-Time Project Fee To Establish New Fun
Escalation: This Agreement shall be self renewing for additional three
year term and the fees to be paid under this agreement after the initial
three year term shall be readjusted upon agreement by both parties taking
into account a number of factors, including service mix, volumes and the
accumulated change in the National Employment Cost Index for Service
Producing Industries (Finance, Insurance, Real Estate) for the preceding
years of the contract, as published by the Bureau of Labor Statistics of
the United States Department of Labor. Fees will be increased or decreased
on this basis on each successive contract anniversary thereafter.
Open Accounts: The terms of this Agreement will cover up to 2,000 Open
Accounts per annum. Excess to be billed at $12.00 per Open Account.
C. STANDARD SERVICES
BankBoston agrees to provide the following services to CCIMF in accordance
with the standard fee set forth in Section B.
Account Maintenance:
1. Establish New Fund and annual services as Transfer Agent, Registrar,
Dividend Disbursement and Dividend Reinvestment Agent.
2. Maintaining shareholder accounts, including the processing of new
accounts, preparation and mailing W-9 certifications to new accounts
and closing accounts.
3. Posting and acknowledging address changes, tax ID number changes and
W-9 certification, and all other routine file maintenance
adjustments.
4. On-line remote access to shareholder and Fund database.
5. Posting all transactions, including routine and non-routine debit
and credit certificates. To include all book or unissued shareholder
transfer activity.
6. Issuance and registration of stock certificates annually. *
7. Researching and responding to all written shareholder and broker
inquiries and phone inquiries.
Colonial California Insured Municipal Fund
<PAGE> 2
Page 2
8. Daily Transfer Activity Journals reflecting ownership changes to be
mailed to CCIMF at the close of each week if required.
9. Processing all New York Window items, mail items and legal
transfers.
10. Processing Indemnity Bonds, placing certificate stop transfer orders
and replacing lost certificates.
11. Coding multiple accounts at a single household to suppress duplicate
report mailings.
12. Maintaining closed accounts.
Mailing & Report Production Services:
1. Addressing and mailing four (4) registered shareholder reports or
letters via First Class Mail per annum.
2. Preparing two (2) full or partial shareholder reports (including
Statistical Reports) per annum.
3. Preparing twelve (12) sets of shareholder labels per annum.
4. Abandoned Property Reports provided at $1,000 per report and $3.00
per respondent.
Annual Meeting Services:
1. Preparing one (1) full stockholder list as of the Annual Meeting
record date.
2. Addressing proxy cards for registered shareholders.
3. Enclosing and mailing proxy cards with proxy statement, annual
report and postage paid return envelope to all registered
shareholders.
4. Preparing one (1) set of registered broker labels and one (1) list
of registered brokers for the Broker Search.
5. Receiving, opening and examining returned proxies.
6. Writing in connection with unsigned or improperly executed proxies.
7. Tabulating returned proxies to include an unlimited number of
proposals.
8. Providing summary reports on the Proxy Vote Tabulation status as
requested.
9. Interface with Solicitor appointed by CCIMF.
10. Preparing one (1) final Annual Meeting list reflecting how each
account has voted on each proposal.
11. Attending the Annual Meeting as Inspector of Election.
12. Respondent Bank Services to include:
- Processing each respondent bank omnibus proxy received.
- Mailing respondent bank search cards.
Colonial California Insured Municipal Fund
<PAGE> 3
Page 3
Note: all out-of-pocket expenses including overprinting proxy cards, card
stock, envelopes, postage and telecopy charges will be billed as incurred.
Dividend Disbursement Services:
As Dividend Disbursing and Paying Agent, BankBoston will perform the
dividend related services listed, pursuant to the following terms and
conditions:
* All funds must be received by 1:00 p.m. Eastern Time on the Mail Date
via Federal Funds Wire or BankBoston Bank Demand Deposit account debit.
1. Preparing and mailing monthly dividend checks with an additional
enclosure.
2. Providing Automated Clearinghouse Funds (ACH) services.
3. Replacing lost dividend checks.
4. Providing photo copies of cashed dividend checks if requested.
5. Processing and record keeping of accumulated uncashed dividends.
6. Reconciling paid and outstanding dividend checks.
7. Coding RPO/SAUK accounts to suppress mailing dividend checks to
undeliverable addresses.
8. Effecting wire transfer of funds to Depository Trust Company on
payable date.
9. Preparing and filing Federal Information Returns (Form 1099-DIV) of
dividends paid during the year and mailing Forms 1099-DIV to each
shareholder.
10. Preparing and filing State Information Returns of dividends paid
during the year to shareholders resident within such State in
accordance with current State Filing regulations.
11. Preparing and filing annual withholding return (Form 1042) and
payments to the government of income taxes withheld from
Non-resident Aliens and mailing Forms 1042 to each foreign
shareholder.
12. Performing the following duties as required by the Interest and
Dividend Tax Compliance Act of 1983:
* Withholding tax from shareholder accounts not in
compliance with the provisions of the Act.
* Reconciling and reporting taxes withheld, including
additional 1099 reporting requirements, to the Internal
Revenue Service.
* Responding to shareholders regarding the regulations.
* Mailing to new accounts which have had taxes withheld,
to inform them of procedures to be followed to cease
future back-up withholding.
* Annual mailing to pre-1984 accounts for which Tax
Identification Numbers (TIN) have not yet been
certified.
* Performing shareholder file adjustments to reflect TIN
certifications.
Note: Depository Wire charges required to fund dividend payments will be
billed to CCIMF as an expense.
Colonial California Insured Municipal Fund
<PAGE> 4
Page 4
Dividend Reinvestment Services:
1. As Administrator for the Open Market and/or Original Issue Dividend
Reinvestment Plans ("DRP"), BankBoston will perform the listed DRP
related services:
2. Reinvestment and/or optional cash investment transactions of DRP
participants. *
3. Processing DTC quarterly reinvestments at $250 per investment.
4. Preparing and mailing a year-to-date dividend reinvestment statement
with an additional enclosure to DRP participants upon completion of
each reinvestment.
5. Preparing and mailing a year-to-date optional cash investment
statement to participants upon the completion of each investment.
6. Maintaining DRP accounts and establishing new DRP accounts.
7. Processing sale/termination requests. *
8. Processing withdrawal requests.
9. Providing CCIMF with a Dividend Reinvestment Investment Summary
Report for each reinvestment and/or optional cash investment.
10. Providing Safekeeping for DRP participant stock certificates.
11. Researching and responding to shareholder inquiries regarding the
Plan.
12. Preparing and mailing Forms 1099 and Forms 1042 to DRP participants
and completing related filings with the IRS.
13. Preparing, mailing and filing Form 1099B relating to DRP sales.
D. LIMITATIONS
The fees as stated in Section B include:
* The issuance and registration of 2,000 stock certificates per
annum. Excess to be billed at $1.50 per stock certificate.
* A total of 20,000 DRP transactions (defined as a dividend
reinvestment and/or cash investment), per annum. Excess to be
billed at $1.25 each.
* ACH $250 per investment, per fund.
* DRP Redemptions (sales or withdrawals) to be billed at $10.00
each (shareholder paid)
Colonial California Insured Municipal Fund
<PAGE> 5
Page 5
E. SERVICES NOT COVERED
Items not included in the fees set forth in this Agreement for "Standard
Services" Section B such as payment of stock dividends or splits or any
other services associated with a special project will be billed separately
on an appraisal basis.
Services required by legislation or regulatory fiat which become effective
after the date of this Agreement shall not be a part of the Standard
Services and shall be billed by appraisal.
All out-of-pocket expenses such as telephone line charges associated with
toll free telephone calls, overprinting, insurance, stationary, envelopes,
telecopy charges, excess material storage and disposal will be billed to
CCIMF as incurred.
F. OTHER TERMS & CONDITIONS
Good funds to cover postage expenses in relation to the mailing of Annual
Meeting materials by BankBoston by 1:00 p.m. Eastern Time on the scheduled
mailing date.
Overtime charges will be assessed in the event material is delivered late
for shareholder mailings unless the mail date is rescheduled to a later
date. Such material includes, but is not limited to: proxy statements,
annual, semi and quarterly reports, dividend enclosures and news releases.
Receipt of material for mailing to shareholders must be received three (3)
full business days in advance of the scheduled mail date.
G. BILLING DEFINITION OF ACCOUNT MAINTENANCE
For billing purposes, number of accounts will be based on open accounts on
file at the beginning of each billing period, plus any new accounts added
during the billing period.
H. TERMINATION
This Agreement may be terminated by either party upon sixty (60) days
written notice to the other. However, BankBoston may terminate this
Agreement upon written notice to CCIMF if CCIMF has breached its
obligation as described in Section I set forth below by failing to make
payment of invoices for a period of three (3) consecutive months and CCIMF
has failed to cure such breach within five (5) business days of receipt of
such notice.
Should CCIMF or BankBoston exercise its right to terminate this Agreement,
all reasonable out-of-pocket expenses associated with the transfer of
records and material will be borne by CCIMF. Out-of-pocket expenses may if
required, include costs associated with any year-end Federal and/or State
tax reporting responsibilities.
I. PAYMENT FOR SERVICES
It is agreed that invoices will be rendered and payable on a monthly
basis. Each billing period will, therefore, be for a one (1) month
duration. CCIMF agrees to pay all fees and reimbursable expenses within
thirty (30) days following the receipt of the respective billing invoice.
Interest charges may begin to accrue on unpaid balances for more than
forty-five (45) days.
Colonial California Insured Municipal Fund
<PAGE> 6
Page 6
J. NON-ASSIGNABILITY
This Agreement, and duties, obligations and services to be provided
herein, may not be assigned or otherwise transferred without prior written
consent of CCIMF.
K. CONFIDENTIALITY
The information contained in this Agreement is confidential and
proprietary in nature. By receiving this Agreement, both parties agree
that none of its directors, officers, employees, or agents without the
prior written consent of the other party will divulge, furnish or make
accessible to any third party, except as permitted by the next sentence,
any part of this Agreement or information in connection therewith which
has been or may be made available to it. In this regard, both parties
agree that they will limit their access to the Agreement and such
information to only those officers and employees with responsibilities for
analyzing the Agreement and to such independent consultants hired
expressly for the purpose of assisting in such analysis. In addition, both
parties agree that any persons to whom such information is properly
disclosed shall be informed on the confidential nature of the Agreement
and the information relating thereto, and shall be directed to treat the
same appropriately.
L. CONTRACT ACCEPTANCE
In witness whereof, the parties hereto have caused this Agreement to be
executed by their respective officers, hereunto duly agreed and
authorized, as of the effective date of this Agreement.
M. LIMITATION OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS (RIDER)
A copy of the Agreement and Declaration of Trust of the Fund is on file
with the Secretary of The Commonwealth of Massachusetts, and notice is
hereby given that this Agreement is executed on behalf of the Trustees of
the Fund as Trustees and not individually and that the obligations of this
Agreement are not binding upon any of the Trustees, officers or
shareholders individually but are binding only upon the assets and
property of the fund.
BANKBOSTON, N.A. COLONIAL CALIFORNIA INSURED MUNICIPAL FUND
By: /s/ David D. Dixon By: /s/ Nancy L. Conlin
------------------------ ---------------------------
Title: Vice President Title: Secretary
<PAGE> 1
Exhibit (k)(2)
PRICING AND BOOKKEEPING AGREEMENT
AGREEMENT dated as of October 26, 1999, between Colonial California Insured
Municipal Fund (Fund) and Colonial Management Associates, Inc. (Colonial), a
Massachusetts corporation. The Fund and Colonial agree as follows:
1. APPOINTMENT. The Fund appoints Colonial as agent to perform the services
described below, such appointment to take effect October 26, 1999.
2. SERVICES. Colonial shall (i) determine and timely communicate to persons
designated by the Fund the Fund's net asset value and offering prices per share;
and (ii) maintain and preserve in a secure manner the accounting records of the
Fund. All records shall be the property of the Fund. Colonial will provide
disaster planning to minimize possible service interruption.
3. AUDIT, USE AND INSPECTION. Colonial shall make available on its premises
during regular business hours all records of a Fund for reasonable audit, use
and inspection by the Fund, its agents and any regulatory agency having
authority over the Fund.
4. COMPENSATION. The Fund will pay Colonial a monthly fee of $1,500 for the
first $50 million of Fund assets, plus a monthly percentage fee at the following
annual rates: 0.0233% on the next $950 million; 0.0167% on the next $1 billion;
0.0100% on the next $1 billion; and 0.0007% on the excess over $3 billion of the
average weekly net assets of the Fund for such month.
5. COMPLIANCE. Colonial shall comply with applicable provisions relating to
pricing and bookkeeping of the prospectus and statement of additional
information of the Fund and applicable laws and rules in the provision of
services under this Agreement.
6. LIMITATION OF LIABILITY. In the absence of willful misfeasance, bad
faith or gross negligence on the part of Colonial, or reckless disregard of its
obligations and duties hereunder, Colonial shall not be subject to any liability
to the Fund, to any shareholder of the Fund or to any other person, firm or
organization, for any act or omission in the course of, or connected with,
rendering services hereunder.
7. AMENDMENTS. The Fund shall submit to Colonial a reasonable time in
advance of filing with the Securities and Exchange Commission copies of any
changes in its Registration Statements. If a change in documents or procedures
materially increases the cost to Colonial of performing its obligations,
Colonial shall be entitled to receive reasonable additional compensation.
8. DURATION AND TERMINATION, ETC. This Agreement may be changed only by
writing executed by each party. This Agreement: (a) shall continue in effect
from year to year so long as approved annually by vote of a majority of the
Trustees who are not affiliated with Colonial; (b) may be terminated at any time
without penalty by sixty days' written notice to either party; and (c) may be
terminated at any time
<PAGE> 2
for cause by either party if such cause remains unremedied for a reasonable
period not to exceed ninety days after receipt of written specification of such
cause. Paragraph 6 of this Agreement shall survive termination. If the Fund
designates a successor to any of Colonial's obligations, Colonial shall, at the
expense and direction of the Fund, transfer to the successor all Fund records
maintained by Colonial.
9. MISCELLANEOUS. This Agreement shall be governed by the laws of The
Commonwealth of Massachusetts.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
day and year first above.
COLONIAL CALIFORNIA INSURED MUNICIPAL FUND
By: /s/ J. KEVIN CONNAUGHTON, CONTROLLER
------------------------------------
J. Kevin Connaughton, Controller
COLONIAL MANAGEMENT ASSOCIATES, INC.
By: /s/ NANCY L. CONLIN, SENIOR VICE PRESIDENT
------------------------------------------
Nancy L. Conlin, Senior Vice President
A copy of the document establishing the Fund is filed with the Secretary of The
Commonwealth of Massachusetts. This Agreement is executed by officers not as
individuals and is not binding upon any of the Trustees, officers or
shareholders of the Fund individually but only upon the assets of the Fund.
<PAGE> 1
Exhibit (k)(3)
FEE WAIVER AGREEMENT
-------------------------------
AGREEMENT made this 25th day of October, 1999, by and between COLONIAL
CALIFORNIA INSURED MUNICIPAL FUND, a Massachusetts business trust (the "Fund"),
and COLONIAL MANAGEMENT ASSOCIATES, INC., a Massachusetts corporation (the
"Adviser").
WHEREAS, the Fund and the Adviser have separately entered into an Investment
Management Agreement of even date herewith (the "Management Agreement");
In consideration of the mutual covenants hereinafter contained, and in
connection with the establishment and commencement of operations of the Fund, it
is hereby agreed by and between the parties hereto as follows:
1. For the period from the commencement of the Fund's operations through
November 30, 1999 and for the 12 month periods ending November 30 in each
indicated year during the term of the Management Agreement (including any
continuation done in accordance with Section 15(c) of the Investment Company Act
of 1940), the Adviser agrees to waive management fees in the amounts determined
by applying the following annual rates to the average daily net assets of the
Fund:
<TABLE>
<CAPTION>
Period Ending Period Ending
November 30 Waiver November 30 Waiver
------------- ------ ------------- ------
<S> <C> <C> <C>
1999 .30%
2000 .30% 2005 .25%
2001 .30% 2006 .20%
2002 .30% 2007 .15%
2003 .30% 2008 .10%
2004 .30% 2009 .05%
</TABLE>
2. This Agreement, and the Adviser's obligation to so waive expenses
hereunder, shall terminate on the earlier of (a) November 30, 2009 or (b)
termination of the Management Agreement.
3. Except as provided in paragraph 2 above, this Agreement may be
terminated only by the vote of (a) the Board of Trustees of the Fund, including
the vote of the members of the Board who are not "interested persons" within the
meaning of the Investment Company Act of 1940, and (b) a majority of the
outstanding voting securities of the Fund.
4. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule, or otherwise, the remainder shall not be thereby
affected.
<PAGE> 2
5. The Fund's Declaration of Trust is on file with the Secretary of the
Commonwealth of Massachusetts. This Agreement is executed on behalf of the Fund
by the Fund's officers as officers and not individually and the obligations
imposed upon the Fund by this Agreement are not binding upon any of the Fund's
Trustees, officers or shareholders individually but are binding only upon the
assets and property of the Fund.
IN WITNESS WHEREOF, the Fund and the Adviser have caused this Agreement to be
executed on the day and year above written.
COLONIAL CALIFORNIA INSURED
MUNICIPAL FUND
By: /s/ J. Kevin Connaughton
---------------------------------
Attest: /s/ William J. Ballou
-----------------------------
Assistant Secretary
COLONIAL MANAGEMENT ASSOCIATES, INC.
By: /s/ Nancy L. Conlin
---------------------------------
Attest: /s/ William J. Ballou
-----------------------------
Assistant Secretary
2
<PAGE> 1
Exhibit (1)
October 26, 1999
Colonial California Insured Municipal Fund
One Financial Center
Boston, Massachusetts 02111
Ladies and Gentlemen:
We have acted as counsel to Colonial California Insured Municipal Fund (the
"Trust") in connection with the Registration Statement of the Trust on Form N-2
(File No. 333-84993) under the Securities Act of 1933 and the Investment
Company Act of 1940 (File No. 811-09537) (the "Registration Statement") as
amended (the "Acts"), with respect to certain of its common shares of beneficial
interest (the "Common Shares"). The Common Shares are to be sold pursuant to an
Underwriting Agreement substantially in the form filed as an exhibit to the
Registration Statement (the "Underwriting Agreement") among the Trust, Colonial
Management Associates, Inc., Salomon Smith Barney Inc., A.G. Edwards & Sons,
Inc., PaineWebber Incorporated, Sutro & Co. Incorporated and Wedbush Morgan
Securities.
We have examined the Trust's Agreement and Declaration of Trust on file in
the office of the Secretary of State of the Commonwealth of Massachusetts, as
amended (the "Declaration of Trust"), and the Trust's By-Laws (the "By-Laws"),
and are familiar with the actions taken by the Trust in connection with the
issuance and sale of the Common Shares. We have also examined such other
documents and records as we have deemed necessary for the purposes of this
opinion.
Based upon the foregoing, we are of the opinion that:
1. The Trust is a duly organized and validly existing unincorporated
association under the laws of the Commonwealth of Massachusetts.
<PAGE> 2
Colonial California Insured Municipal Fund -2- October 26, 1999
2. The Common Shares have been duly authorized and, when issued and paid
for in accordance with the Underwriting Agreement, will be validly issued, fully
paid and nonassessable by the Trust.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that a notice of such disclaimer be given
in each note, bond, contract, instrument, certificate or undertaking entered
into or executed by the Trust or its Trustees. The Declaration of Trust provides
for indemnification out of the property of the Trust for all loss and expense of
any shareholder of the Trust held personally liable solely by reason of his
being or having been a shareholder. Thus, the risk of a shareholder's incurring
financial loss on account of being a shareholder is limited to circumstances in
which the Trust itself would be unable to meet its obligations.
We understand that this opinion is to be used in connection with the
registration of the Common Shares for offering and sale pursuant to the
Securities Act of 1933, as amended. We consent to the filing of this opinion
with and as part of the Registration Statement and to the references to our firm
in the related prospectus under the captions "Tax Matters" and "Legal Opinions"
in the Prospectus contained in the Registration Statement.
Very truly yours,
/s/ Ropes & Gray
---------------------------------
Ropes & Gray
<PAGE> 1
Exhibit (n)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Pre-Effective Amendment No. 3 to the registration
statement on Form N-2 (the "Registration Statement") of our report dated October
26, 1999 relating to the financial statements of Colonial California Insured
Municipal Fund, which appears in such Statement of Additional Information which
constitutes part of this Registration Statement. We also consent to the
references to us under the headings "Independent Accountants" and "Financial
Statements" in such Statement of Additional Information.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
October 26, 1999
<PAGE> 1
Exhibit (r)
POWER OF ATTORNEY FOR SIGNATURE
The undersigned constitutes William J. Ballou, Suzan M. Barron, Nancy L. Conlin,
Ellen Harrington, Timothy J. Jacoby, John M. Loder and John W. Reading
individually, as my true and lawful attorney, with full power to each of them to
sign for me and in my name, any and all registration statements and any and all
amendments to the registration statements filed under the Securities Act of 1933
or the Investment Company Act of 1940 with the Securities and Exchange
Commission for the purpose of complying with such registration requirements in
my capacity as a trustee of Colonial Insured Municipal Fund, Colonial New York
Insured Municipal Fund, Colonial Massachusetts Insured Municipal Fund and
Colonial California Insured Municipal Fund. This Power of Attorney authorizes
the above individuals to sign my name and will remain in full force and effect
until specifically rescinded by me.
I specifically permit this Power of Attorney to be filed as an exhibit to any
registration statement or amendment to a registration statement of Colonial
Insured Municipal Fund, Colonial New York Insured Municipal Fund, Colonial
Massachusetts Insured Municipal Fund and Colonial California Insured Municipal
Fund, and I request that this Power of Attorney constitute authority to sign
additional amendments and registration statements by virtue of its incorporation
by reference into any registration statements or amendments for Colonial Insured
Municipal Fund, Colonial New York Insured Municipal Fund, Colonial Massachusetts
Insured Municipal Fund and Colonial California Insured Municipal Fund.
In witness whereof, I have signed this Power of Attorney on this 20th day of
August, 1999.
Robert J. Birnbaum James L. Moody, Jr.
Tom Bleasdale John J. Neuhauser
John V. Carberry Thomas E. Stitzel
Lora S. Collins Robert L. Sullivan
James E. Grinnell Anne-Lee Verville
Richard W. Lowry
Salvatore Macera
William E. Mayer
Page 1
