<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 18, 1998
SECURITIES ACT FILE NO. 333-50141
INVESTMENT COMPANY ACT FILE NO. 811-5567
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. ____1______ [X]
Post-Effective Amendment No.___________ [ ]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. ___8______ [X]
COLONIAL INTERMEDIATE HIGH INCOME FUND
(Exact Name of Registrant as Specified in Charter)
One Financial Center, Boston, Massachusetts 02111
(Address of Principal Executive Offices)
(617) 426-3750
(Registrant's Telephone Number, including Area Code)
William J. Ballou, Esq.
Colonial Management Associates, Inc.
One Financial Center
Boston, Massachusetts 02111-2621
(Name and Address of Agent For Service)
With a copy to:
John M. Loder, Esq. Thomas A. Hale, Esq.
Ropes & Gray Skadden, Arps, Slate, Meagher & Flom (Illinois)
One International Place 333 West Wacker Drive
Boston, Massachusetts 02110-2624 Chicago, Illinois 60606-1285
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after the effective date of this Registration Statement.
If any securities being registered on this form will be offered on a delayed or
continuous basis in reliance on Rule 415 under the Securities Act of 1933, other
than securities offered in connection with a dividend
reinvestment plan, check the following box. [X]
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
PROPOSED PROPOSED
TITLE OF MAXIMUM MAXIMUM
SECURITIES AMOUNT OFFERING AGGREGATE AMOUNT OF
BEING BEING PRICE PER OFFERING REGISTRATION
REGISTERED REGISTERED SHARE(1) PRICE(1) FEE(2)
- ---------- ---------- --------- --------- ------------
Shares of
Beneficial
Interest 5,010,532 $7.625 $38,205,306 $11,271
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933. Based
on the average of the high and low sales prices reported on the
average of the high and low sales prices reported on the New York
Stock Exchange on April 10, 1998.
(2) $11,207 of the Registration Fee has been previously paid.
<PAGE> 2
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
COLONIAL INTERMEDIATE HIGH INCOME FUND
FORM N-2
CROSS REFERENCE SHEET
Item Number and Heading Caption in Prospectus
------------------------ --------------------
Part A
------
1. Outside Front Cover Cover Page
2. Inside Front and Outside Cover Page
Back Cover Page
3. Fee Table and Synopsis Fee Table; Prospectus Summary
4. Financial Highlights Financial Highlights
5. Plan of Distribution Cover Page; Prospectus Summary;
The Offer
6. Selling Stockholders Not Applicable
7. Use of Proceeds Use of Proceeds
8. General Description of the Cover Page; Prospectus Summary;
Registrant The Fund; Investment Policies
and Limitations; Risk Factors and
Special Considerations;
Financial Highlights; Information
Regarding Senior Securities;
Description of Shares of Beneficial
Interest; Description of Term Note
9. Management Prospectus Summary; The Adviser;
Information Regarding Senior
Securities; Description of Shares of
Beneficial Interest;
Description of Term Note; Custodian,
Transfer Agent, Dividend
Disbursing Agent and Registrar
10. Capital Stock, Long-Term Description of Term Note; Information
Debt and Other Securities Regarding Senior Securities;
Description of Shares of Beneficial
Interest; Federal Taxation; Investment
Policies and Limitations;
Dividends and Distributions; Dividend
Reinvestment Plan;
Financial Highlights
11. Defaults and Arrears on Not Applicable
Senior Securities
12. Legal Proceedings Not Applicable
13. Table of Contents of the Statement of Additional Information
Caption in Statement of
Additional Information
-------------------------
Part B
-------
14. Cover Page Cover Page
15. Table of Contents Table of Contents
16. General Information and Not Applicable
History
17. Investment Objective and Investment Objective and
Policies Policies; Fundamental
Investment Policies;
Other Investment Policies
18. Management Trustees and Officers
19. Control Persons and Ownership of the Fund
Principal Holders of
Securities
20. Investment Advisory and Fund Charges and Expenses;
Other Services Management of the Fund;
Custodian;
Independent Accountants
21. Brokerage Allocation and Fund Charges and Expenses;
Other Practices Portfolio Transactions
22. Tax Status Taxes
23. Financial Highlights Financial Highlights
<PAGE> 3
COLONIAL INTERMEDIATE HIGH INCOME FUND
5,010,532 SHARES OF BENEFICIAL INTEREST
ISSUABLE UPON EXERCISE OF
RIGHTS TO SUBSCRIBE FOR SUCH SHARES
------------------------
Colonial Intermediate High Income Fund (the "Fund") is issuing to its
shareholders of record ("Record Date Shareholders"), as of the close of business
on May 26, 1998 (the "Record Date"), transferable rights ("Rights") entitling
the holders thereof to subscribe for up to 5,010,532 shares of beneficial
interest, no par value, of the Fund (the "Shares") at the rate of one Share for
every three Rights held (the "Offer"). Fractional shares will not be issued upon
the exercise of Rights. Record Date Shareholders will receive one Right for each
whole share held on the Record Date. Record Date Shareholders issued fewer than
three Rights are entitled to subscribe for one Share pursuant to the primary
subscription (as described herein). The Rights entitle each Record Date
Shareholder to subscribe, subject to certain limitations and subject to
allotment, for any Shares not acquired by exercise of the Rights. The Rights are
transferable and the Rights will be listed for trading on the New York Stock
Exchange (the "Exchange") under the symbol "CIF RT," subject to notice of
issuance. The Fund's shares trade on the Exchange under the symbol "CIF." The
Shares issued pursuant to the Offer will be listed on the Exchange, subject to
notice of issuance. See "The Offer." Record Date Shareholders, where the context
requires, shall also include beneficial owners whose shares are held of record
by Cede & Co. ("Cede"), nominee for The Depository Trust Company ("DTC"), or by
any other depository or nominee. THE SUBSCRIPTION PRICE PER SHARE (THE
"SUBSCRIPTION PRICE") WILL BE $6.75.
THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON JUNE 19, 1998
UNLESS EXTENDED AS DESCRIBED HEREIN (THE "EXPIRATION DATE").
AN IMMEDIATE DILUTION, WHICH COULD BE SUBSTANTIAL, OF THE AGGREGATE NET
ASSET VALUE OF THE SHARES OWNED BY RECORD DATE SHAREHOLDERS WHO DO NOT FULLY
EXERCISE THEIR RIGHTS MAY BE EXPERIENCED AS A RESULT OF THE OFFER BECAUSE THE
SUBSCRIPTION PRICE PER SHARE MAY BE LESS THAN THE FUND'S NET ASSET VALUE PER
SHARE ON THE EXPIRATION DATE, AND THE NUMBER OF SHARES OUTSTANDING AFTER THE
OFFER IS LIKELY TO INCREASE IN A GREATER PERCENTAGE THAN THE INCREASE IN THE
SIZE OF THE FUND'S ASSETS. IN ADDITION, AS A RESULT OF THE OFFER, RECORD DATE
SHAREHOLDERS WHO DO NOT FULLY EXERCISE THEIR RIGHTS SHOULD EXPECT THAT THEY
WILL, AT THE COMPLETION OF THE OFFER, OWN A SMALLER PROPORTIONAL INTEREST IN THE
FUND THAN WOULD OTHERWISE BE THE CASE. SEE "RISK FACTORS AND SPECIAL
CONSIDERATIONS--DILUTION" AND "THE OFFER." EXCEPT AS DESCRIBED HEREIN, RECORD
DATE SHAREHOLDERS AND HOLDERS OF RIGHTS ACQUIRED DURING THE SUBSCRIPTION PERIOD
WILL HAVE NO RIGHT TO RESCIND THEIR SUBSCRIPTIONS AFTER RECEIPT OF THEIR PAYMENT
FOR SHARES BY THE SUBSCRIPTION AGENT (AS DEFINED HEREIN).
The Fund is a diversified, closed-end management investment company with a
leveraged capital structure. The Fund's investment objective is to seek high
current income and total return by investing primarily in lower-rated corporate
debt securities. Under normal market conditions, the Fund invests primarily in a
professionally managed, diversified portfolio of debt securities rated in the
lower categories by established rating agencies (consisting principally of
securities rated "BBB" or lower by Standard & Poor's Ratings Group ("S&P") or
"Baa" or lower by Moody's Investors Service, Inc. ("Moody's," and together with
S&P, the "Rating Agencies")), or nonrated securities deemed by Colonial
Management Associates, Inc. (the "Adviser") to be of comparable quality.
Securities rated "BB" or lower by S&P or "Ba" or lower by Moody's are commonly
referred to as "high yield," high risk securities or "junk bonds." LOWER RATED
SECURITIES ENTAIL RISKS THAT ARE DIFFERENT AND MORE PRONOUNCED THAN THOSE
INVOLVED IN HIGHER RATED SECURITIES. AN INVESTMENT IN THE FUND IS NOT
APPROPRIATE FOR ALL INVESTORS, AND NO ASSURANCE CAN BE GIVEN THAT THE FUND WILL
ACHIEVE ITS INVESTMENT OBJECTIVE. SEE "RISK FACTORS AND SPECIAL CONSIDERATIONS."
The Fund's use of leverage creates the opportunity for greater total returns but
at the same time involves certain substantial risks. See "The Fund" and "Risk
Factors and Special Considerations--Risk of Leverage." The Adviser has served as
the Fund's investment adviser since the Fund's inception in 1988. Since the
Adviser's fee is based on the average weekly net assets of the Fund, the Adviser
will benefit from any increase in the Fund's net assets resulting from the
Offer. See "The Adviser."
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
SUBSCRIPTION PRICE SALES LOAD(1) PROCEEDS TO FUND(2)(3)
- -----------------------------------------------------------------------------------------------------------------
Per Share............................ $6.75 $0.25 $6.50
- -----------------------------------------------------------------------------------------------------------------
Total Maximum........................ $33,821,091 $1,268,291 $32,552,800
=================================================================================================================
</TABLE>
(footnotes on following page)
PAINEWEBBER INCORPORATED
THE DATE OF THIS PROSPECTUS IS MAY 19, 1998
<PAGE> 4
(continued from cover page)
Prior to the Expiration Date, PaineWebber Incorporated (the "Dealer
Manager") may offer Shares acquired through its purchase and exercise of Rights
at prices it sets from time to time. Because the Dealer Manager will determine
the price, it may realize profits or losses independent of any fees referred to
under "The Offer--Distribution Arrangements."
This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing. Investors are advised to
read this Prospectus and to retain it for future reference. Additional
information about the Fund is contained in the May 19, 1998 Statement of
Additional Information (the "SAI") which has been filed with the Securities and
Exchange Commission (the "Commission") and is obtainable free of charge by
calling the Adviser at 1-800-426-3750. The SAI is incorporated by reference in
(which means it is considered to be a part of) this Prospectus. See page 40 of
this Prospectus for a table of contents of the SAI.
All questions and inquiries relating to the Offer should be directed to
Shareholder Communications Corporation (the "Information Agent") at (800)
733-8481, ext. 486. The Fund's address is One Financial Center, Boston,
Massachusetts 02111, and its telephone number is (617) 426-3750.
The Fund announced its intention to make the Offer after the close of
trading on the Exchange on April 15, 1998. The net asset values per Share at the
close of business on April 10, 1998 (the last trading date on which the Fund
publicly reported its net asset value prior to the announcement of the Offer)
and on May 15, 1998 (the last trading date prior to the date of this Prospectus
on which the Fund publicly reported its net asset value) were $7.52 and $7.43,
respectively, and the last reported sales prices of a Share on the Exchange on
those dates were $7.688 and $7.625, respectively.
------------------------
(1) In connection with the Offer, the Fund has agreed to pay PaineWebber
Incorporated (the "Dealer Manager") a fee for its financial advisory,
marketing and soliciting services equal to 3.75% of the aggregate
Subscription Price for Shares issued pursuant to the Offer. The Dealer
Manager will reallow to broker-dealers included in the selling group to be
formed and managed by the Dealer Manager ("Selling Group Members")
solicitation fees equal to 2.50% of the Subscription Price per Share for
each Share issued pursuant to the Offer as a result of their soliciting
efforts. In addition, the Dealer Manager will reallow to other
broker-dealers that have executed and delivered a soliciting dealer
agreement and have solicited the exercise of Rights solicitation fees equal
to 0.50% of the Subscription Price per Share for each Share issued pursuant
to the exercise of Rights as a result of their soliciting efforts, subject
to a maximum fee based upon the number of Shares held by each broker-dealer
through DTC on the Record Date. The Fund and the Adviser have agreed to
indemnify the Dealer Manager and each Selling Group Member and soliciting
dealer against certain liabilities under the Securities Act of 1933, as
amended.
(2) Before deduction of offering expenses incurred by the Fund, estimated at
$500,000, which includes up to $100,000 that may be paid to the Dealer
Manager as partial reimbursement for its expenses relating to the Offer.
(3) Funds received by check prior to the final due date of this Offer will be
deposited into a segregated interest-bearing account (which interest will
accrue to the benefit of the Fund) pending proration and distribution of the
Shares.
-----------------------------
Certain numbers in this Prospectus have been rounded for ease of
presentation and, as a result, may not total precisely.
IN CONNECTION WITH THIS OFFERING, THE DEALER MANAGER MAY EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE RIGHTS AND THE
SHARES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, ON NASDAQ OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE> 5
PROSPECTUS SUMMARY
The following is qualified in its entirety by the more detailed information
included elsewhere in this Prospectus.
PURPOSE OF THE OFFER
The Board of Trustees of Colonial Intermediate High Income Fund (the
"Fund") has determined that it may be in the best interests of the Fund and its
shareholders to increase the number of outstanding shares of the Fund and to
increase the assets of the Fund available for investment.
In reaching its decision, the Board of Trustees of the Fund was advised by
the Fund's investment adviser, Colonial Management Associates, Inc. (the
"Adviser"), that an increase in the assets of the Fund would permit the Fund to
pursue attractive investment opportunities in the "high yield," high risk
securities market, while retaining portfolio investments that the Adviser
believes should continue to be held. The Adviser believes the Offer may result
in greater portfolio diversification opportunities and enhance its ability to
buy and sell larger blocks of securities on potentially better terms.
The Fund maintains a leveraged capital structure when it believes such a
capital structure is of potential benefit to shareholders. The Fund utilizes
leverage seeking to enhance returns to shareholders by borrowing capital at a
lower interest rate than that which the Fund earns on its investments. The Board
of Trustees believes that increasing the Fund's assets will provide the Fund
with additional flexibility in connection with the Fund's leverage, including
enhancing its ability to increase the Fund's existing leverage, while reducing
the overall effective cost of the leverage. For a discussion of the anticipated
impact of the Offer on the Fund's leverage, please refer to "Investment Policies
and Limitations" and "Risk Factors and Special Considerations--Risk of
Leverage."
In addition, the Board of Trustees believes that increasing the size of the
Fund may lower the Fund's expenses as a proportion of average net assets because
the Fund's fixed costs can be spread over a larger asset base. The Board of
Trustees also believes that a larger number of outstanding shares and a larger
number of beneficial owners of shares could increase the level of market
interest in the Fund and the liquidity of Fund shares on the New York Stock
Exchange (the "Exchange"). The distribution to shareholders of transferable
Rights which themselves may have a realizable value will also afford
nonparticipating shareholders the potential of receiving a cash payment upon
sale of such Rights, receipt of which may be viewed as partial compensation for
the dilution of their interest in the Fund that may result from the Offer.
The Board of Trustees also considered the impact of the Offer on the Fund's
current distributions. Based on the Adviser's assessment of current market
conditions in the lower rated debt market and available leverage opportunities,
the Board of Trustees believes the Offer will not result in a decrease in the
Fund's current level of dividends per share. For a further discussion of the
anticipated impact of the Offer on the Fund's dividends, please refer to "Risk
Factors and Special Considerations--Dividends and Distributions."
TERMS OF THE OFFER
The Fund is issuing to its shareholders of record ("Record Date
Shareholders") as of the close of business on May 26, 1998 (the "Record Date")
transferable rights ("Rights") entitling the holders thereof to subscribe for up
to 5,010,532 shares of beneficial interest, no par value (the "Shares"), of the
Fund (the "Offer"). Each such Record Date Shareholder is being issued one Right
for each whole share owned on the Record Date. The Rights entitle the holders
thereof to subscribe for one Share for every three Rights held (1-for-3).
Fractional shares will not be issued upon the exercise of Rights. Record Date
Shareholders issued fewer than three Rights are entitled to subscribe for one
Share pursuant to the primary subscription (as described below). Rights may be
exercised at any time during the subscription period (the "Subscription
Period"), which commences on May 26, 1998 and ends at 5:00 p.m., New York City
time, on June 19, 1998 unless extended by the Fund (the "Expiration Date"). The
Rights are evidenced by Subscription Certificates ("Subscription Certificates")
that will be mailed to Record Date Shareholders promptly following the Record
Date, except as discussed below under "Foreign Restrictions."
3
<PAGE> 6
Record Date Shareholders, where the context requires, shall also include
beneficial owners whose shares are held of record by Cede & Co. ("Cede"),
nominee for The Depository Trust Company ("DTC"), or by any other depository or
nominee. In the case of shares held of record by Cede or any other depository or
nominee, beneficial owners for whom Cede or any other depository or nominee is
the holder of record will be deemed to be the holders of the Rights that are
issued to Cede or such other depository or nominee on their behalf.
A Record Date Shareholder's right to acquire during the Subscription Period
at the Subscription Price one Share for every three Rights held is hereinafter
referred to as the "Primary Subscription." The Rights are transferable and
persons who become holders of Rights who are not Record Date Shareholders
("Rights Holders") may also purchase Shares in the Primary Subscription. All
Rights may be exercised until 5:00 p.m., New York City time, on the Expiration
Date. (Record Date Shareholders and Rights Holders purchasing Shares in the
Primary Subscription and those Record Date Shareholders who purchase Shares
pursuant to the Over-Subscription Privilege described below are hereinafter
referred to as "Exercising Rights Holders.")
The first dividend to be paid on Shares acquired upon exercise of Rights
will be the first monthly dividend, the record date for which occurs after the
issuance of such Shares. It is the Fund's present policy to pay dividends on the
last Friday on or before the 15th day of each month to shareholders of record on
the last Business Day (as defined herein) of the month prior to the payment
date. Except as described below, it is expected that the first dividend to be
paid on Shares issued pursuant to the Offer will be paid on or about August 14,
1998. To accommodate settlement of the Offer, the June 1998 record date for
dividends may be accelerated so that the issuance of Shares by the Fund in
connection with the Offer and the receipt of proceeds of such issuance by the
Fund, subject to certain exceptions, occurs shortly after the June 1998 record
date for dividends.
Prior to the Expiration Date, the Dealer Manager may offer Shares acquired
through the purchase and exercise of Rights at prices it sets from time to time.
To the extent such Shares are issued prior to a dividend record date of the Fund
that precedes the Expiration Date, such Shares will be paid the dividend
declared to the same extent as other shares outstanding on such dividend record
date, and thus, the issuance of such Shares may have a dilutive effect on the
income per share available for such dividend.
OVER-SUBSCRIPTION PRIVILEGE
Record Date Shareholders who fully exercise all Rights issued to them
(other than those Rights which cannot be exercised because they represent the
right to acquire less than one Share) are entitled to subscribe for those Shares
which were not otherwise subscribed for by others in the Primary Subscription
(the "Over-Subscription Privilege"). If sufficient Shares are available, all
Record Date Shareholder over-subscription requests will be honored in full. If
Record Date Shareholder requests for Shares pursuant to the Over-Subscription
Privilege exceed Shares available, the available Shares will be allocated pro
rata among those who over-subscribe based on the number of Rights originally
issued to them by the Fund. See "The Offer--Over-Subscription Privilege."
Banks, brokers, trustees and other nominee holders of Rights will be
required to certify to the Subscription Agent (as defined herein), before any
Over-Subscription Privilege may be exercised with respect to any particular
beneficial owner, as to the aggregate number of Rights exercised pursuant to the
Primary Subscription and the number of Shares subscribed for pursuant to the
Over-Subscription Privilege by such beneficial owner and that such beneficial
owner's Primary Subscription was exercised in full. Nominee Holder
Over-Subscription Forms and Beneficial Owner Certificate Forms will be
distributed to banks, brokers, trustees and other nominee holders with the
Subscription Certificates.
The Fund will not offer or sell in connection with the Offer any Shares
that are not subscribed for pursuant to the Primary Subscription or the
Over-Subscription Privilege.
SUBSCRIPTION PRICE
The Subscription Price per Share ("Subscription Price") for the Shares to
be issued pursuant to the Offer will be $6.75.
4
<PAGE> 7
METHOD FOR EXERCISING RIGHTS
Rights are evidenced by Subscription Certificates that, except as described
below under "Foreign Restrictions," will be mailed promptly following the Record
Date to Record Date Shareholders or, if a shareholder's shares are held by Cede,
as nominee for DTC, or any other depository or nominee on its behalf, to Cede or
such depository or nominee. Rights may be exercised by completing and signing
the Subscription Certificate that accompanies this Prospectus and mailing it in
the envelope provided, or otherwise delivering the completed and signed
Subscription Certificate to the Subscription Agent, together with payment in
full for the Shares to be purchased at the Subscription Price by the Expiration
Date. Rights may also be exercised by contacting your broker, bank or trust
company, which can arrange, on your behalf, to guarantee delivery of payment and
delivery of a properly completed and executed Subscription Certificate pursuant
to a Notice of Guaranteed Delivery ("Notice of Guaranteed Delivery") by the
close of business on the third Business Day after the Expiration Date. A fee may
be charged for this service. Fractional shares will not be issued. Completed
Subscription Certificates must be received by the Subscription Agent prior to
5:00 p.m., New York City time, on the Expiration Date at one of the addresses
set forth herein (unless the guaranteed delivery procedures are complied with as
described below under the heading "The Offer--Payment for Shares").
SALE OF RIGHTS
The Rights are transferable until the Expiration Date. The Rights will be
listed for trading on the Exchange, subject to notice of issuance. The Fund will
use its best efforts to ensure that an adequate trading market for the Rights
will exist, although no assurance can be given that a market for the Rights will
develop. Trading in the Rights on the Exchange may be conducted until the close
of trading on the Exchange on June 18, 1998, the last Business Day (as defined
below) prior to the Expiration Date. The Fund expects that a market for the
Rights will develop and that the value of the Rights, if any, will be affected
by the market price. Rights may be sold by individual holders through brokerage
channels or may be submitted to the Subscription Agent for sale by or to the
Dealer Manager. Any Rights to be submitted by the Subscription Agent to the
Dealer Manager for purchase or sale must be received by the Subscription Agent
at or prior to 5:00 p.m., New York City time, on June 17, 1998, two Business
Days prior to the Expiration Date, due to normal settlement procedures. It is
anticipated the Rights will trade on the Exchange commencing on a when-issued
basis on or about May 20, 1998 until approximately May 28, 1998 and on a regular
way basis thereafter until and including June 18, 1998, the last Business Day
prior to the Expiration Date. If the Subscription Agent receives Rights for sale
in a timely manner, it will either sell the Rights to the Dealer Manager or the
Dealer Manager will use its best efforts to sell the Rights. The Dealer Manager
will also either purchase or attempt to sell any Rights submitted to it by the
Subscription Agent that a Record Date Shareholder is unable to exercise because
such Rights represent the right to subscribe for less than one Share. Any
commissions will be paid by the selling Record Date Shareholder. Neither the
Fund nor the Subscription Agent for the Dealer Manager will be responsible for
Rights that cannot be sold nor will they guarantee any minimum sale price for
the Rights. "Business Day" means a day on which the Exchange is open for trading
and which is not a Saturday or Sunday or a holiday, including New Year's Day,
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Columbus Day, Thanksgiving Day, Christmas Day or
any other day on which banks in New York City are authorized or obligated by law
or executive order to close. Record Date Shareholders are urged to obtain a
recent trading price for the Rights on the Exchange from their broker, bank,
financial adviser or the financial press. Exercising Rights Holders' inquiries
should be directed to the Information Agent.
OFFERING FEES AND EXPENSES
The Fund has agreed to pay the Dealer Manager a fee for its financial
advisory, marketing and soliciting services equal to 3.75% of the aggregate
Subscription Price for Shares issued pursuant to the Offer. The Dealer Manager
will reallow to broker-dealers included in the selling group to be formed and
managed by the Dealer Manager ("Selling Group Members"), solicitation fees equal
to 2.50% of the Subscription Price per Share for each Share issued pursuant to
the Offer as a result of their soliciting efforts. In addition, the Dealer
Manager will reallow to other broker-dealers that have executed and delivered a
soliciting dealer agreement and have solicited the exercise of Rights
solicitation fees equal to 0.50% of the Subscription Price per Share
5
<PAGE> 8
for each Share issued pursuant to the exercise of Rights as a result of their
soliciting efforts, subject to a maximum fee based upon the number of shares
held by each broker-dealer through DTC on the Record Date. Fees will be paid to
the broker-dealer designated on the applicable portion of the Subscription
Certificates or, in the absence of such designation, to the Dealer Manager. See
"The Offer--Distribution Arrangements." Other offering expenses incurred by the
Fund are estimated at $500,000, which includes up to $100,000 that may be paid
to the Dealer Manager as partial reimbursement for its expenses relating to the
Offer.
FOREIGN RESTRICTIONS
Subscription Certificates will not be mailed to Record Date Shareholders
whose record addresses are outside the United States (the term "United States'
includes the states, the District of Columbia and the territories and
possessions of the United States) ("Foreign Record Date Shareholders"). Foreign
Record Date Shareholders will be sent written notice of the Offer. The Rights to
which such Subscription Certificates relate will be held by the Subscription
Agent for such Foreign Record Date Shareholders' accounts until instructions are
received to exercise the Rights. If no instructions have been received by 5:00
p.m., New York City time, on June 16, 1998, three Business Days prior to the
Expiration Date, the Rights of those Foreign Record Date Shareholders will be
transferred by the Subscription Agent to the Dealer Manager who will either
purchase the Rights or use its best efforts to sell the Rights. The net
proceeds, if any, from the sale of those Rights by or to the Dealer Manager will
be remitted to the Foreign Record Date Shareholders.
USE OF PROCEEDS
Based on the Subscription Price of $6.75 per Share, the net proceeds of the
Offer, assuming all 5,010,532 Shares offered hereby are sold, are estimated to
be approximately $32,052,800, after deducting offering expenses payable by the
Fund estimated at approximately $500,000. The Adviser anticipates that
investment of such proceeds in accordance with the Fund's investment objective
and policies will take up to 30 days from their receipt by the Fund, depending
on market conditions and the availability of appropriate securities for
purchase, but in no event does the Adviser anticipate that such investment will
take longer than six months. Pending such investment in accordance with the
Fund's investment objective and policies, the proceeds will be held in U.S.
Government securities (which term includes obligations of the United States
Government, its agencies or instrumentalities) and other high-quality short-term
money market instruments.
INFORMATION AGENT
Any questions or request for assistance concerning the method of
subscribing for Shares or for additional copies of this Prospectus or
Subscription Certificates or Notices of Guaranteed Delivery may be directed to
the Information Agent at its telephone number and address listed below.
Information Agent for the Offer is:
Shareholder Communications Corporation
17 State Street, 27th Floor
New York, New York 10004
(800) 733-8481, ext. 486
Shareholders may also contact their brokers or nominees for information
with respect to the Offer.
6
<PAGE> 9
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IMPORTANT DATES TO REMEMBER
<TABLE>
<CAPTION>
EVENT DATE
----- ----
<S> <C>
Record Date........................................... May 26, 1998
Subscription Period................................... May 26, 1998to
June 19, 1998(a)
Expiration Date....................................... June 19, 1998(a)
Subscription Certificates and Payment for Shares
Due(b).............................................. June 19, 1998(a)
Notice of Guaranteed Delivery Due(b).................. June 19, 1998(a)
Payment for Guarantees of Delivery Due................ June 24, 1998(a)
Confirmation to Participants.......................... July 1, 1998(a)
</TABLE>
- ---------------
(a) Unless the Offer is extended.
(b) A shareholder exercising Rights must deliver by June 19, 1998 either (i) a
Subscription Certificate and payment for Shares or (ii) a Notice of
Guaranteed Delivery.
INFORMATION REGARDING THE FUND
The Fund has been engaged in business as a diversified, closed-end
management investment company since 1988. The Fund's investment objective is to
seek high current income and total return by investing primarily in lower-rated
corporate debt securities. An investment in the Fund may not be appropriate for
all investors, and no assurance can be given that the Fund's investment
objective will be achieved.
Under normal conditions, the Fund invests primarily in a professionally
managed, diversified portfolio of debt securities rated in the lower categories
by established rating agencies (consisting principally of securities rated "BBB"
or lower by Standard & Poor's Ratings Group ("S&P") or "Baa" or lower by Moody's
Investors Service, Inc. ("Moody's," and together with S&P, the "Rating
Agencies")) or nonrated securities deemed by the Adviser to be of comparable
quality. Securities rated "BB" or lower by S&P or "Ba" or lower by Moody's are
commonly referred to as "high yield," high risk securities or "junk bonds." Such
securities are generally regarded by the Rating Agencies as significantly more
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation and more likely to default than
higher quality debt securities. In addition to investing in such lower rated
debt securities, the Fund may engage in, among other activities, certain options
activities, investments in equity securities and higher rated debt securities,
the use of futures contracts and options thereon and repurchase agreements. The
Fund may also invest in foreign and restricted securities. See "Investment
Policies and Limitations" and the Statement of Additional Information. Lower
rated and comparable nonrated securities and foreign securities may be subject
to a greater degree of risk than higher rated and domestic securities,
respectively. See "Risk Factors and Special Considerations."
The Fund completed an initial public offering of 11,000,000 shares in July
1988, raising approximately $102.3 million. Concurrently with its initial public
offering, the Fund issued $37.4 million aggregate principal amount of Senior
Extendible Notes (the "Senior Extendible Notes"). During the fiscal year ended
October 31, 1996 the Fund redeemed all of its outstanding Senior Extendible
Notes.
The Fund entered into a Credit Agreement dated as of June 12, 1996 (the
"Credit Agreement") with Bank of America Illinois ("Bank of America") pursuant
to which the Fund issued a term note (the "Term Note") to Bank of America in the
original aggregate principal amount of $27,400,000. The Term Note bears interest
at the fixed annual rate of 7.33% and is payable in full on June 14, 1999. The
Credit Agreement requires the Fund to comply with certain asset coverage,
liquidity and investment limitations. See "Description of Term Note."
The Fund currently is seeking a commitment from its lender to increase its
leverage. The additional leverage, if any, may be implemented prior to, at the
time of or following completion of the Offer (through one or more credit
facilities or amendments to the existing Credit Agreement). There are no
assurances that any such binding commitments from its lender will be obtained by
the Fund. The inability to increase, or delays in increasing, the Fund's
leverage could, depending on market conditions, adversely affect the Fund's
earnings
- --------------------------------------------------------------------------------
7
<PAGE> 10
and net asset value. The Board of Trustees has authorized the Fund to increase
its current level of leverage. If such leverage is added, the percentage of the
Fund's assets representing leverage is expected to increase from approximately
20% to approximately 25% prior to and also following completion of the Offer.
The Fund reserves the right at any time, if it believes that market conditions
are appropriate, further to increase its level of debt or other senior
securities to maintain or increase the Fund's current level of leverage to the
extent permitted under the Investment Company Act of 1940, as amended (the "1940
Act"), and any relevant agreements between the Fund and third parties, including
the Credit Agreement referred to above. See "Risk Factors and Special
Considerations--Risk of Leverage."
The Fund's outstanding shares are listed and traded on the Exchange. The
average weekly trading volumes of the Fund's shares on the Exchange for the
Fund's fiscal years ended October 31, 1996 and 1997 and for the six months ended
April 30, 1998 were 117,262 shares, 114,140 shares and 120,650 shares,
respectively. As of April 30, 1998, the Fund had 14,971,645 shares outstanding
and net assets of approximately $111.3 million.
INFORMATION REGARDING THE ADVISER
Colonial Management Associates, Inc., an investment adviser registered
under the Investment Advisers Act of 1940, as amended, has served as investment
adviser to the Fund since its inception. The Adviser is a wholly owned
subsidiary of The Colonial Group, Inc. ("TCG"), and both TCG and the Adviser are
indirect subsidiaries of Liberty Mutual Insurance Company, an underwriter of
workers' compensation insurance and a property and casualty insurer in the U.S.
The Adviser has been an investment adviser since 1931. As of the date of this
Prospectus, the Adviser serves as investment adviser for 39 open-end and 5
closed-end management investment companies.
Andrea S. Feingold, Vice President and head of the Corporate Group of the
Adviser, has managed the Fund since 1993. Ms. Feingold joined the Adviser in
1991 as an Investment Analyst.
The Fund pays the Adviser a monthly fee at the annual rate of 0.65% of the
Fund's average weekly net assets. Since the Adviser's fee is based on the
average weekly net assets of the Fund, the Adviser will benefit from any
increase in the Fund's net assets resulting from the Offer. See "The Adviser."
RISK FACTORS AND SPECIAL CONSIDERATIONS
The following summarizes certain matters that should be considered, among
others, in connection with the Offer and investment in the Fund generally.
Dilution. An immediate dilution of the aggregate net asset value of the
shares owned by Record Date Shareholders who do not fully exercise their Rights
may be experienced as a result of the Offer because the Subscription Price per
Share may be less than the Fund's net asset value per share on the Expiration
Date, and the number of shares outstanding after the Offer is likely to increase
in a greater percentage than the increase in the size of the Fund's assets. In
addition, as a result of the Offer, Record Date Shareholders who do not fully
exercise their Rights should expect that they will, at the completion of the
Offer, own a smaller proportional interest in the Fund than would otherwise be
the case. Although it is not possible to state precisely the amount of any such
decrease in net asset value, because it is not known at this time what the net
asset value per share will be at the Expiration Date or what proportion of the
Shares will be subscribed, such dilution could be substantial. For example,
assuming that all Rights are exercised at the Subscription Price of $6.75, which
is 9.2% below the Fund's net asset value of $7.43 per share as of May 15, 1998,
the Fund's net asset value per share (after payment of the Dealer Manager and
soliciting fees and estimated offering expenses) would be reduced by
approximately $0.26 per share (or 3.5%). The distribution to shareholders of
transferable Rights which themselves may have a realizable value will afford
nonparticipating shareholders the potential of receiving a cash payment upon
sale of such Rights, receipt of which may be viewed as partial compensation for
the possible dilution of their interest in the Fund. No assurance can be given
that a market for the Rights will develop or as to the value, if any, that such
Rights will have.
Risk of Leverage. Leverage creates the opportunity for greater total
returns, but at the same time involves certain risks. Any investment income or
gains earned with respect to the amounts borrowed pursuant
8
<PAGE> 11
to the Credit Agreement or other forms of leverage, which is in excess of
interest due thereon, will augment the Fund's income attributable to its shares
of beneficial interest. Conversely, if the investment performance with respect
to the amounts borrowed pursuant to the Credit Agreement or other forms of
leverage fails to cover the interest on such borrowings, the value of the Fund's
shares may decrease more quickly than would otherwise be the case and dividends
thereon would be reduced or eliminated. This is the speculative effect of
leverage.
The Fund currently is seeking a commitment from its lender to increase its
leverage. The additional leverage, if any, may be implemented prior to, at the
time of or following completion of the Offer (through one or more credit
facilities or amendments to the existing Credit Agreement). There are no
assurances that any such binding commitments from its lender will be obtained by
the Fund. The inability to increase, or delays in increasing, the Fund's
leverage could, depending on market conditions, adversely affect the Fund's
earnings and net asset value. The Board of Trustees has authorized the Fund to
increase its current level of leverage. If such leverage is added, the
percentage of the Fund's assets representing leverage is expected to increase
from approximately 20% to approximately 25% prior to and also following
completion of the Offer. The Fund reserves the right at any time, if it believes
that market conditions are appropriate, further to increase its level of debt or
other senior securities to maintain or increase the Fund's level of leverage to
the extent permitted under the 1940 Act and any relevant agreements between the
Fund and third parties.
Because the Credit Agreement obligations are senior to the Fund's shares in
any liquidation of the Fund, such obligations would have to be paid in full
before any payments would be made with respect to the shares. In addition, the
risk of adverse changes in net asset value is increased by the Fund's leveraged
structure. See "Risk Factors and Special Considerations."
Discount from Net Asset Value. Shares of closed-end funds frequently trade
at a market price that is less than the value of the net assets attributable
thereto. The possibility that Shares of the Fund will trade at a discount from
net asset value is a risk separate and distinct from the risk that the Fund's
net asset value will decrease. It should be noted, however, that in some cases,
shares of closed-end funds trade at a premium to net asset value. The Fund's
shares have traded in the market above, at and below net asset value at various
times since the commencement of the Fund's operations. See "Trading and Net
Asset Value Information." In addition, the net asset value of the Fund will
change with changes in the value of its portfolio securities.
Lower-Rated Investments. Debt securities offering the high current income
sought by the Fund will ordinarily be in the lower rating categories of
recognized rating agencies or will be nonrated. Such securities are generally
regarded by the Rating Agencies as significantly more speculative with respect
to capacity to pay interest and repay principal in accordance with the terms of
the obligation and more likely to default than higher quality debt securities.
The values of such securities tend to reflect individual corporate developments
to a greater extent than higher rated securities, which tend to react more to
changes in the general market level of interest rates. Relative to other debt
securities, the values of lower rated debt securities may be more volatile
because: (i) an economic downturn may more significantly impact their potential
for default, or (ii) the secondary market for such securities may at times be
less liquid or respond more adversely to negative publicity or investor
perceptions, making it more difficult to value or dispose of the securities. In
addition, the trading market for lower rated securities is generally less liquid
than the market for higher rated securities. As of April 30, 1998, approximately
97.15% of the market value of the Fund's total investments was represented by
debt securities regarded by the Rating Agencies as below investment grade (that
is, rated below BBB by S&P or below Baa by Moody's) or deemed by the Adviser to
be below investment grade.
For a more detailed discussion of the risks and special considerations with
respect to lower rated securities, see "Risk Factors and Special
Considerations--Lower-Rated Investments."
Dividends and Distributions. It is the Fund's present policy, which may be
changed by the Board of Trustees, to pay dividends of investment company taxable
income on a monthly basis to holders of shares and to distribute any net
short-term capital gains and net capital gains annually. Based on information
provided by the Adviser on current market conditions in the lower rated debt
market and available leverage opportunities, the Board of Trustees believes the
Offer will not result in a decrease in the Fund's current level of dividends per
share. However, there can be no assurance that the Fund will be able to maintain
its current level of
9
<PAGE> 12
dividends per share, and the Board of Trustees may, in its sole discretion,
change the Fund's current level of dividends per share in response to market or
other conditions.
For a more detailed discussion of the risks and special considerations with
respect to dividends and distributions, see "Risk Factors and Special
Considerations--Dividends and Distributions."
Other Matters. There are additional matters which should be considered in
connection with an investment in the Fund, including provisions of the Fund's
Agreement and Declaration of Trust, limitations on the ability of the Fund to
declare dividends or other distributions contained in the 1940 Act and in the
Credit Agreement, and the possible conversion of the Fund to an open-end
investment company. See "Risk Factors and Special Considerations" and "Share
Repurchases; Conversion to Open-End Status."
Investors should carefully consider their ability to assume the foregoing
risks before making an investment in the Fund. An investment in shares of the
Fund is not appropriate for all investors. See "Risk Factors and Special
Considerations."
10
<PAGE> 13
FEE TABLE
<TABLE>
<S> <C>
Shareholder Transaction Expenses
Sales Load (as a percentage of the Subscription Price per
Share)(1)................................................. 3.75%
Annual Expenses (as a percentage of average weekly net
assets attributable to shares)(2)
Management Fees(3).......................................... 0.65%
Interest and Amortization of Deferred Debt Issuance
Expense................................................... 1.40%
Other Expenses.............................................. 0.19%
-----
Total Annual Expenses............................. 2.24%
=====
</TABLE>
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
--------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment, assuming a 5% annual return
throughout the periods.......................... $59 $105 $153 $285
</TABLE>
- ---------------
(1) The Fund has agreed to pay the Dealer Manager a fee for its financial
advisory, marketing and soliciting services equal to 3.75% of the aggregate
Subscription Price for Shares issued pursuant to the Offer. The Dealer
Manager will reallow to broker-dealers included in the selling group to be
formed and managed by the Dealer Manager ("Selling Group Members")
solicitation fees equal to 2.50% of the Subscription Price per Share for
each Share issued pursuant to the Offer as a result of their soliciting
efforts. In addition, the Dealer Manager will reallow, to other
broker-dealers that have executed and delivered a soliciting dealer
agreement and have solicited the exercise of Rights, solicitation fees equal
to 0.50% of the Subscription Price per Share for each Share issued pursuant
to the exercise of Rights as a result of their soliciting efforts, subject
to a maximum fee based upon the number of shares held by each broker-dealer
through DTC on the Record Date. The Fund has also agreed to reimburse the
Dealer Manager for its expenses relating to the Offer up to an aggregate of
$100,000. In addition, the Fund has agreed to pay fees to the Subscription
Agent (as defined herein) and the Information Agent (as defined herein),
estimated to be $35,000 and $27,000, respectively, for their services
related to the Offer, excluding reimbursement for their out-of-pocket
expenses. These fees and expenses will be borne by the Fund and indirectly
by all of the Fund's shareholders, including those shareholders who do not
exercise their Rights.
(2) Amounts are based on estimated amounts for the Fund's current fiscal year
after giving effect to anticipated net proceeds of the Offer, assuming that
all of the Rights are exercised.
(3) The Fund pays the Adviser a monthly fee at an annual rate of 0.65% of the
Fund's average weekly net assets. See "The Adviser."
THE FOREGOING FEE TABLE AND EXAMPLE ARE INTENDED TO ASSIST INVESTORS IN
UNDERSTANDING THE COSTS AND EXPENSES THAT AN INVESTOR IN THE FUND WILL BEAR
DIRECTLY OR INDIRECTLY.
The Example set forth above assumes reinvestment of all dividends and
distributions at net asset value, payment of a 3.75% sales load and an annual
expense ratio of 2.24%. The table above and the assumption in the Example of a
5% annual return are required by Commission regulations applicable to all
management investment companies. THE EXAMPLE SHOULD NOT BE CONSIDERED AS A
REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN. ACTUAL
EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR
PURPOSES OF THE EXAMPLE. In addition, while the Example assumes reinvestment of
all dividends and distributions at net asset value, participants in the Fund's
Dividend Reinvestment Plan may receive shares purchased or issued at a price or
value different from net asset value. See "Dividends and Distributions; Dividend
Reinvestment Plan."
11
<PAGE> 14
FINANCIAL HIGHLIGHTS(A)
The table below sets forth certain specified information for a share of
beneficial interest of the Fund outstanding throughout each period presented.
The financial highlights for each period presented have been audited by Price
Waterhouse LLP, the Fund's independent accountants, whose unqualified report is
included in the Fund's October 31, 1997 Annual Report and is incorporated by
reference in the Statement of Additional Information. The financial highlights
should be read in conjunction with the financial statements and notes thereto
included in the Fund's October 31, 1997 Annual Report which is available upon
request from the Fund's registrar and transfer agent, First Data Investor
Services Group, Inc.
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED OCTOBER 31,
-----------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989
-------- ------- ------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value --
beginning of period.... $ 6.890 $ 6.620 $ 6.280 $ 6.920 $ 6.430 $ 6.290 $ 4.880 $ 8.260 $ 9.220
-------- ------- ------- ------- ------- ------- ------- ------- --------
Net investment income... 0.699(c) 0.699 0.696 0.693 0.709 0.773 0.800 1.072 1.223
Net realized and
unrealized gain
(loss)................. 0.383 0.258 0.340 (0.587) 0.497 0.142 1.385 (3.332) (0.983)
-------- ------- ------- ------- ------- ------- ------- ------- --------
Total from investment
operations......... 1.082 0.957 1.036 0.106 1.206 0.915 2.185 (2.260) (0.240)
-------- ------- ------- ------- ------- ------- ------- ------- --------
Distributions:
From net investment
income............... (0.702) (0.687) (0.696) (0.746) (0.716) (0.775) (0.775) (1.106) (1.200)
From paid-in capital... -- -- -- -- -- -- -- (0.014)(d) --
-------- ------- ------- ------- ------- ------- ------- ------- --------
Total
distributions...... (0.702) (0.687) (0.696) (0.746) (0.716) (0.775) (0.775) (1.120) (1.200)
-------- ------- ------- ------- ------- ------- ------- ------- --------
Net asset value -- end
of period.............. $ 7.270 $ 6.890 $ 6.620 $ 6.280 $ 6.920 $ 6.430 $ 6.290 $ 4.880 $ 8.260
======== ======= ======= ======= ======= ======= ======= ======= ========
Per share market value:
End of Period.......... $ 7.562 $ 7.125 $ 6.875 $ 5.750 $ 6.625 $ 6.250 $ 6.000 $ 4.500 $ 7.375
======== ======= ======= ======= ======= ======= ======= ======= ========
Total return based on
market value(e)........ 16.97% 14.62% 33.00% ( 2.80)% 17.89% 17.39% 54.29% (27.10)% (11.20)%
======== ======= ======= ======= ======= ======= ======= ======= ========
Net assets, end of
period(f).............. $107,774 $99,925 $93,984 $87,519 $95,164 $87,149 $83,613 $64,872 $107,769
======== ======= ======= ======= ======= ======= ======= ======= ========
Ratio of operating
expenses to average net
assets................. 0.89%(c) 0.98%(c) 0.95%(c) 0.97% 1.00% 1.00% 1.38% 1.31% 1.24%
Ratio of interest and
amortization of
deferred debt issuance
expenses to average net
assets................. 1.96% 2.07% 1.94% 1.91% 2.66% 3.24% 3.80% 4.23% 3.26%
Ratio of net investment
income to average net
assets................. 9.63%(c) 10.11%(c) 10.76%(c) 10.40% 10.62% 11.98% 14.40% 15.86% 13.48%
Portfolio turnover
rate................... 92% 92% 92% 160% 135% 78% 30% 12% 23%
<CAPTION>
JULY 29, 1988
(COMMENCEMENT
OF OPERATIONS)
TO OCTOBER 31,
1988
----
<S> <C>
Net asset value --
beginning of period.... $ 9.262(b)
--------
Net investment income... 0.257
Net realized and
unrealized gain
(loss)................. (0.054)
--------
Total from investment
operations......... 0.203
--------
Distributions:
From net investment
income............... (0.245)
From paid-in capital... --
--------
Total
distributions...... (0.245)
--------
Net asset value -- end
of period.............. $ 9.220
========
Per share market value:
End of Period.......... $ 9.500
========
Total return based on
market value(e)........ (2.50)%
========
Net assets, end of
period(f).............. $116,613
========
Ratio of operating
expenses to average net
assets................. 1.04%(g)
Ratio of interest and
amortization of
deferred debt issuance
expenses to average net
assets................. 3.26%(g)
Ratio of net investment
income to average net
assets................. 11.06%(g)
Portfolio turnover
rate................... 34%(g)
</TABLE>
- ---------------
(a) Per share data are calculated based on average shares outstanding during the
period.
(b) Net of initial offering and underwriting costs, which amounted to $0.038 per
share.
(c) The benefits derived from custody credits and directed brokerage
arrangements had an impact of 0.01% and $0.001 per share in 1997 only. Prior
years' ratios are net of benefits received, if any.
(d) Because of differences between book and tax basis accounting, there was no
return of capital for federal income tax purposes.
(e) Total return at market value assuming all distributions reinvested and
excluding brokerage commissions.
(f) Dollars in thousands.
(g) Annualized.
12
<PAGE> 15
CAPITALIZATION
AT APRIL 30, 1998
<TABLE>
<CAPTION>
AMOUNT OUTSTANDING AMOUNT HELD
EXCLUSIVE OF AMOUNT BY THE FUND
HELD BY THE FUND OR FOR ITS
TITLE OF CLASS AMOUNT AUTHORIZED OR FOR ITS ACCOUNT ACCOUNT
- -------------- ----------------- ------------------- -----------
<S> <C> <C> <C>
Shares of Beneficial Interest, no par Unlimited 14,971,645 shares -0- shares
value...................................
Term Note................................. -- $27,400,000 N/A
</TABLE>
INFORMATION REGARDING SENIOR SECURITIES
The following table shows certain information regarding each class of
senior security of the Fund as of the end of each fiscal year of the Fund since
its inception.
<TABLE>
<CAPTION>
AT TOTAL AMOUNT ASSET COVERAGE
OCTOBER 31 OUTSTANDING PER UNIT(2)
---------- ------------ --------------
<S> <C> <C> <C>
Senior Extendible Notes(1)............................. 1988 $37,400,000 $3,120
1989 37,400,000 2,880
1990 27,400,000 2,370
1991 27,400,000 3,050
1992 27,400,000 3,180
1993 27,400,000 3,470
1994 27,400,000 3,190
1995 27,400,000 3,430
1996 0 --
Term Note(1)........................................... 1996 $27,400,000 $3,650
1997 27,400,000 3,930
</TABLE>
- ---------------
(1) On July 15, 1996, the Fund redeemed the remaining $27,400,000 principal
amount of its Senior Extendible Notes, which carried an annual interest rate
through July 15, 1996 of 6.21%, for $28,250,770. The Fund thereafter entered
into a Credit Agreement dated as of June 12, 1996 with Bank of America
Illinois, pursuant to which the Fund issued a Term Note due June 14, 1999 in
the original aggregate principal amount of $27,400,000, which bears interest
at a fixed annual rate of 7.33%.
(2) Amount shown is per $1,000 of Senior Extendible Note or Term Note, as the
case may be. Calculated by subtracting the Fund's total liabilities from the
Fund's total assets and dividing such amount by the quotient of (a) the
principal amount of outstanding Senior Extendible Notes or the Term Note, as
the case may be, divided by (b) $1,000.
13
<PAGE> 16
TRADING AND NET ASSET VALUE INFORMATION
In the past, the Fund's shares have traded at various times at either a
premium or a discount in relation to net asset value. Although the Fund's shares
recently have been trading at a premium above net asset value, there can be no
assurance that this premium will continue after the Offer or that the shares
will not again trade at a discount. Shares of other closed-end investment
companies frequently trade at a discount from net asset value. See "Risk Factors
and Special Considerations."
The following table shows the high and low sales prices of the Fund's
shares on the New York Stock Exchange Composite Tape, quarterly trading volume
on the Exchange, the high and low net asset value per share and the high and low
premium or discount at which the Fund's shares were trading for each fiscal
quarter during the two most recent fiscal years and for the fiscal quarters
ended January 31, 1998 and April 30, 1998.
<TABLE>
<CAPTION>
PREMIUM/
(DISCOUNT)
TO NET ASSET
MARKET PRICE QUARTERLY NET ASSET VALUE VALUE(%)
---------------- TRADING ---------------- ------------
QUARTER ENDED HIGH LOW VOLUME HIGH LOW HIGH LOW
- ------------- ---- --- --------- ---- --- ---- ---
(THOUSANDS
OF SHARES)
<S> <C> <C> <C> <C> <C> <C> <C>
January 31, 1996................ $7.125 $6.750 1,519.0 $6.79 $6.60 8.0% 0.9%
April 30, 1996.................. 7.250 6.875 1,662.0 6.89 6.70 7.1% 1.6%
July 31, 1996................... 7.000 6.625 1,710.2 6.75 6.68 4.3% (1.0%)
October 31, 1996................ 7.250 6.875 1,105.5 6.96 6.74 4.9% 0.5%
January 31, 1997................ 7.375 7.125 1,846.1 7.09 6.90 5.5% 0.5%
April 30, 1997.................. 7.500 7.125 1,677.2 7.20 6.85 6.7% 0.5%
July 31, 1997................... 7.750 7.375 1,618.5 7.30 6.98 7.7% 3.6%
October 31, 1997................ 7.938 7.375 1,501.4 7.44 7.25 6.8% 0.9%
January 31, 1998................ 7.938 7.340 1,424.6 7.49 7.28 7.1% 0.0%
April 30, 1998.................. 8.188 7.563 1,586.2 7.52 7.41 9.2% 0.7%
</TABLE>
The net asset values per share of the Fund at the close of business on
April 10, 1998 (the last trading date on which the Fund publicly reported its
net asset value prior to the announcement of the Offer) and on May 15, 1998 (the
last trading date prior to the date of this Prospectus on which the Fund
publicly reported its net asset value) were $7.52 and 7.43, respectively, and
the last reported sales prices of a share of the Fund on the Exchange on those
dates were $7.688 and $7.625, respectively.
14
<PAGE> 17
THE FUND
The Fund is a diversified, closed-end management investment company with a
leveraged capital structure, consisting of (i) a $27,400,000 aggregate principal
amount Term Note, and (ii) 14,971,645 shares of beneficial interest, as of April
30, 1998. The Fund's investment objective is to seek high current income and
total return by investing primarily in lower-rated corporate debt securities.
Under normal market conditions, the Fund invests primarily in a professionally
managed, diversified portfolio of debt securities rated in the lower categories
by the Rating Agencies (consisting principally of securities rated "BBB"/"Baa"
or lower by the Rating Agencies(1)) or nonrated debt securities deemed by the
Adviser to be of comparable quality. Securities rated "BB"/"Ba" or lower are
commonly referred to as "high yield," high risk securities or "junk bonds." The
Fund's investments are subject to restrictions on investments contained in the
Credit Agreement. See "Description of Term Note--Restrictive Covenants." Such
securities are generally regarded by the Rating Agencies as significantly more
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation and more likely to default than
higher quality debt securities. In addition to investing in lower rated
securities, the Fund may engage in, among other activities, certain options
activities, investments in equity securities and higher rated debt securities,
the use of futures contracts and options thereon and repurchase agreements. The
Fund may also invest in foreign and restricted securities. See "Investment
Policies and Limitations" and the Statement of Additional Information. Lower
rated and comparable nonrated securities and foreign securities may be subject
to a greater degree of risk than higher rated and domestic securities,
respectively. See "Risk Factors and Special Considerations."
The capital structure of the Fund has been designed to take advantage of
the historical spread in yields between lower rated securities and
representative U.S. Treasury securities, compared with the average default loss
on such lower rated securities. In addition, through investment leverage,
investors in the Fund receive increased yields to the extent that the rate of
return (i.e., the current interest yield on the Fund's portfolio reduced by the
actual default loss rate experienced on that portfolio) earned on the Fund's
assets exceeds, after expenses of Fund management, the interest rate on the Term
Note. Conversely, to the extent that the rate of return on the portfolio does
not exceed the interest rate on the Term Note, yields to investors in the shares
will be reduced.
The Fund is a closed-end investment company. Closed-end investment
companies differ from open-end investment companies (commonly referred to as
"mutual funds") in that closed-end investment companies have a fixed capital
base, whereas open-end companies issue securities redeemable at net asset value
at any time at the option of the shareholder and typically engage in a
continuous offering of their shares. Accordingly, open-end investment companies
are subject to periodic asset in-flows and out-flows that can complicate
portfolio management. Closed-end investment companies do not face the prospect
of having to liquidate portfolio holdings to satisfy redemptions at the option
of shareholders or having to maintain cash positions to meet the possibility of
such redemptions. The Fund will, however, be required to have sufficient cash or
cash equivalents to meet interest payments on the Term Note and to fund certain
redemptions of the Term Note in certain circumstances. See "Description of Term
Note" and "Description of Shares of Beneficial Interest."
The Fund was organized as a Massachusetts business trust under the laws of
The Commonwealth of Massachusetts on May 24, 1988 and has registered with the
Commission under the 1940 Act. The Fund's principal office is located at One
Financial Center, Boston, Massachusetts 02111. The Fund's Adviser is Colonial
Management Associates, Inc., an investment management firm registered with the
Commission under the Investment Advisers Act of 1940, as amended. See "The
Adviser."
- ---------------
1Throughout this Prospectus, references to ratings by the Rating Agencies
will indicate the S&P rating followed by the Moody's rating in the format
shown.
15
<PAGE> 18
THE OFFER
PURPOSE OF THE OFFER
The Board of Trustees of the Fund has determined that it may be in the best
interests of the Fund and its shareholders to increase the number of outstanding
shares of the Fund and to increase the assets of the Fund available for
investment.
In reaching its decision, the Board of Trustees of the Fund was advised by
the Fund's investment adviser, Colonial Management Associates, Inc. (the
"Adviser"), that an increase in the assets of the Fund would permit the Fund to
pursue attractive investment opportunities in the "high yield," high risk
securities market, while retaining portfolio investments that the Adviser
believes should continue to be held. The Adviser believes the Offer may result
in greater portfolio diversification opportunities and enhance its ability to
buy and sell larger blocks of securities on potentially better terms.
The Fund maintains a leveraged capital structure when it believes such a
capital structure is of potential benefit to shareholders. The Fund utilizes
leverage seeking to enhance returns to shareholders by borrowing capital at a
lower interest rate than that which the Fund earns on its investments. The Board
of Trustees believes that increasing the Fund's assets will provide the Fund
with additional flexibility in connection with the Fund's leverage, including
enhancing its ability to increase the Fund's existing leverage, while reducing
the overall effective cost of the leverage. For a discussion of the anticipated
impact of the Offer on the Fund's leverage, please refer to "Investment Policies
and Limitations" and "Risk Factors and Special Considerations--Risk of
Leverage."
In addition, the Board of Trustees believes that increasing the size of the
Fund may lower the Fund's expenses as a proportion of average net assets because
the Fund's fixed costs can be spread over a larger asset base. The Board of
Trustees also believes that a larger number of outstanding shares and a larger
number of beneficial owners of shares could increase the level of market
interest in the Fund and the liquidity of Fund shares on the New York Stock
Exchange (the "Exchange"). The distribution to shareholders of transferable
Rights which themselves may have a realizable value will also afford
nonparticipating shareholders the potential of receiving a cash payment upon
sale of such Rights, receipt of which may be viewed as partial compensation for
the dilution of their interest in the Fund that may result from the Offer.
The Board of Trustees also considered the impact of the Offer on the Fund's
current distributions. Based on the Adviser's assessment of current market
conditions in the lower rated debt market and available leverage opportunities,
the Board of Trustees believes the Offer will not result in a decrease in the
Fund's current level of dividends per share. For a further discussion of the
anticipated impact of the Offer on the Fund's dividends, please refer to "Risk
Factors and Special Considerations--Dividends and Distributions."
The Adviser will benefit from the Offer because the Adviser's fee is based
on the average weekly net assets of the Fund. See "The Adviser."
The Fund may, in the future and at its discretion, choose to make
additional rights offerings from time to time for a number of shares and on
terms which may or may not be similar to the Offer. Any such future rights
offering will be made in accordance with the 1940 Act.
TERMS OF THE OFFER
The Fund is issuing to its Record Date Shareholders, as of the close of
business on the Record Date, Rights entitling the holders thereof to subscribe
for up to 5,010,532 Shares of the Fund. Each such Record Date Shareholder is
being issued one Right for each whole share owned on the Record Date. The Rights
entitle the holders thereof to subscribe for one Share for every three Rights
held (1-for-3). Fractional shares will not be issued upon the exercise of
Rights. Record Date Shareholders issued fewer than three Rights are entitled to
subscribe for one Share pursuant to the Primary Subscription. Rights may be
exercised at any time during the Subscription Period, which commences on May 26,
1998 and ends at 5:00 p.m., New York City time, on June 19, 1998, unless
extended by the Fund. The Rights are evidenced by Subscription Certificates that
will be mailed to Record Date Shareholders, except as discussed below under
"Foreign Shareholders."
16
<PAGE> 19
Shares not subscribed for in the Primary Subscription will be offered, by
means of the Over-Subscription Privilege, to those Record Date Shareholders who
have exercised all Rights issued to them and who wish to acquire more than the
number of Shares they are entitled to purchase pursuant to the exercise of their
Rights (other than those Rights which cannot be exercised because they represent
the right to acquire less than one Share). Shares acquired pursuant to the
Over-Subscription Privilege are subject to allotment, as more fully discussed
below under "Over-Subscription Privilege." For purposes of determining the
maximum number of Shares a shareholder may acquire pursuant to the Offer,
shareholders whose shares are held of record by Cede, as nominee for DTC, or by
any other depository or nominee will be deemed to be the holders of the Rights
that are issued to Cede or such other depository or nominee on their behalf.
There is no minimum number of Rights which must be exercised in order for
the Offer to close.
The first dividend to be paid on Shares acquired upon exercise of Rights
will be the first monthly dividend, the record date for which occurs after the
issuance of such Shares. It is the Fund's present policy to pay dividends on the
last Friday on or before the 15th day of each month to shareholders of record on
the last Business Day (as defined herein) of the month prior to the payment
date. Except as described below, it is expected that the first dividend to be
paid on Shares issued pursuant to the Offer will be paid on or about August 14,
1998. To accommodate settlement of the Offer, the June 1998 record date for
dividends may be accelerated so that the issuance of Shares by the Fund in
connection with the Offer and the receipt of proceeds of such issuance by the
Fund, subject to certain exceptions, occurs shortly after the June 1998 record
date for dividends.
Prior to the Expiration Date, the Dealer Manager may offer Shares acquired
through the purchase and exercise of Rights at prices it sets from time to time.
To the extent such Shares are issued prior to a dividend record date of the Fund
that precedes the Expiration Date, such Shares will be paid the dividend
declared to the same extent as other shares outstanding on such dividend record
date, and thus, the issuance of such Shares may have a dilutive effect on the
income per share available for such dividend.
OVER-SUBSCRIPTION PRIVILEGE
Shares not subscribed for by Exercising Rights Holders (the "Excess
Shares") will be offered, by means of the Over-Subscription Privilege, to the
Record Date Shareholders who have exercised all exercisable Rights issued to
them (other than those Rights which cannot be exercised because they represent
the right to acquire less than one Share) and who wish to acquire more than the
number of Shares for which the Rights issued to them are exercisable. Record
Date Shareholders should indicate, on the Subscription Certificate which they
submit with respect to the exercise of the Rights issued to them, how many
Excess Shares they are willing to acquire pursuant to the Over-Subscription
Privilege. If sufficient Excess Shares remain, all Record Date Shareholder
over-subscription requests will be honored in full. If Record Date Shareholder
requests for Shares pursuant to the Over-Subscription Privilege exceed the
Excess Shares available, the available Excess Shares will be allocated pro rata
among Record Date Shareholders who oversubscribe based on the number of Rights
originally issued to such Record Date Shareholders.
Banks, brokers, trustees and other nominee holders of Rights will be
required to certify to the Subscription Agent (as defined herein), before any
Over-Subscription Privilege may be exercised with respect to any particular
beneficial owner, as to the aggregate number of Rights exercised pursuant to the
Primary Subscription and the number of Shares subscribed for pursuant to the
Over-Subscription Privilege by such beneficial owner and that such beneficial
owner's Primary Subscription was exercised in full. Nominee Holder
Over-Subscription Forms and Beneficial Owner Certification Forms will be
distributed to banks, brokers, trustees and other nominee holders with the
Subscription Certificates.
The Fund will not offer or sell in connection with the Offer any Shares
that are not subscribed for pursuant to the Primary Subscription or the
Over-Subscription Privilege.
SUBSCRIPTION PRICE
The Subscription Price for the Shares to be issued pursuant to the Offer
will be $6.75.
17
<PAGE> 20
The Fund announced the Offer after the close of trading on the Exchange on
April 15, 1998. The net asset values per share at the close of business on April
10, 1998 (the last trading date on which the Fund publicly reported its net
asset value prior to the announcement) and on May 15, 1998 (the last trading
date prior to the date of this Prospectus on which the Fund publicly reported
its net asset value) were $7.52 and $7.43, respectively, and the last reported
sales prices of a share of the Fund on the Exchange on those dates were $7.688
and $7.625, respectively.
EXPIRATION OF THE OFFER
The Offer will expire at 5:00 p.m., New York City time, on June 19, 1998,
unless extended by the Fund. The Rights will expire on the Expiration Date and
thereafter may not be exercised. Any extension of the Offer will be followed as
promptly as practicable by announcement thereof. Such announcement will be
issued no later than 9:00 a.m., New York City time, on the next Business Day
following the previously scheduled Expiration Date. Without limiting the manner
in which the Fund may choose to make such announcement, the Fund will not,
unless otherwise required by law, have any obligation to publish, advertise or
otherwise communicate any such announcement other than by making a release to
the Dow Jones News Service or such other means of announcement as the Fund deems
appropriate.
SUBSCRIPTION AGENT
The subscription agent is First Data Investor Services Group, Inc. (the
"Subscription Agent"). The Subscription Agent will receive for its
administrative, processing, invoicing and other services as subscription agent a
fee estimated to be approximately $35,000, excluding reimbursement for its
out-of-pocket expenses related to the Offer. The Subscription Agent is also the
Fund's transfer agent, dividend-paying agent and registrar for the shares.
Questions regarding the Subscription Certificates should be directed to
Shareholder Communications Corporation at 800-733-8481, ext. 486 (toll free);
shareholders may also consult their brokers or nominees. Completed Subscription
Certificates must be sent together with proper payment of the Subscription Price
for all Shares subscribed for in the Primary Subscription and the
Over-Subscription Privilege (for Record Date Shareholders) to the Subscription
Agent by one of the methods described below. Alternatively, Notices of
Guaranteed Delivery may be sent by facsimile to (781) 794-6333 to be received by
the Subscription Agent prior to 5:00 p.m., New York City time, on the Expiration
Date. Facsimiles should be confirmed by telephone at (781) 794-6388. The Fund
will accept only properly completed and executed Subscription Certificates
actually received at any of the addresses listed below, prior to 5:00 p.m., New
York City time, on the Expiration Date or by the close of business on the third
Business Day after the Expiration Date following timely receipt of a Notice of
Guaranteed Delivery. See "Payment for Shares" below.
<TABLE>
<S> <C>
(1) BY FIRST CLASS MAIL: First Data Investor Services Group, Inc.
c/o BankBoston N.A.
Corporate Reorganization
P.O. Box 9573
Boston, Massachusetts 02205-9573
(2) BY OVERNIGHT COURIER: First Data Investor Services Group, Inc.
c/o BankBoston N.A.
Corporate Reorganization
70 Campanelli Drive
Braintree, Massachusetts 02184
(3) BY HAND: First Data Investor Services Group, Inc.
c/o BankBoston N.A.
Securities Transfer & Reporting Services, Inc.
55 Broadway, Third Floor
New York, NY 10006
</TABLE>
DELIVERY TO AN ADDRESS OTHER THAN ONE OF THE ADDRESSES LISTED ABOVE WILL NOT
CONSTITUTE VALID DELIVERY.
18
<PAGE> 21
METHOD FOR EXERCISING RIGHTS
Rights are evidenced by Subscription Certificates that, except as described
below under "Foreign Shareholders," will be mailed promptly following the Record
Date to Record Date Shareholders or, if a shareholder's shares are held by Cede
or any other depository or nominee on their behalf, to Cede or such depository
or nominee. Rights may be exercised by completing and signing the Subscription
Certificate that accompanies this Prospectus and mailing it in the envelope
provided, or otherwise delivering the completed and signed Subscription
Certificate to the Subscription Agent, together with payment in full for the
Shares to be purchased at the Subscription Price by the Expiration Date. Rights
may also be exercised by contacting your broker, bank or trust company, which
can arrange, on your behalf, to guarantee delivery of payment and delivery of a
properly completed and executed Subscription Certificate pursuant to a Notice of
Guaranteed Delivery by the close of business on June 24, 1998, the third
Business Day after the Expiration Date. A fee may be charged for this service.
Fractional shares will not be issued upon the exercise of Rights. Record Date
Shareholders issued fewer than three Rights are entitled to subscribe for one
Share pursuant to the Primary Subscription. Completed Subscription Certificates
must be received by the Subscription Agent prior to 5:00 p.m., New York City
time, on the Expiration Date at one of the addresses set forth above (unless the
guaranteed delivery procedures are complied with as described below under
"Payment for Shares").
Shareholders Who Are Record Owners. Shareholders who are record owners can
choose between either option to exercise their Rights as described below under
"Payment for Shares." If time is of the essence, option (2) under "Payment for
Shares" below will permit delivery of the Subscription Certificate and payment
after the Expiration Date.
Shareholders Whose Shares Are Held by a Nominee. Shareholders whose shares
are held by a nominee, such as a bank, broker or trustee, must contact that
nominee to exercise their Rights. In such case, the nominee will complete the
Subscription Certificate on behalf of the shareholder and arrange for proper
payment by one of the methods described below under "Payment for Shares."
Nominees. Nominees who hold shares for the account of others should notify
the beneficial owners of such shares as soon as possible to ascertain such
beneficial owners' intentions and to obtain instructions with respect to the
Rights. If the beneficial owner so instructs, the nominee should complete the
Subscription Certificate and submit it to the Subscription Agent with the proper
payment as described below under "Payment for Shares."
INFORMATION AGENT
Any questions or requests for assistance concerning the method of
subscribing for Shares or for additional copies of this Prospectus or
Subscription Certificates or Notices of Guaranteed Delivery may be directed to
the Information Agent at its telephone number and address listed below:
Information Agent for the Offer is:
Shareholder Communications Corporation
17 State Street, 27th Floor
New York, New York 10004
800-733-8481, ext. 486
Shareholders may also contact their brokers or nominees for information
with respect to the Offer. The Information Agent will receive a fee estimated to
be $27,000, excluding reimbursement for its out-of-pocket expenses related to
the Offer.
PAYMENT FOR SHARES
Shareholders who wish to acquire Shares pursuant to the Offer may choose
between the following methods of payment:
(1) An Exercising Rights Holder may send the Subscription Certificate
together with payment for the Shares acquired in the Primary Subscription
and any additional Shares subscribed for pursuant to the
19
<PAGE> 22
Over-Subscription Privilege (for Record Date Shareholders) to the
Subscription Agent based on the Subscription Price of $6.75 per Share. A
subscription will be accepted when payment, together with a properly
completed and executed Subscription Certificate, is received by the
Subscription Agent's office at one of the addresses set forth above no
later than 5:00 p.m., New York City time, on the Expiration Date. The
Subscription Agent will deposit all checks and money orders received by it
for the purchase of Shares into a segregated interest-bearing account (the
interest from which will accrue to the benefit of the Fund) pending
proration and distribution of Shares. A PAYMENT PURSUANT TO THIS METHOD
MUST BE IN U.S. DOLLARS BY MONEY ORDER OR CHECK DRAWN ON A BANK OR BRANCH
LOCATED IN THE UNITED STATES, MUST BE PAYABLE TO COLONIAL INTERMEDIATE HIGH
INCOME FUND AND MUST ACCOMPANY A PROPERLY COMPLETED AND EXECUTED
SUBSCRIPTION CERTIFICATE FOR SUCH SUBSCRIPTION CERTIFICATE TO BE ACCEPTED.
EXERCISE BY THIS METHOD IS SUBJECT TO ACTUAL COLLECTION OF CHECKS BY 5:00
P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. BECAUSE UNCERTIFIED
PERSONAL CHECKS MAY TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR, SHAREHOLDERS
ARE STRONGLY URGED TO PAY, OR ARRANGE FOR PAYMENT, BY MEANS OF A CERTIFIED
OR CASHIER'S CHECK OR MONEY ORDER.
(2) Alternatively, an Exercising Rights Holder may acquire Shares, and
a subscription will be accepted by the Subscription Agent if, prior to 5:00
p.m., New York City time, on the Expiration Date, the Subscription Agent
has received a Notice of Guaranteed Delivery by facsimile (telecopy) or
otherwise from a financial institution that is a member of the Securities
Transfer Agents Medallion Program, the Stock Exchange Medallion Program or
the New York Stock Exchange Medallion Signature Program guaranteeing
delivery of (i) payment of the Subscription Price of $6.75 per share for
the Shares subscribed for in the Primary Subscription and any additional
Shares subscribed for pursuant to the Over-Subscription Privilege (for
Record Date Shareholders), and (ii) a properly completed and executed
Subscription Certificate. The Subscription Agent will not honor a Notice of
Guaranteed Delivery unless a properly completed and executed Subscription
Certificate and full payment for the Shares is received by the Subscription
Agent by the close of business on June 24, 1998, the third Business Day
after the Expiration Date.
On a date within eight Business Days following the Expiration Date (the
"Confirmation Date"), the Subscription Agent will send to each Exercising Rights
Holder (or, if shares are held by Cede or any other depository or nominee, to
Cede or such other depository or nominee) a confirmation showing (i) the number
of Shares purchased pursuant to the Primary Subscription and (ii) the number of
Shares, if any, acquired pursuant to the Over-Subscription Privilege (for Record
Date Shareholders). All payments by an Exercising Rights Holder must be in U.S.
dollars by money order or check drawn on a bank or branch located in the United
States and payable to COLONIAL INTERMEDIATE HIGH INCOME FUND.
The Subscription Agent will deposit all checks received by it prior to the
final payment date into a segregated interest-bearing account (which interest
will accrue to the benefit of the Fund) pending proration and distribution of
the Shares.
WHICHEVER OF THE TWO METHODS DESCRIBED ABOVE IS USED, ISSUANCE OF THE
SHARES PURCHASED IS SUBJECT TO COLLECTION OF CHECKS AND ACTUAL PAYMENT. IF A
HOLDER OF RIGHTS WHO SUBSCRIBES FOR SHARES PURSUANT TO THE PRIMARY SUBSCRIPTION
OR OVER-SUBSCRIPTION PRIVILEGE (FOR RECORD DATE SHAREHOLDERS) DOES NOT MAKE
PAYMENT OF ANY AMOUNTS DUE BY THE TENTH BUSINESS DAY AFTER THE CONFIRMATION
DATE, THE SUBSCRIPTION AGENT RESERVES THE RIGHT TO TAKE ANY OR ALL OF THE
FOLLOWING ACTIONS: (i) FIND OTHER RECORD DATE SHAREHOLDERS TO PURCHASE SUCH
SUBSCRIBED AND UNPAID FOR SHARES; (ii) APPLY ANY PAYMENT ACTUALLY RECEIVED BY IT
TOWARD THE PURCHASE OF THE GREATEST WHOLE NUMBER OF SHARES WHICH COULD BE
ACQUIRED BY SUCH HOLDER UPON EXERCISE OF THE PRIMARY SUBSCRIPTION AND/OR
OVER-SUBSCRIPTION PRIVILEGE, AND/OR (iii) EXERCISE ANY AND ALL OTHER RIGHTS OR
REMEDIES TO WHICH IT MAY BE ENTITLED, INCLUDING, WITHOUT LIMITATION, THE RIGHT
TO SET OFF AGAINST PAYMENTS ACTUALLY RECEIVED BY IT WITH RESPECT TO SUCH
SUBSCRIBED SHARES.
20
<PAGE> 23
THE METHOD OF DELIVERY OF SUBSCRIPTION CERTIFICATES AND PAYMENT OF THE
SUBSCRIPTION PRICE TO THE FUND WILL BE AT THE ELECTION AND RISK OF THE
EXERCISING RIGHTS HOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT SUCH
CERTIFICATES AND PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH
RETURN RECEIPT REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO
ENSURE DELIVERY TO THE SUBSCRIPTION AGENT AND CLEARANCE OF PAYMENT PRIOR TO 5:00
P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. BECAUSE UNCERTIFIED PERSONAL
CHECKS MAY TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR, YOU ARE STRONGLY URGED TO
PAY, OR ARRANGE FOR PAYMENT, BY MEANS OF CERTIFIED OR CASHIER'S CHECK OR MONEY
ORDER.
All questions concerning the timeliness, validity, form and eligibility of
any exercise of Rights will be determined by the Fund, whose determinations will
be final and binding. The Fund in its sole discretion may waive any defect or
irregularity, or permit a defect or irregularity to be corrected within such
time as it may determine, or reject the purported exercise of any Right.
Subscriptions will not be deemed to have been received or accepted until all
irregularities have been waived or cured within such time as the Subscription
Agent determines in its sole discretion.
The Subscription Agent will not be under any duty to give notification of
any defect or irregularity in connection with the submission of Subscription
Certificates or incur any liability for failure to give such notification.
EXERCISING RIGHTS HOLDERS WILL HAVE NO RIGHT TO RESCIND THEIR SUBSCRIPTION
AFTER RECEIPT OF THEIR PAYMENT FOR SHARES BY THE SUBSCRIPTION AGENT, EXCEPT AS
PROVIDED BELOW UNDER "NOTICE OF NET ASSET VALUE DECLINE."
SALE OF RIGHTS
The Rights are transferable until the Expiration Date. The Rights will be
listed for trading on the Exchange, subject to notice of issuance. The Fund will
use its best efforts to ensure that an adequate trading market for the Rights
will exist, although no assurance can be given that a market for the Rights will
develop. It is anticipated that the Rights will trade on the Exchange on a
when-issued basis commencing on or about May 20, 1998 until approximately May
28, 1998 and on a regular way basis thereafter until and including June 18,
1998, the last Business Day prior to the Expiration Date.
Sales through Subscription Agent and Dealer Manager. Record Date
Shareholders who do not wish to exercise any or all of their Rights may instruct
the Subscription Agent to sell any unexercised Rights through or to the Dealer
Manager. Subscription Certificates representing the Rights to be sold by or to
the Dealer Manager must be received by the Subscription Agent on or before June
17, 1998 (or if the Offer is extended, until two Business Days prior to the
Expiration Date). Upon the timely receipt by the Subscription Agent of
appropriate instructions to sell Rights, the Subscription Agent will request the
Dealer Manager either to purchase or to use its best efforts to complete the
sale and the Subscription Agent will remit the proceeds of sale, net of
commissions, to the selling Record Date Shareholder. Any commissions on sales of
Rights will be paid by the selling Record Date Shareholder. If the Rights can be
sold, sales of such Rights will be deemed to have been effected at the
weighted-average price received by the Dealer Manager on the day such Rights are
sold. The sale price of any Rights sold to the Dealer Manager will be based upon
the then current market price for the Rights, less amounts comparable to the
usual and customary brokerage fees. The Dealer Manager will also attempt to sell
all Rights which remain unclaimed as a result of Subscription Certificates being
returned by the postal authorities to the Subscription Agent as undeliverable as
of the fourth Business Day prior to the Expiration Date. Such sales will be made
net of commissions on behalf of the nonclaiming Record Date Shareholders. The
Subscription Agent will hold the proceeds from those sales for the benefit of
such nonclaiming Record Date Shareholders until such proceeds are either claimed
or escheat. There can be no assurance that the Dealer Manager will purchase or
be able to complete the sale of any such Rights, and neither the Fund nor the
Dealer Manager has guaranteed any minimum sales price for the Rights.
Other Transfers. The Rights evidenced by a Subscription Certificate may be
transferred in whole by endorsing the Subscription Certificate for transfer in
accordance with the accompanying instructions. A
21
<PAGE> 24
portion of the Rights evidenced by a single Subscription Certificate (but not
fractional Rights) may be transferred by delivering to the Subscription Agent a
Subscription Certificate properly endorsed for transfer, with instructions to
register such portion of the Rights evidenced thereby in the name of the
transferee and to issue a new Subscription Certificate to the transferee
evidencing such transferred Rights. In such event, a new Subscription
Certificate evidencing the balance of the Rights, if any, will be issued to the
Record Date Shareholder or, if the Record Date Shareholder so instructs, to an
additional transferee. The signature on the Subscription Certificate must
correspond with the name as written upon the face of the Subscription
Certificate in every particular, without alteration or enlargement, or any
change whatever. A signature guarantee must be provided by an eligible financial
institution as defined in Rule 17Ad-15 of the Securities Exchange Act of 1934,
as amended (the "1934 Act"), subject to the standards and procedures adopted by
the Fund.
Record Date Shareholders wishing to transfer all or a portion of their
Rights should allow at least five Business Days prior to the Expiration Date for
(i) the transfer instructions to be received and processed by the Subscription
Agent; (ii) a new Subscription Certificate to be issued and transmitted to the
transferee or transferees with respect to transferred Rights, and to the
transferor with respect to retained Rights, if any; and (iii) the Rights
evidenced by such new Subscription Certificate to be exercised or sold by the
recipients thereof. Neither the Fund nor the Subscription Agent nor the Dealer
Manager shall have any liability to a transferee or transferor of Rights if
Subscription Certificates are not received in time for exercise or sale prior to
the Expiration Date.
Except for the fees charged by the Subscription Agent and Dealer Manager
(which will be paid by the Fund), all commissions, fees and other expenses
(including brokerage commissions and transfer taxes) incurred or charged in
connection with the purchase, sale or exercise of Rights will be for the account
of the transferor of the Rights, and none of such commissions, fees or expenses
will be paid by the Fund, the Subscription Agent or the Dealer Manager.
The Fund anticipates that the Rights will be eligible for transfer through,
and that the exercise of the Primary Subscription (but not the Over-Subscription
Privilege) may be effected through, the facilities of The Depository Trust
Company ("DTC"; Rights exercised through DTC are referred to as "DTC Exercised
Rights"). Record Date Shareholders of DTC Exercised Rights may exercise the
Over-Subscription Privilege in respect of such DTC Exercised Rights by properly
executing and delivering to the Subscription Agent, at or prior to 5:00 p.m.,
New York City time, on the Expiration Date, a Nominee Holder Over-Subscription
Exercise Form or a substantially similar form satisfactory to the Subscription
Agent, together with payment of the Subscription Price for the number of Shares
for which the Over-Subscription Privilege is to be exercised.
DISTRIBUTION ARRANGEMENTS
PaineWebber Incorporated, which is a broker-dealer and member of the
National Association of Securities Dealers, Inc., will act as the Dealer Manager
for the Offer. Under the terms and subject to the conditions contained in the
Dealer Manager Agreement dated on or about the date hereof (the "Dealer Manager
Agreement"), the Dealer Manager will provide financial advisory and marketing
services in connection with the Offer and will solicit the exercise of Rights
and participation in the Over-Subscription Privilege. The Offer is not
contingent upon any number of Rights being exercised. The Fund has agreed to pay
the Dealer Manager a fee for its financial advisory, marketing and soliciting
services equal to 3.75% of the aggregate Subscription Price for Shares issued
pursuant to the Offer. The Dealer Manager will reallow to Selling Group Members
solicitation fees equal to 2.50% of the Subscription Price per Share for each
Share issued pursuant to the Offer as a result of their soliciting efforts. In
addition, the Dealer Manager will reallow to other broker-dealers that have
executed and delivered a soliciting dealer agreement and have solicited the
exercise of Rights, solicitation fees equal to 0.50% of the Subscription Price
per Share for each Share issued pursuant to the exercise of Rights as a result
of their soliciting efforts, subject to a maximum fee based upon the number of
shares held by each broker-dealer through DTC on the Record Date. Fees will be
paid to the broker-dealer designated on the applicable portion of the
Subscription Certificates or, in the absence of such designation, to the Dealer
Manager.
22
<PAGE> 25
In addition, the Fund may reimburse the Dealer Manager up to an aggregate
of $100,000 for its reasonable expenses incurred in connection with the Offer.
The Fund and the Adviser have each agreed to indemnify the Dealer Manager or
contribute to losses arising out of certain liabilities including liabilities
under the Securities Act of 1933, as amended (the "Securities Act"). The Dealer
Manager Agreement also provides that the Dealer Manager will not be subject to
any liability to the Fund in rendering the services contemplated by such
Agreement except for any act of bad faith, willful misconduct or gross
negligence of the Dealer Manager or reckless disregard by the Dealer Manager of
its obligations and duties under such Agreement.
The Fund has agreed not to offer or sell, or enter into any agreement to
sell, any equity or equity related securities of the Fund or securities
convertible into such securities for a period of 180 days after the date of the
Dealer Manager Agreement, except for the Shares to be issued upon exercise of
the rights offered hereby and shares issued in reinvestment of dividends or
distributions.
DELIVERY OF SHARE CERTIFICATES
Except as described herein, certificates representing Shares acquired in
the Primary Subscription and representing Shares acquired pursuant to the
Over-Subscription Privilege will be mailed promptly after the expiration of the
Offer once full payment for such Shares has been received and cleared.
Participants in the Fund's Dividend Reinvestment Plan (the "Plan") will have any
Shares acquired in the Primary Subscription and pursuant to the
Over-Subscription Privilege credited to their shareholder dividend reinvestment
accounts in the Plan. Participants in the Plan wishing to exercise Rights for
the Shares held in their accounts in the Plan must exercise such Rights in
accordance with the procedures set forth above. Shareholders whose shares are
held of record by Cede or by any other depository or nominee on their behalf or
their broker-dealer's behalf will have any Shares acquired in the Primary
Subscription credited to the account of Cede or such other depository or
nominee. Shares acquired pursuant to the Over-Subscription Privilege will be
certificated and certificates representing such Shares will be sent directly to
Cede or such other depository or nominee. Stock certificates will not be issued
for Shares credited to Plan accounts.
FOREIGN SHAREHOLDERS
Subscription Certificates will not be mailed to Record Date Shareholders
whose record addresses are outside the United States (the term "United States"
includes the states, the District of Columbia, and the territories and
possessions of the United States) ("Foreign Record Date Shareholders"). Foreign
Record Date Shareholders will be sent written notice of the Offer. The Rights to
which such Subscription Certificates relate will be held by the Subscription
Agent for such Foreign Record Date Shareholders' accounts until instructions are
received to exercise the Rights. If no instructions have been received by 5:00
p.m., New York City time, on June 16, 1998, which is three Business Days prior
to the Expiration Date, the Rights of those Foreign Record Date Shareholders
will be transferred by the Subscription Agent to the Dealer Manager, who will
either purchase the rights or use its best efforts to sell the Rights. The net
proceeds, if any, from the sale of those Rights by or to the Dealer Manager will
be remitted to Foreign Record Date Shareholders.
FEDERAL INCOME TAX CONSEQUENCES OF THE OFFER
The U.S. federal income tax consequences to holders of shares with respect
to the Offer will be as follows:
1. The distribution of Rights to Record Date Shareholders will not
result in taxable income to such holders nor will such holders realize
taxable income as a result of the exercise of the Rights. No loss will be
realized if the Rights expire without exercise.
2. The basis of a Right will be (a) to a holder of shares to whom the
Right is issued and who exercises or sells the Right (i) if the fair market
value of the Right immediately after issuance is less than 15% of the fair
market value of the shares with regard to which it is issued, zero (unless
the holder elects with respect to all Rights so received, by filing a
statement with his timely filed federal income tax return for the year in
which the Rights are received, to allocate the basis of the shares between
the Right and the shares based on their respective fair market values
immediately after the Right is issued), and (ii) if the fair market value
of the Right immediately after issuance is 15% or more of the fair market
value of the
23
<PAGE> 26
shares with regard to which it is issued, a portion of the basis in the
shares based upon their respective fair market values immediately after the
Right is issued, and (b) to a holder of shares to whom the Right is issued
and who allows the Right to expire, zero.
3. The holding period of a Right received by a Record Date
Shareholder includes the holding period of the share with regard to which
the Right is issued. If the Right is exercised, the holding period of the
Share acquired begins on the date the Right is exercised.
4. A Record Date Shareholder's basis for determining gain or loss
upon the sale of a Share acquired upon the exercise of a Right will be
equal to the sum of the Record Date Shareholder's basis in the Right, if
any, and the Subscription Price per Share. A Record Date Shareholder's gain
or loss recognized upon a sale of a Share acquired upon the exercise of a
Right will be capital gain or loss if the Share was held at the time of
sale as a capital asset and will be long-term capital gain or loss if the
Share is held for more than one year. See "Taxes--Federal Income Tax
Treatment of Holders of Shares" in the Statement of Additional Information
for more information regarding the capital gains tax rates applicable to
capital gains or losses recognized upon the sale of shares.
The Fund is required to withhold and remit to the U.S. Treasury 31% of
reportable payments paid on an account if the holder of the account provides the
Fund with either an incorrect taxpayer identification number or no number at
all, or fails to certify that he or she is not subject to such withholding.
The foregoing is a general summary of the material U.S. federal income tax
consequences of the Offer under the provisions of the U.S. Internal Revenue Code
of 1986, as amended (the "Code"), and Treasury regulations presently in effect
that are generally applicable to Record Date Shareholders that are United States
persons within the meaning of the Code and any other Record Date Shareholder who
would be subject to U.S. federal income tax upon the sale or exchange of the
Shares acquired upon the exercise of the Rights, and does not cover foreign,
state or local taxes. The Code and such regulations are subject to change by
legislative or administrative action, which may be retroactive. Exercising
Rights Holders should consult their tax advisers regarding specific questions as
to foreign, federal, state or local taxes. See "Federal Taxation."
NOTICE OF NET ASSET VALUE DECLINE
The Fund has, as required by the Commission's registration form, undertaken
to suspend the Offer until it amends this Prospectus if, subsequent to the
effective date of the Fund's Registration Statement, the Fund's net asset value
declines more than 10% from its net asset value as of that date. Accordingly,
the Expiration Date would be extended and the Fund would notify Record Date
Shareholders of any such decline and permit Exercising Rights Holders to cancel
their exercise of Rights.
EMPLOYEE PLAN CONSIDERATIONS
Shareholders that are tax-deferral arrangements, such as plans qualified
under Code section 401(a) (including corporate savings plans, 401(k) plans, and
Keogh plans of self-employed individuals), individual retirement accounts under
Code section 408 ("IRAs"), Roth IRAs under Code section 408A, and custodial
accounts under Code section 403(b) (collectively, "Retirement Plans"), should be
aware that additional contributions of cash to the Retirement Plan (other than
rollover contributions or trustee-to-trustee transfers from another Retirement
Plan) in order to exercise Rights would be treated as contributions to the
Retirement Plan and, when taken together with contributions previously made, may
result in, among other things, excise taxes for excess or nondeductible
contributions. In the case of Retirement Plans qualified under Code section
401(a) and certain other Retirement Plans, additional cash contributions could
cause the maximum contribution limitations of Code section 415 or other
qualification rules to be violated.
Retirement Plans and other tax exempt entities, including governmental
plans, should also be aware that if they borrow in order to finance their
exercise of Rights, they may become subject to the tax on unrelated business
taxable income ("UBTI") under Code section 511. If any portion of an IRA or a
Roth IRA is used as security for a loan, the portion so used is also treated as
distributed to the IRA or Roth IRA depositor, which may result in current income
taxation and penalty taxes.
24
<PAGE> 27
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
contains fiduciary responsibility requirements, and ERISA and the Code contain
prohibited transaction rules that may apply to the exercise of Rights by
Retirement Plans. Retirement Plans that are not subject to ERISA (such as
governmental plans) may be subject to state law restrictions that could affect
the decision to exercise or transfer Rights. Due to the complexity of these
rules and the penalties for noncompliance, shareholders that are Retirement
Plans should consult with their counsel and other advisers regarding the
consequences of their exercise of Rights under ERISA, the Code, and, where
applicable, state law.
IMPORTANT DATES TO REMEMBER
<TABLE>
<CAPTION>
EVENT DATE
----- ----
<S> <C>
Record Date................................................. May 26, 1998
Subscription Period......................................... May 26, 1998to
June 19, 1998
Expiration Date............................................. June 19, 1998(a)
Subscription Certificates and Payment for Shares Due(b)..... June 19, 1998(a)
Notice of Guaranteed Delivery Due(b)........................ June 19, 1998(a)
Payment for Guarantees of Delivery Due...................... June 24, 1998(a)
Confirmation to Participants................................ July 1, 1998(a)
</TABLE>
- ---------------
(a) Unless the Offer is extended.
(b) A shareholder exercising Rights must deliver by June 19, 1998 either (i) a
Subscription Certificate and payment for Shares or (ii) a Notice of
Guaranteed Delivery.
USE OF PROCEEDS
Based on the Subscription Price of $6.75 per Share, the net proceeds of the
Offer to the Fund, assuming all 5,010,532 Shares offered hereby are sold, are
estimated to be approximately $32,052,800, after deducting offering expenses
payable by the Fund estimated at approximately $500,000. The Adviser anticipates
that investment of such proceeds in accordance with the Fund's investment
objective and policies will take up to thirty days from their receipt by the
Fund, depending on market conditions and the availability of appropriate
securities for purchase, but in no event will such investment take longer than
six months. Pending such investment in accordance with the Fund's investment
objective and policies, the proceeds will be held in U.S. Government securities
(which term includes obligations of the United States Government, its agencies
or instrumentalities) and other high-quality short-term money market
instruments.
INVESTMENT POLICIES AND LIMITATIONS
The investment objective of the Fund is to seek high current income and
total return by investing primarily in lower-rated corporate debt securities.
INVESTMENT STRATEGY
It is the Fund's policy that, under normal market conditions, up to 80% of
its total assets will be invested in debt securities rated in the lower
categories by recognized rating agencies or nonrated debt securities deemed by
the Adviser to be of comparable quality. The Fund's portfolio investments have
consisted and generally will continue to consist principally of debt securities,
including fixed-income securities, rated "BBB"/"Baa" or lower by the Rating
Agencies.
The Fund may invest up to 100% of its assets in higher rated securities,
if, in the opinion of the Adviser, such investments are in the best interests of
the Fund because of narrow yield spreads between lower and higher rated
securities. The Fund may invest in debt securities of any maturity, but under
normal conditions, the average maturity of the Fund's investments is expected to
be between 3 and 10 years. The Fund will not invest more than 25% of its total
assets in a single industry and not more than 25% of its total assets in
securities issued or guaranteed by foreign governments or foreign companies.
Debt Securities. The Fund may invest in debt securities of any maturity
that pay fixed, floating or adjustable interest rates. The values of debt
securities generally fluctuate inversely with changes in interest rates. This is
less likely to be true for adjustable or floating rate securities, since
interest rate changes are more
25
<PAGE> 28
likely to be reflected in changes in the rates paid on the securities. However,
reductions in interest rates also may translate into lower distributions paid by
the Fund.
The Fund also may invest in debt securities (i) that do not pay interest
but instead are issued at a significant discount to their maturity values
(referred to as zero coupon securities), (ii) that pay interest, at the issuer's
option, in additional securities instead of cash (referred to as pay-in-kind
securities) or (iii) that pay interest at predetermined rates that increase over
time (referred to as step coupon bonds). Because zero coupon securities,
pay-in-kind securities and step coupon bonds may not pay cash interest on a
current basis, but the Fund nevertheless must accrue and distribute to investors
the income deemed to be earned on a current basis, the Fund may have to sell
other investments to raise the cash needed to make income distributions.
Common Stocks. The Fund may invest up to 20% of its total assets in common
stocks, usually as a result of warrants associated with debt instruments
purchased by the Fund, but also under certain circumstances to seek capital
appreciation.
Lower Rated Debt Securities. Lower rated debt securities are debt
securities which are not considered to be investment grade (that is, they are
rated below "BBB" by S&P or below "Baa" by Moody's, or are unrated but
considered by the Adviser to be of comparable credit quality). Securities rated
"BB" or lower by S&P or "Ba" or lower by Moody's are commonly referred to as
"high yield," high risk securities or "junk bonds." For a description of S&P's
and Moody's rating systems, see Appendix A to this Prospectus. Lower rated debt
securities are generally considered significantly more speculative and likely to
default than higher quality debt securities. Because of the increased risk of
default, lower rated debt securities generally have higher interest rates than
higher quality securities.
The Fund may purchase bonds in the lowest rating categories (C for Moody's
and D for S&P) and comparable unrated securities. However, the Fund will only
purchase securities rated Ca or lower by Moody's or CC or lower by S&P if the
Adviser believes the quality of such securities is higher than indicated by the
rating.
The values of lower rated securities are less likely than those of higher
quality debt securities to fluctuate inversely with changes in interest rates.
This is because increases in interest rates often are associated with an
improving economy, which may translate into an improved ability of the issuers
of lower-rated securities to pay off their bonds (lowering the risk of default).
Relative to other debt securities, the values of lower rated debt securities may
be more volatile because: (i) an economic downturn may more significantly impact
their potential for default, or (ii) the secondary market for such securities
may at times be less liquid or respond more adversely to negative publicity or
investor perceptions, making it more difficult to value or dispose of the
securities. The likelihood that these securities will help the Fund achieve its
investment objective is more dependent on the Adviser's own credit analysis.
The credit ratings of all bonds held by the Fund at October 31, 1997 are
set forth below. This information reflects the composition of the Fund's assets
at October 31, 1997 and is not necessarily representative of the Fund holdings
currently or at any time in the future.
<TABLE>
<CAPTION>
RATED BY
S&P
--------
<S> <C>
Investment Grade............................................ 2.6%
BB.......................................................... 9.7%
B........................................................... 74.7%
CCC......................................................... 5.6%
CC.......................................................... 0.0%
C........................................................... 0.0%
D........................................................... 0.0%
Nonrated.................................................... 1.5%
-----
Subtotal............................................... 94.1%
U.S. Governments, equities and others....................... 5.9%
-----
Total.................................................. 100.0%
=====
</TABLE>
Foreign Investments. Investments in foreign securities have special risks
related to political, economic and legal conditions outside the U.S. As a
result, the prices of foreign securities may fluctuate substantially
26
<PAGE> 29
more than the prices of securities of issuers based in the U.S. Special risks
associated with foreign securities include the possibility of unfavorable
movements in currency exchange rates, the existence of less liquid markets, the
unavailability of reliable information about issuers, the existence (or
potential imposition) of exchange control regulations (including currency
blockage), and political and economic instability, among others. In addition,
transactions in foreign securities may be more costly because of currency
conversion costs and higher brokerage and custodial costs. See "Miscellaneous
Investment Practices--Foreign Investments" and "Miscellaneous Investment
Practices--Foreign Currency Transactions" in the Statement of Additional
Information for more information about foreign investments.
Emerging Markets. The Fund may invest in foreign securities issued or
guaranteed by companies or governments located in countries whose economies or
securities markets are not yet highly developed. Special risks associated with
these investments (in addition to those of foreign investments generally) may
include, among others, greater political uncertainties, an economy's dependence
on revenues from particular commodities or on international aid or development
assistance, extreme or volatile debt burdens or inflation rates, highly limited
numbers of potential buyers for such securities, heightened volatility of
security prices, restrictions on repatriation of capital invested abroad and
delays and disruptions in securities settlement procedures.
Foreign Currency Transactions. In connection with its investments in
foreign securities, the Fund may purchase and sell (i) foreign currencies on a
spot or forward basis, (ii) foreign currency futures contracts and (iii) options
on foreign currencies and foreign currency futures. Such transactions will be
entered into (a) to lock in a particular foreign exchange rate pending
settlement of a purchase or sale of a foreign security or pending the receipt of
interest, principal or dividend payments on a foreign security held by the Fund,
or (b) to hedge against a decline in the value, in U.S. dollars or in another
currency, of a foreign currency in which securities held by the Fund are
denominated. The Fund will not attempt, nor would it be able, to eliminate all
foreign currency risk. Further, although hedging may lessen the risk of loss if
the hedged currency's value declines, it limits the potential gain from currency
value increases. See "Miscellaneous Investment Practices--Foreign Currency
Transactions" in the Statement of Additional Information for more information
relating to the Fund's obligations in entering into foreign currency
transactions.
Temporary/Defensive Investments. Temporarily available cash may be
invested in certificates of deposit, bankers' acceptances, high quality
commercial paper, Treasury bills, repurchase agreements and U.S. government
securities. Some or all of the Fund's assets also may be invested in such
investments during periods of unusual market conditions. Under a repurchase
agreement, the Fund buys a security from a bank or dealer, which is obligated to
buy it back at a fixed price and time. The security is held in a separate
account at the Fund's custodian and constitutes the Fund's collateral for the
bank's or dealer's repurchase obligation. Additional collateral will be added so
that the obligation will at all times be fully collateralized. However, if the
bank or dealer defaults or enters bankruptcy, the Fund may experience costs and
delays in liquidating the collateral, and may experience a loss if it is unable
to demonstrate its rights to the collateral in a bankruptcy proceeding.
Interest Rate Futures and Options. For hedging purposes, the Fund may (1)
buy or sell interest rate futures and (2) buy put and call options on such
futures. The total market value of securities to be delivered or acquired
pursuant to such contracts will not exceed 5% of the Fund's net assets. A
futures contract creates an obligation by the seller to deliver and the buyer to
take a delivery of the type of instrument at the time and in the amount
specified in the contract. Although futures contracts call for the delivery (or
acceptance) of the specified instrument, the contracts are usually closed out
before the settlement date through the purchase (or sale) of an offsetting
contract. If the price of the initial sale of the futures contract exceeds (or
is less than) the price of the offsetting purchase, the Fund realizes a gain (or
loss).
"When-Issued" and "Delayed Delivery" Securities. The Fund may acquire
securities on a "when-issued" or "delayed delivery" basis by contracting to
purchase securities for a fixed price on a date beyond the customary settlement
time with no interest accruing until settlement. If made through a dealer, the
contract is dependent on the dealer completing the sale. The dealer's failure
could deprive the Fund of an advantageous
27
<PAGE> 30
yield or price. These contracts involve the risk that the value of the
underlying security may change prior to settlement. The Fund may realize
short-term gains or losses if the contracts are sold.
Other. The Fund may not achieve its investment objective. The Fund may
trade portfolio securities for short-term profits to take advantage of price
differentials. High portfolio turnover may result in higher transaction costs
and higher levels of realized capital gains. The Fund's investment objective and
nonfundamental investment policies may be changed without shareholder approval.
Additional information concerning certain of the securities and investment
techniques and strategies described above or in which the Fund also engages is
contained in the Statement of Additional Information.
Additional Leverage. The Fund has reserved the right to borrow money to
the extent such borrowing would not result in a violation of the Asset Coverage
Requirements (as defined under "Risk Factors and Special Considerations--Risk of
Leverage") and would not otherwise violate Section 18 of the 1940 Act. The Fund
may borrow to the extent then permitted by the Credit Agreement and the 1940 Act
through the public or private issuance of debt securities and/or from lenders of
all types, such as banks, savings and loan associations, insurance companies and
similar financial institutions. To the extent permitted by the Credit Agreement
and the 1940 Act, the Fund may also borrow additional amounts as it redeems the
Term Note. See "Description of Term Note--Restrictive Covenants."
The Fund currently is seeking a commitment from its lender to increase its
leverage. The additional leverage, if any, may be implemented prior to, at the
time of or following the completion of the Offer (through one or more credit
facilities or amendments to the existing Credit Agreement). There are no
assurances that any such binding commitments from its lender will be obtained by
the Fund. The inability to increase, or delays in increasing, the Fund's
leverage could, depending on market conditions, adversely affect the Fund's
earnings and net asset value. The Board of Trustees has authorized the Fund to
increase its current level of leverage. If such leverage is added, the
percentage of the Fund's assets representing leverage is expected to increase
from approximately 20% to approximately 25% prior to and also following
completion of the Offer. The Fund reserves the right at any time, if it believes
that market conditions are appropriate, further to increase its level of debt or
other senior securities to maintain or increase the Fund's current level of
leverage to the extent permitted under the 1940 Act and any relevant agreements
between the Fund and third parties. See "Risk Factors and Special
Considerations" for a discussion of certain risks associated with borrowings by
the Fund.
28
<PAGE> 31
RISK FACTORS AND SPECIAL CONSIDERATIONS
An investment in the Fund is subject to a number of risks and special
considerations, including the following:
DILUTION
An immediate dilution of the aggregate net asset value of the shares owned
by Record Date Shareholders who do not fully exercise their Rights may be
experienced as a result of the Offer because the Subscription Price per Share
may be less than the Fund's net asset value per share on the Expiration Date,
and the number of shares outstanding after the Offer is likely to increase in a
greater percentage than the increase in the size of the Fund's assets. In
addition, as a result of the Offer, Record Date Shareholders who do not fully
exercise their Rights should expect that they will, at the completion of the
Offer, own a smaller proportional interest in the Fund than would otherwise be
the case. Although it is not possible to state precisely the amount of any such
decrease in net asset value, because it is not known at this time what the net
asset value per share will be at the Expiration Date or what proportion of the
Shares will be subscribed, such dilution could be substantial. For example,
assuming that all Rights are exercised, at the Subscription Price of $6.75,
which is 9.2% below the Fund's net asset value of $7.43 per share as of May 15,
1998, the Fund's net asset value per share (after payment of the Dealer Manager
and soliciting fees and estimated offering expenses) would be reduced by
approximately $0.26 per share (or 3.5%). The distribution to shareholders of
transferable Rights which themselves may have a realizable value will afford
nonparticipating shareholders the potential of receiving a cash payment upon the
sale of such Rights, receipt of which may be viewed as partial compensation for
the possible dilution of their interest in the Fund. No assurance can be given
that a market for the Rights will develop or as to the value, if any, that such
Rights will have.
RISK OF LEVERAGE
The Fund's leveraged capital structure creates special risks not associated
with unleveraged funds having similar investment objectives and policies,
including a higher volatility of the net asset value of the shares and
potentially more volatility in the market value of the shares. For a description
of the Term Note, see "Description of Term Note." Any investment income or gains
earned by the Fund on amounts borrowed under the Term Note or other forms of
leverage that is in excess of interest and dividends due thereon will cause the
value of and dividends, if any, on the Fund's shares to rise more quickly than
would otherwise be the case. Conversely, if the investment performance by the
Fund on amounts borrowed under the Term Note or other forms of leverage fails to
cover the interest and dividends on such leverage, the value of the shares may
decrease more quickly than would otherwise be the case and dividends thereon
will be reduced or eliminated. This is the speculative effect of "leverage."
The interest rate on the Term Note is a fixed annual rate of 7.33%. Based
on the interest rate payable on the Term Note, the annual return after other
operating expenses of the Fund's portfolio must equal at least such interest
rate in order to cover the interest payments on the Term Note.
Since any decline in the net asset value of the Fund's investments will be
borne entirely by holders of the shares, the effect of leverage in a declining
market would result in a greater decrease in net asset value to holders of the
shares than if the Fund were not leveraged, which would likely be reflected in a
greater decline in the market price for the shares. In an extreme case, if the
Fund's current investment income were not sufficient to meet interest payments
on the Term Note or other forms of leverage, it could be necessary for the Fund
to liquidate certain of its investments, thereby reducing the net asset value
attributable to the shares. In addition, a decline in the net asset value of the
Fund's investments may affect the ability of the Fund to make dividend payments
on its shares and such failure to pay dividends or make distributions may result
in the Fund ceasing to qualify as a regulated investment company under the Code.
The Term Note or other forms of leverage may constitute a substantial lien and
burden on the shares by reason of their prior claim against the income of the
Fund and against the net assets of the Fund in liquidation.
The Fund currently is seeking a commitment from its lender to increase its
leverage. The additional leverage, if any, may be implemented prior to, at the
time of or following completion of the Offer (through one
29
<PAGE> 32
or more credit facilities or amendments to the existing Credit Agreement). There
are no assurances that any such binding commitments from its lender will be
obtained by the Fund. The inability to increase, or delays in increasing, the
Fund's leverage could, depending on market conditions, adversely affect the
Fund's earnings and net asset value. The Board of Trustees has authorized the
Fund to increase its current level of leverage. If such leverage is added, the
percentage of the Fund's assets representing leverage is expected to increase
from approximately 20% to approximately 25% prior to and also following
completion of the Offer. The Fund reserves the right at any time, if it believes
that market conditions are appropriate, to increase its level of debt or other
senior securities to maintain or increase the Fund's current level of leverage
to the extent permitted by the 1940 Act and any relevant agreements between the
Fund and third parties.
The 1940 Act generally imposes on registered closed-end investment
companies, such as the Fund, a 300% "asset coverage" test for "senior securities
representing indebtedness" and a 200% "asset coverage" test for "senior
securities representing stock" (the "Asset Coverage Requirements"). The 1940 Act
generally restricts distributions to holders of common stock and preferred stock
of a registered closed-end investment company while any senior security
representing indebtedness is outstanding and restricts distributions to the
holders of common stock while any senior security representing stock is
outstanding, unless such coverage requirements are satisfied. The Fund's shares
of beneficial interest constitute common stock for this purpose. Furthermore,
the 1940 Act generally limits registered closed-end investment companies from
issuing more than one class of senior securities representing indebtedness and
more than one class of senior securities representing stock, subject to various
exceptions.
The following table illustrates the effect of leverage (using senior
securities--i.e., $27.4 million Term Note) on the return of a holder of the
shares, assuming a Fund portfolio of approximately $111 million, the annual
returns set forth in such table and a fixed annual rate of 7.33% payable on the
Term Note:
<TABLE>
<S> <C> <C> <C> <C> <C>
Assumed Return on Portfolio
(Net of Expenses Except
Interest)........................ -10% -5% 0% 5% 10%
Corresponding Return to
Shareholder...................... -14.29% -8.05% -1.82% 4.42% 10.66%
</TABLE>
The purpose of the foregoing table is to assist the investor in
understanding the effects of leverage. The figures in the table are hypothetical
and the actual returns to a holder of the shares may be greater or less than
those appearing in the table.
DISCOUNT FROM NET ASSET VALUE
Shares of closed-end funds frequently trade at a market price which is less
than the value of the net assets attributable thereto. The possibility that
shares of the Fund will trade at a discount from net asset value is a risk
separate and distinct from the risk that the Fund's net asset value will
decrease. It should be noted, however, that in some cases, shares of closed-end
funds may trade at a premium to net asset value. The Fund's shares have traded
at various times in the market above, at and below net asset value since the
commencement of the Fund's operations. See "Trading and Net Asset Value
Information." In addition, the net asset value of the Fund will change with
changes in the value of its portfolio securities. Because the Fund invests
primarily in fixed-income securities, the net asset value of the shares of the
Fund can be expected to change as general levels of interest rates fluctuate.
When interest rates decline, the value of a fixed-income portfolio can be
expected to rise. Conversely, when interest rates rise, the value of a
fixed-income portfolio can be expected to decline. In addition, in a period of
rising interest rates, increasing defaults by issuers of lower rated debt
obligations could exacerbate such decline in the Fund's net asset value,
although in some circumstances an interest rate increase may be associated with
an improving economy, which may translate into an improved ability of the
issuers of lower rated debt securities to make their payment obligations. The
Fund cannot predict whether its shares will trade at, below or above net asset
value.
LOWER-RATED INVESTMENTS
The Fund is designed for long-term investors who can accept the risks
entailed in seeking a high level of current income available from investments in
long-term, high yielding, lower quality debt securities. Consistent with a
long-term investment approach, investors in the Fund should not rely on the Fund
for their short-term financial needs. The principal value of the lower quality
securities in which the Fund invests will be
30
<PAGE> 33
affected by interest rate levels, general economic conditions, specific industry
conditions and the creditworthiness of the individual issuer. Although the Fund
seeks to reduce risk by portfolio diversification, extensive credit analysis,
and attention to trends in the economy, industries and financial markets, such
efforts will not eliminate risk.
Debt securities offering the high current income sought by the Fund will
ordinarily be in the lower rating categories of recognized rating agencies or
will be unrated. The values of such securities tend to reflect individual
corporate developments or adverse economic changes to a greater extent than
higher rated securities, which tend to react more to fluctuations in the general
market level of interest rates. Periods of economic uncertainty and changes
generally result in increased volatility in the market prices and yields of
lower rated securities and thus in the Fund's net asset value. Further, these
securities are generally regarded by the Rating Agencies as significantly more
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation and more likely to default than
securities in the higher rating categories; the Fund may incur additional
expenses to the extent it is required to seek recovery upon a default in the
payment of principal of or interest on its portfolio holdings. The lower rated
securities held by the Fund are frequently subordinated to the prior payment of
senior indebtedness and are traded in markets that may be relatively less liquid
than the market for higher rated securities. Changes by recognized rating
services in their ratings of any debt security and in the ability of an issuer
to make payments of interest and principal may also affect the value of the
Fund's investments. Changes in the value of portfolio securities will not
necessarily affect cash income derived from such securities, but will affect the
Fund's net asset value. The Fund will rely on the Adviser's judgment, analysis
and experience in evaluating the creditworthiness of an issuer. In this
evaluation, the Adviser will take into consideration, among other things, the
issuer's financial resources, its sensitivity to economic conditions and trends,
its operating history, the quality of the issuer's management and regulatory
matters.
The values of lower rated securities are less likely than higher quality
debt securities to fluctuate inversely with changes in interest rates. This is
because increases in interest rates may be associated with an improving economy,
which may translate into an improved ability of the issuers of lower rated
securities to pay off their bonds (lowering the risk of default). Relative to
other debt securities, the values of lower rated debt securities may be more
volatile because: (i) an economic downturn may more significantly impact their
potential for default, or (ii) the secondary market for such securities may at
times be less liquid or respond more adversely to negative publicity or investor
perceptions, making it more difficult to value or dispose of the securities. In
addition, the trading market for lower rated securities is generally less liquid
than the market for higher rated securities. As of April 30, 1998, approximately
97.15% of the market value of the Fund's total investments was represented by
debt securities regarded by the Rating Agencies as below investment grade (that
is, rated below BBB by S&P or below Baa by Moody's) or deemed by the Adviser to
be below investment grade. In addition, in a period of rising interest rates,
increasing defaults by issuers of such debt obligations could exacerbate any
decline in the Fund's net asset value. If an issuer of a security containing a
redemption or call provision exercises either provision in a declining interest
rate market, the Fund would be likely to replace the security with a
lower-yielding investing, which could result in a decreased return for
shareholders.
The market for lower rated securities has expanded rapidly in recent years.
This expanded market has not yet completely weathered an economic downturn. A
further economic downturn or an increase in interest rates could have a negative
effect on the lower rated debt market and on the market value of such securities
held by the Fund, as well as on the ability of the issuers of such securities to
repay principal and interest on their borrowings.
The credit ratings issued by credit rating services may not fully reflect
the true risks of an investment. For example, credit ratings typically evaluate
the safety of principal and interest payments, not market value risk, of lower
rated securities. Also, credit rating agencies may fail to change on a timely
basis a credit rating to reflect changes in economic or company conditions that
affect a security's market value. Although the Adviser considers ratings of
recognized rating services such as Moody's and S&P, the Adviser primarily relies
on its own credit analysis, which includes a study of the issuer's existing
debt, capital structure, ability to service debt and to pay dividends, the
issuer's sensitivity to economic conditions, its operating history and the
current trend
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of earnings. The Adviser continually monitors the investments in the Fund's
portfolio and carefully evaluates whether to dispose of or retain lower rated
securities whose credit ratings have changed.
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's present policy, which may be changed by the Board of
Trustees, to pay dividends on a monthly basis to holders of the shares of
investment company taxable income and to distribute any net short-term capital
gains and net capital gains annually. See "Dividends and Distributions; Dividend
Reinvestment Plan." However, there can be no assurance that the Fund will be
able to maintain its current level of dividends per share, and the Fund may
change the Fund's current level of dividends per share in response to market or
other conditions. The Fund currently has accumulated undistributed net
investment income upon which it has paid taxes. Based on information provided by
the Adviser on current market conditions in the lower rated debt market and
available leverage opportunities, the Board of Trustees believes the Offer will
not result in a decrease in the Fund's current level of dividends per share. See
"Financial Highlights" and "The Offer--Purpose of the Offer."
The Fund will not be permitted to declare dividends or other distributions
with respect to the shares or purchase shares unless at the time thereof the
Fund meets certain asset coverage requirements, including those imposed by the
1940 Act. Failure to pay dividends or other distributions could result in the
Fund ceasing to qualify as a regulated investment company under the Code. See
"Federal Taxation" and "Description of Shares of Beneficial Interest--Dividends
and Distributions." In the event the Fund fails to satisfy certain asset
coverage requirements, the Fund may be required to effect mandatory partial or
complete redemption of the Term Note. Redemption of the Term Note would reduce
the Fund's leverage and could negatively affect potential returns with respect
to the Shares.
Given the above-described investment risks inherent in the Fund, investment
in shares of the Fund should not be considered a complete investment program and
is not appropriate for all investors. Investors should carefully consider their
ability to assume these risks before making an investment in the Fund.
THE ADVISER
THE ADVISER
The Adviser is Colonial Management Associates, Inc., a Massachusetts
corporation having its principal offices at One Financial Center, Boston,
Massachusetts 02111. The Adviser is a wholly owned subsidiary of The Colonial
Group, Inc. ("TCG"), and both TCG and the Adviser are indirect subsidiaries of
Liberty Mutual Insurance Company, an underwriter of workers' compensation
insurance and a property and casualty insurer in the U.S. The Adviser has been
an investment adviser since 1931. As of the date of this Prospectus, the Adviser
serves as investment adviser for 39 open-end and 5 closed-end management
investment companies.
Andrea S. Feingold, Vice President and head of the Corporate Group of the
Adviser, has managed the Fund since November 1993. Ms. Feingold joined the
Adviser in 1991 as an Investment Analyst.
MANAGEMENT AGREEMENT
The Management Agreement between the Adviser 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 Adviser 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 Adviser, subject to review by the Board of Trustees of the Fund
and compliance with the applicable provisions of the 1940 Act.
The Adviser 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.
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Under the Management Agreement with the Fund, the Adviser receives a
monthly advisory fee at the annual rate of 0.65% of the average weekly net
assets of the Fund. Since the Adviser's fee is based on the average weekly net
assets of the Fund, the Adviser will benefit from any increase in the Fund's net
assets resulting from the Offer. It is not possible to state precisely the
amount of additional compensation the Adviser will receive as a result of the
Offer because it is not known how many Shares will be subscribed for and because
the proceeds of the Offer will be invested in additional portfolio securities
which will fluctuate in value. However, based on the estimated proceeds from the
Offer assuming all the Rights are exercised in full for the Subscription Price
of $6.75 per Share, the Adviser would receive additional annual advisory fees of
approximately $208,000 as a result of the increase in average weekly net assets
under management over the Fund's current assets under management, assuming no
fluctuations in the value of Fund portfolio securities.
The Adviser places all orders for the purchase and sale of portfolio
securities. In selecting broker-dealers, the Adviser may consider research and
brokerage services furnished by such broker-dealers to the Adviser and its
affiliates. In recognition of the research and brokerage services provided, the
Adviser 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 Adviser may consider sales of
shares of certain other Colonial funds in selecting broker-dealers for portfolio
security transactions.
YEAR 2000 COMPLIANCE
The Adviser is actively coordinating, managing and monitoring Year 2000
readiness for the Fund. A central program office at the Adviser is working
within the Adviser and with vendors who provide services, software and systems
to the Fund to help 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 Adviser, 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. The cost of these modifications will not affect the Fund.
However, no assurances can be given that all modifications required to ensure
proper data processing and calculation on and after January 1, 2000 will be
timely made or that services to the Fund will not be adversely affected.
DETERMINATION OF NET ASSET VALUE
Net asset value of the shares will be determined as of the close of regular
trading on the Exchange (generally 4:00 p.m. New York City time) on the last
Business Day of each week (generally Friday), and at such other times as the
Fund may authorize. Net asset value is determined by dividing the value of the
net assets of the Fund (for the purpose of determining the net asset value per
share, the value of the Fund's net assets shall be deemed to equal the value of
the Fund's assets less the Fund's liabilities (including the outstanding
principal amount of the Term Note and accrued but unpaid interest on the Term
Note)), by the total number of shares outstanding. 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 Adviser 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.
SHARE REPURCHASES; CONVERSION TO OPEN-END STATUS
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 Fund's market price and net asset value. If shares of the Fund 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 shares on the open market or
the making of tender offers for such shares. Since commencement of the Fund's
operations, no such open market purchases or tender offers have been made, and
no assurances can be given that such actions will be taken in the future. The
Fund may borrow
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<PAGE> 36
money to finance the repurchase of shares, subject to compliance with the Asset
Coverage Requirements, Section 18 of the 1940 Act and the other limitations
described under "Investment Policies and Limitations--Investment
Strategy--Additional Leverage." Shares may not be repurchased, however, (i) if
applicable asset coverage requirements under the 1940 Act (i.e., 300% with
respect to the Term Note and 200% with respect to preferred stock, if any) are
not met or would not be met following such repurchase, (ii) when payments of
principal of or interest on the Term Note are in default or (iii) if otherwise
prohibited by applicable law.
There can be no assurance that repurchases or tenders, if they were to
occur, would result in the shares trading at a price which is equal to their net
asset value. The Fund anticipates that the market price of the shares will
usually vary from net asset value. The market price of the shares will be
determined, among other things, by the relative demand for and supply of the
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 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 at any time a proposal to convert the Fund to an
open-end investment company and in connection therewith to redeem or otherwise
retire the Term Note, as would be required upon such conversion by the 1940 Act.
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 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 lower rated
securities in the Fund's portfolio and interest and dividend charges on senior
securities 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 shares 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 converted to an open-end investment company, it could be
required to liquidate portfolio securities to meet requests for redemption, and
the shares would no longer be listed on the Exchange. In the event the Fund
converts to open-end status, the Fund would only be able to borrow through bank
borrowings within certain limits and would not be allowed to have preferred
stock. 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.
DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN
It is the Fund's present policy, which may be changed by the Board of
Trustees, to pay dividends of investment company taxable income (but not
including short-term capital gains or "net capital gains," defined as the excess
of net long-term capital gains over net short-term capital losses) on a monthly
basis to holders of shares, and to distribute any net short-term capital gains
and net capital gains annually. Under present law, if the Fund were to retain
ordinary income or net capital gains, taxes would be imposed with respect to
those amounts. There can be no assurance that the Fund will be able to maintain
its current level of dividends, and the Fund may change the Fund's current level
of dividends in response to market or other conditions. See "Risk Factors and
Special Considerations--Dividends and Distributions." See also "Federal
Taxation," "Description of Term Note--Restrictive Covenants" and "Description of
Shares of Beneficial Interest--Dividends and Distributions" for a discussion of
certain possible restrictions on the Fund's ability to declare dividends on the
Shares.
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Pursuant to the Fund's Dividend Reinvestment Plan (the "Plan"), all
shareholders whose shares are registered in their own names will have all
distributions reinvested automatically in additional shares of the Fund by First
Data Investor Services Group, Inc., as agent under the Plan (acting in such
capacity, the "Plan Agent"), unless a shareholder elects to receive cash. An
election to receive cash may be revoked or reinstated at the option of the
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 brokers or nominees elect 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 Offer 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 or capital gains
distribution 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 cash dividend or capital gains distribution, participants will be issued
shares at the net asset value most recently determined as provided under
"Determination of Net Asset Value" in this Prospectus and in the Statement of
Additional Information, or, if higher, at 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 or capital gains
distribution payable only in cash, the Plan Agent will, as agent for the
participants, buy shares in the open market, on the 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 or capital gains distribution had been paid in shares issued by the
Fund. The Plan Agent will apply all cash received as a dividend or capital gains
distribution to purchase shares in the open market as soon as practicable after
the payment date of such dividend or capital gains distribution, 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 or capital
gains distributions. The Plan Agent's fees for handling the reinvestment of
dividends and capital gains distributions 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 shares or
in cash. However, each participant will pay a pro rata share of brokerage
commissions incurred with respect to the Plan Agent's open market purchases in
connection with the reinvestment of dividends and capital gains distributions.
The automatic reinvestment of dividends and capital gains distributions
pursuant to the Plan will not relieve participants of any income tax which may
be payable on such dividends or distributions.
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 or capital gains distribution paid after written notice
of the change sent to participants in the Plan at least 30 days before the
record date for such dividend or
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capital gains distribution. All correspondence concerning the Plan should be
directed to the Plan Agent at P.O. Box 1376, Boston, Massachusetts 02104.
FEDERAL TAXATION
The following discussion offers only a brief outline of certain material
federal income tax consequences of investing in shares of the Fund and is based
on the federal income tax laws in effect on the date hereof. Such tax laws are
subject to change by legislative, judicial or administrative action, possibly
with retroactive effect. Investors should consult their own tax advisors for
more detailed information and for information regarding the impact of state,
local and foreign taxes upon such an investment. See the Statement of Additional
Information for further discussion of federal income tax aspects of an
investment in the Fund.
The Fund has qualified and intends to continue to qualify as a "regulated
investment company" for federal income tax purposes and to meet all other
requirements necessary for it to be relieved of federal taxes on income and
gains it distributes to shareholders. In order to maintain its status as a
regulated investment company, the Fund will distribute substantially all of its
ordinary income and capital gain net income on a current basis.
Fund distributions will be taxable to shareholders as ordinary income to
the extent derived from the Fund's investment income and net short-term capital
gains (that is, net capital gains from securities held for not more than a
year). Distributions designated by the Fund as deriving from net capital gains
on securities held for more than one year but not more than 18 months and from
net gains on securities held for more than 18 months will be taxable to
shareholders as such, regardless of how long such shareholder has held the
shares. Pursuant to the Taxpayer Relief Act of 1997, long-term capital gains are
subject to a maximum tax rate of either 28% or 20% depending on the Fund's
holding period for the portfolio assets generating such gains. Distributions
will be taxable as described above whether received in cash or in shares through
the reinvestment of distributions.
Generally, gain recognized by a shareholder on the sale of Fund shares held
for more than one year will be taxable as long-term capital gain subject to a
maximum tax rate of 28% if such shares were held for more than one year but not
more than 18 months or 20% if such shares were held for more than 18 months. See
"Taxes--Federal Income Tax Treatment of Holders of Shares" in the Statement of
Additional Information for more information regarding the capital gains tax
rates applicable to capital gains or losses recognized upon the sale of shares.
If a shareholder holds shares primarily for sale to customers in the ordinary
course of business rather than for investment, any gain recognized on the sale
of those shares would be taxable as ordinary income.
Early in each calendar year the Plan Agent will notify each shareholder of
the amount and tax status of distributions paid to such shareholder for the
preceding year.
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
GENERAL
The Fund has an unlimited number of authorized shares of beneficial
interest, no par value. As of April 30, 1998, 14,971,645 shares were
outstanding. The Board of Trustees has the authority under the Agreement and
Declaration of Trust to, and reserves the right to, issue shares from time to
time. See "Description of Term Note--Restrictive Covenants" for certain
restrictions. The shares issued are, or upon issuance will be, fully paid and
nonassessable (although shareholders could, in certain circumstances, be liable
for the obligations of the Fund to the extent set forth under "Shareholder
Liability" in the Statement of Additional Information) and will have no
preemptive rights or conversion rights. The Fund's shares are listed on the
Exchange under the symbol "CIF."
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DIVIDENDS AND DISTRIBUTIONS
The Fund may not declare dividends or distributions or purchase or redeem
any shares if, at the time of the declaration, purchase or redemption, as
applicable (and after giving effect thereto), asset coverage with respect to the
Fund's senior securities representing indebtedness, including the Term Note,
would be less than 300% (or such higher percentage as may in the future be
required by law) or asset coverage with respect to any senior securities of a
class which is stock would be less than 200% (or such higher percentage as may
in the future be required by law). See "Description of Term Note--Restrictive
Covenants" for certain definitions relating to the foregoing restrictions. Under
the Credit Agreement (as defined herein), the declaration of dividends or other
distributions on or the purchase or the redemption of shares will be prohibited
at any time payments of principal of or interest on the Term Note are in
default.
LIQUIDATION RIGHTS
Upon a liquidation, dissolution or winding up of the Fund (whether
voluntary or involuntary), the holders of the shares will be entitled to
participate equally in the remaining assets of the Fund. Neither a sale, lease
or exchange of all or substantially all of the property and assets of the Fund
nor a consolidation or merger of the Fund with or into any other corporation or
business trust will be deemed to be a liquidation, dissolution or winding up of
the Fund.
VOTING
Holders of shares have voting rights of one vote per share. The Fund is
required by the rules of the Exchange to hold annual meetings of shareholders.
The most recent annual meeting of shareholders was held on April 29, 1998. The
next annual meeting of shareholders is expected to be scheduled for April 28,
1999.
CERTAIN PROVISIONS OF THE AGREEMENT AND 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 more
difficult a change in the Fund's management, and could have the effect of
depriving shareholders of an opportunity to sell their shares at a premium over
prevailing market prices by discouraging a third party from seeking to obtain
control of the Fund in a tender offer or similar transaction. In addition, the
Agreement and Declaration of Trust provides that the affirmative vote or consent
of two-thirds of the outstanding shares of the Fund is 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.
DESCRIPTION OF TERM NOTE
GENERAL
The Fund issued a $27,400,000 (principal amount) Term Note dated as of June
14, 1996, due in June 1999, pursuant to a credit agreement (the "Credit
Agreement") dated as of June 12, 1996, between the Fund and Bank of America
Illinois ("Bank of America"). The issuance of any subsequent senior securities
will be subject to compliance with the 1940 Act, including Section 18 thereof.
Any such subsequent senior securities may have certain terms, including, but not
limited to, those relating to interest rate, redemptions, repurchases and
maturity which differ from the credit terms of the Term Note. The following
summary of the principal terms of the Term Note and certain terms of the Credit
Agreement is qualified in its entirety by reference to all provisions of the
Credit Agreement, including the definitions therein of certain terms. A copy of
the Credit Agreement is filed as an exhibit to the Fund's Registration Statement
on Form N-2, of which this Prospectus forms a part.
INTEREST
The Term Note bears interest at the rate of 7.33% per annum from June 14,
1996 through and including June 14, 1999. Interest on the Term Note is payable
on June 13 and December 13 of each year, commencing December 13, 1996. The Term
Note will mature on June 14, 1999 if not repaid or redeemed prior to that date.
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REDEMPTION
The Term Note is redeemable by the Fund prior to maturity upon the payment
of certain prepayment penalties, as set forth in the Credit Agreement. The Term
Note may also be declared immediately due and payable by Bank of America or, in
certain circumstances, may become immediately due and payable without such
declaration. All redemptions of the Term Note by the Fund will be at a price of
100% of the principal amount thereof, plus accrued interest to the date of
redemption, plus applicable prepayment penalties, if any.
RANKING OF TERM NOTE
The Term Note will rank pari passu with all other existing and future
senior indebtedness of the Fund and is senior to the shares. "Senior
indebtedness" means the principal of and interest on and other amounts due on or
in connection with any existing or future unsecured indebtedness of the Fund.
RESTRICTIVE COVENANTS
Under the 1940 Act and the Credit Agreement, the Fund may not declare
dividends or other distributions on the shares or purchase any shares if, at the
time of the declaration or purchase, as applicable (and after giving effect
thereto), asset coverage with respect to the Fund's senior securities
representing indebtedness, including the Term Note, would be less than 300% (or
such higher percentage as may in the future be required by law). Under the Code,
the Fund must, among other things, distribute at least 90% of its investment
company taxable income each year in order to maintain its qualification for tax
treatment as a regulated investment company. The foregoing limitations on
dividends, distributions and purchases may under certain circumstances impair
the Fund's ability to maintain such qualification. See "Federal Taxation" and
the Statement of Additional Information. The Credit Agreement also restricts the
Fund from investing more than 5% of the total assets of the Fund in a single
issuer and requires the Fund to retain certain levels of cash and "cash
equivalents" in its portfolio at all times.
The asset coverage of a class of senior securities representing
indebtedness, such as the Term Note, is defined as the ratio of (i) the total
assets of the Fund, less all liabilities and indebtedness not represented by
senior securities, to (ii) the aggregate amount of senior securities
representing indebtedness of the Fund. The asset coverage of a class of senior
securities representing stock (see "Description of Shares of Beneficial
Interest--Dividends and Distributions") is defined as the ratio of (i) the total
assets of the Fund, less all liabilities and indebtedness not represented by
senior securities, to (ii) the aggregate amount of senior securities
representing indebtedness of the Fund, plus the aggregate of the liquidation
preference of the senior securities representing stock. "Senior securities
representing indebtedness" generally means any bond, debenture, note or similar
obligation or instrument constituting a security (other than stock) and
evidencing indebtedness. For purposes of determining asset coverage for senior
securities representing indebtedness in connection with the payment of dividends
or other distributions on or purchases or redemptions of stock, the term "senior
security" does not include any promissory note or other evidence of indebtedness
issued in consideration of any loan, extension or renewal thereof, made by a
bank or other person and privately arranged, and not intended to be publicly
distributed. The term "senior security" also does not include any such
promissory note or other evidence in any case where such a loan is for temporary
purposes only and in an amount not exceeding 5% of the value of the total assets
of the Fund at the time when the loan is made; a loan is presumed under the 1940
Act to be for temporary purposes if it is repaid within 60 days and is not
extended or renewed; otherwise it is presumed not to be for temporary purposes.
For purposes of determining whether the 300% and 200% asset coverage
requirements described above apply in connection with dividends or distributions
on or purchases or redemptions of the shares and for purposes of determining
conformance with Asset Coverage Requirements, such asset coverages may be
calculated on the basis of values calculated as of a time within 48 hours (not
including Sundays or holidays) next preceding the time of the applicable
determination. The foregoing definitions reflect the provisions of the 1940 Act
as in effect on the date hereof and are subject to change to the extent
necessary to reflect changes in the 1940 Act, if any.
The Credit Agreement contains a covenant limiting the Fund's ability to
incur, assume, guarantee or otherwise become liable with respect to any
indebtedness for money borrowed or issue preferred stock other than the Term
Note, a limited amount of unsecured indebtedness to the Fund's Custodian and
reverse
38
<PAGE> 41
repurchase agreements permitted by the Fund's investment restrictions. See the
Statement of Additional Information.
CUSTODIAN, TRANSFER AGENT, DIVIDEND
DISBURSING AGENT AND REGISTRAR
The Fund's securities and cash are held by The Chase Manhattan Bank, whose
principal business address is 4 Chase MetroTech Center, Brooklyn, New York
11245, as custodian (the "Custodian") under a custodian contract.
First Data Investor Services Group, Inc. serves as dividend disbursing
agent, as agent under the Plan and as transfer agent and registrar for the
shares.
LEGAL OPINIONS
The validity of the Shares offered hereby will be passed upon for the Fund
by Ropes & Gray, Boston, Massachusetts, which serves as counsel to the Fund.
Certain matters will be passed on for the Dealer Manager by Skadden, Arps,
Slate, Meagher & Flom (Illinois), Chicago, Illinois.
REPORTS TO SHAREHOLDERS
The Fund will send unaudited semiannual and audited annual reports to its
shareholders, including a list of investments held.
EXPERTS
The Financial Statements incorporated by reference in the Statement of
Additional Information have been so incorporated in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting. The address of Price Waterhouse LLP
is 160 Federal Street, Boston, Massachusetts 02110.
FURTHER INFORMATION
The Fund has filed with the Commission, Washington, D.C. 20549, a
Registration Statement under the Securities Act with respect to the Shares
offered hereby. Further information concerning these securities and the Fund may
be found in the Registration Statement, of which this Prospectus constitutes a
part, on file with the Commission. The Registration Statement may be inspected
without charge at the Commission's office in Washington, D.C., and copies of all
or any part thereof may be obtained from such office after payment of the fees
prescribed by the Commission.
The Fund is subject to the informational requirements of the 1934 Act and
the 1940 Act, and in accordance therewith files reports and other information
with the Commission. Such reports, proxy and information statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, Washington, D.C. 20549 and the
Commission's regional offices, including offices at Seven World Trade Center,
New York, New York 10048. Copies of such material can be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. Such reports and other information
concerning the Fund may also be inspected at the offices of the Exchange. The
Commission maintains a Web site (http://www.sec.gov) that contains the Statement
of Additional Information, material incorporated by reference into this
Prospectus and the Statement of Additional Information, and reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. In addition, reports, proxy and information
statements and other information concerning the Fund can be inspected at the
offices of the Exchange, 20 Broad Street, New York, New York 10005.
39
<PAGE> 42
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Definitions................................................. 2
Investment Objective and Policies........................... 2
Fundamental Investment Policies............................. 2
Other Investment Policies................................... 3
Fund Charges and Expenses................................... 3
Management of the Fund...................................... 7
Custodian................................................... 7
Independent Accountants..................................... 8
Incorporation of Financial Statements by Reference.......... 8
Determination of Net Asset Value............................ 8
Portfolio Transactions...................................... 9
Miscellaneous Investment Practices.......................... 10
Taxes....................................................... 23
Shareholder Liability....................................... 27
</TABLE>
40
<PAGE> 43
APPENDIX A
BOND RATINGS
THE FOLLOWING RATING SERVICES DESCRIBE RATED SECURITIES AS FOLLOWS:
MOODY'S INVESTORS SERVICE, INC.
BONDS
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 edged." 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 risk appear somewhat larger than the '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.
STANDARD & POOR'S
BONDS
AAA--Debt rated 'AAA' has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
41
<PAGE> 44
A--Debt rated 'A' has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB-B-CCC-CC-C--Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. 'BB'
indicates the lowest degree of speculation and 'C' the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
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' 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.
D--Bonds rated 'D' are 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
on the filing of a bankruptcy petition if debt service payments are jeopardized.
42
<PAGE> 45
======================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE FUND OR THE DEALER MANAGER. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE FUND SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE. HOWEVER, IF ANY MATERIAL CHANGE OCCURS WHILE THIS
PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS PROSPECTUS WILL BE AMENDED
OR SUPPLEMENTED ACCORDINGLY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE
REGISTERED SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY IN ANY CIRCUMSTANCES IN
WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
------------------------
TABLE OF CONTENTS
PROSPECTUS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Fee Table............................. 11
Financial Highlights.................. 12
Capitalization at April 30, 1998...... 13
Information Regarding Senior
Securities.......................... 13
Trading and Net Asset Value
Information......................... 14
The Fund.............................. 15
The Offer............................. 16
Use of Proceeds....................... 25
Investment Policies and Limitations... 25
Risk Factors and Special
Considerations...................... 29
The Adviser........................... 32
Determination of Net Asset Value...... 33
Share Repurchases; Conversion to Open-
End Status.......................... 33
Dividends and Distributions; Dividend
Reinvestment Plan................... 34
Federal Taxation...................... 36
Description of Shares of Beneficial
Interest............................ 36
Description of Term Note.............. 37
Custodian, Transfer Agent, Dividend
Disbursing Agent and Registrar...... 39
Legal Opinions........................ 39
Reports to Shareholders............... 39
Experts............................... 39
Further Information................... 39
Table of Contents of Statement of
Additional Information.............. 40
Appendix A............................ 41
</TABLE>
======================================================
======================================================
5,010,532 SHARES OF BENEFICIAL
INTEREST ISSUABLE UPON
EXERCISE OF RIGHTS TO
SUBSCRIBE FOR SUCH SHARES
COLONIAL INTERMEDIATE
HIGH INCOME FUND
SHARES OF BENEFICIAL INTEREST
------------------------------
PROSPECTUS
------------------------------
PAINEWEBBER INCORPORATED
------------------------
MAY 19, 1998
======================================================
<PAGE> 46
COLONIAL INTERMEDIATE HIGH INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information ("SAI") contains information which
may be useful to investors but which is not included in the Prospectus of
Colonial Intermediate High Income Fund (the "Fund"). This SAI is not a
prospectus and is only authorized for distribution when accompanied or preceded
by the Prospectus of the Fund dated May 19, 1998. This SAI should be read
together with the Prospectus. Investors may obtain a free copy of the Prospectus
dated May 19, 1998 and the Annual Report dated October 31, 1997 from Liberty
Financial Investments, Inc., One Financial Center, Boston, Massachusetts
02111-2621.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Definitions................................................. 2
Investment Objective and Policies........................... 2
Fundamental Investment Policies............................. 2
Other Investment Policies................................... 3
Fund Charges and Expenses................................... 3
Management of the Fund...................................... 7
Custodian................................................... 7
Independent Accountants..................................... 8
Incorporation of Financial Statements by Reference.......... 8
Determination of Net Asset Value............................ 8
Portfolio Transactions...................................... 9
Miscellaneous Investment Practices.......................... 10
Taxes....................................................... 23
Shareholder Liability....................................... 27
</TABLE>
<PAGE> 47
COLONIAL INTERMEDIATE HIGH INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
DEFINITIONS
<TABLE>
<S> <C>
"Fund" Colonial Intermediate High Income Fund
"Adviser" Colonial Management Associates, Inc., the Fund's investment
adviser
"First Data" First Data Investor Services Group, Inc., the Fund's
transfer agent, dividend disbursing agent, plan agent and
registrar
</TABLE>
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.
FUNDAMENTAL INVESTMENT POLICIES
The Investment Company Act of 1940, as amended (the "Act"), provides that a
"vote of a majority of the outstanding voting securities" means the affirmative
vote of the lesser of (1) more than 50% of the outstanding shares of the Fund,
or (2) 67% or more of the shares present at a meeting if more than 50% of the
outstanding shares are represented at the meeting in person or by proxy. The
following fundamental investment policies cannot be changed without such a vote.
Total assets and net assets are determined at current value for purposes of
compliance with investment restrictions and policies. All percentage limitations
will apply at the time of investment and are not violated unless an excess or
deficiency occurs as a result of such investment. For the purpose of the Act's
diversification requirement, an issuer is the entity whose revenues support the
security.
The Fund may:
1. Issue senior securities or borrow money to the extent permitted by
the Act;
2. Only own real estate acquired as a result of owning securities;
3. Purchase and sell interest rate futures contracts, foreign
currency forward or futures contracts, futures contracts on
indexes of securities, and options relating to any of the
foregoing;
4. Underwrite securities issued by others only when disposing of
portfolio securities;
5. Make loans through lending of securities, through the purchase of
debt instruments or similar evidences of indebtedness typically
sold to financial institutions and through repurchase agreements;
and
6. Not concentrate more than 25% of its total assets in any one
industry, or with respect to 75% of total assets purchase any
security (other than obligations of the U.S. Government and cash
items including receivables) if as a result more than 5% of its
total assets would then be invested in securities of a single
issuer or purchase the voting securities of an issuer if, as a
result of such purchase, the Fund would own more than 10% of the
outstanding voting shares of such issuer.
2
<PAGE> 48
OTHER INVESTMENT POLICIES
The following non-fundamental policies may be changed without shareholder
approval:
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. Have a short securities position, unless the Fund owns, or owns
rights (exercisable without payment) to acquire, an equal amount
of such securities;
3. Own securities of any company if the Fund knows that officers and
Trustees of the Fund or officers or directors of the Adviser who
individually own more than 0.5% of such securities together own
more than 5% of such securities; and
4. Invest in interests in oil, gas or other mineral exploration or
development programs, including leases.
FUND CHARGES AND EXPENSES
Under the Fund's management agreement, the Fund pays the Adviser a monthly
fee based on the average weekly net assets of the Fund at the annual rate of
0.65%.
RECENT FEES PAID TO THE ADVISER AND FIRST DATA (dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31
----------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Management fee................................. $680 $631 $588
Bookkeeping fee................................ 46 43 41
Transfer agent fee............................. 51 53 59
</TABLE>
BROKERAGE COMMISSIONS
The Fund did not pay any brokerage commissions for the fiscal years ended
October 31, 1997, 1996 and 1995.
TRUSTEES AND OFFICERS
The Trustees and officers of the Fund, their addresses, their ages and
their principal occupations for at least the past five years are set forth
below.
<TABLE>
<CAPTION>
NAME AND ADDRESS AGE POSITION WITH FUND PRINCIPAL OCCUPATION
- ---------------- --- ------------------ --------------------
<S> <C> <C> <C>
Robert J. Birnbaum................... 70 Trustee Retired (formerly Special Counsel,
313 Bedford Road Dechert Price & Rhoads from
Ridgewood, NJ 07450 September, 1988 to December, 1993).
Tom Bleasdale........................ 67 Trustee Retired (formerly Chairman of the
11 Carriage Way Board and Chief Executive Officer,
Danvers, MA 01923 Shore Bank & Trust Company from
1992-1993), is a Director of Empire
Company Limited since June, 1995.
Lora S. Collins...................... 62 Trustee Attorney (formerly Attorney, Kramer,
1175 Hill Road Levin, Naftalis & Frankel from
Southold, NY 11971 September, 1986 to November, 1996).
James E. Grinnell.................... 68 Trustee Private Investor since November,
22 Harbor Avenue 1988.
Marblehead, MA 01945
Richard W. Lowry..................... 61 Trustee Private Investor since August, 1987.
10701 Charleston Drive
Vero Beach, FL 32963
</TABLE>
3
<PAGE> 49
<TABLE>
<CAPTION>
NAME AND ADDRESS AGE POSITION WITH FUND PRINCIPAL OCCUPATION
---------------- --- ------------------ --------------------
<S> <C> <C> <C>
William E. Mayer*.................... 57 Trustee Partner, Development Capital, LLC
500 Park Avenue, 5th Floor (formerly Dean, College of Business
New York, NY 10022 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................... 66 Trustee Retired (formerly Chairman of the
16 Running Tide Road Board, Hannaford Bros. Co. from May,
Cape Elizabeth, ME 04107 1984 to May, 1997, and Chief
Executive Officer, Hannaford Bros.
Co. from May, 1973 to May, 1992).
John J. Neuhauser.................... 55 Trustee Dean, Boston College School of
140 Commonwealth Avenue Management since 1977.
Chestnut Hill, MA 02167
Robert L. Sullivan................... 70 Trustee Retired Partner, KPMG Peat Marwick
7121 Natelli Woods Lane LLP.
Bethesda, MD 20817.................
Anne-Lee Verville.................... 51 Trustee Consultant (formerly General Manager,
359 Stickney Hill Road Global Education Industry from 1994
Hopkinton, NH 03229 to 1997, and President, Applications
Solutions Division from 1991 to 1994,
IBM Corporation).
Harold W. Cogger..................... 62 President President of Colonial Funds (defined
below) since March, 1996 (formerly
Vice President from July, 1993 to
March, 1996); is Director since
March, 1984 and Chairman of the Board
since March, 1996 of the Adviser
(formerly President from July, 1993,
to December, 1996, Chief Executive
Officer from March, 1995 to December,
1996 and Executive Vice President
from October, 1989 to July, 1993);
Director since October, 1991 and
Chairman of the Board since March,
1996 of TCG (formerly President from
October, 1994 to December, 1996 and
Chief Executive Officer from March,
1995 to December, 1996); Executive
Vice President and Director since
March, 1995, Liberty Financial;
Director since November, 1996 of
Stein Roe & Farnham Incorporated.
J. Kevin Connaughton................. 33 Controller and Chief Controller and Chief Accounting
Accounting Officer Officer of Colonial Funds since
February, 1998; Vice President of the
Adviser 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; Vice President, The
Boston Company (subsidiary of Mellon
Bank) from December, 1993 to March,
1994; Assistant Vice President and
Tax Manager, Mellon Bank from March,
1992 to December, 1993).
</TABLE>
4
<PAGE> 50
<TABLE>
<CAPTION>
NAME AND ADDRESS AGE POSITION WITH FUND PRINCIPAL OCCUPATION
---------------- --- ------------------ --------------------
<S> <C> <C> <C>
Timothy J. Jacoby.................... 45 Treasurer and Chief Treasurer and Chief Financial Officer
Financial Officer of Colonial Funds since October, 1996
(formerly Controller and Chief
Accounting Officer from October, 1997
to February, 1998); Senior Vice
President of the Adviser since
September, 1996 (formerly Senior Vice
President, Fidelity Accounting and
Custody Services from September, 1993
to September, 1996 and Assistant
Treasurer to the Fidelity Group of
Funds from August, 1990 to September,
1993).
Davey S. Scoon....................... 51 Vice President Vice President of Colonial Funds
since June, 1993; Executive Vice
President since July, 1993 and
Director since March, 1985 of the
Adviser (formerly Senior Vice
President and Treasurer of the
Adviser from March, 1985 to July,
1993); Executive Vice President and
Chief Operating Officer, TCG since
March, 1995 (formerly Vice
President -- Finance and
Administration of TCG from November,
1985 to March, 1995).
Nancy L. Conlin...................... 44 Secretary Secretary of Colonial Funds since
April, 1998 (formerly Assistant
Secretary from July, 1994 to April,
1998); Director, Senior Vice
President, General Counsel, Clerk and
Secretary of the Adviser since April,
1998 (formerly Vice President,
Counsel, Assistant Secretary and
Assistant Clerk from July, 1994 to
April, 1998), Vice
President -- Legal, General Counsel
and Clerk of TCG since April, 1998
(formerly Assistant Clerk from July,
1994 to April, 1998).
</TABLE>
- ---------------
* A Trustee who is an "interested person" (as defined in the Act) of the Fund or
the Adviser.
The business address of the officers of the Fund is One Financial Center,
Boston, Massachusetts 02111.
The Trustees serve as trustees of all Colonial Funds, for which each
Trustee will receive an annual retainer of $45,000 and attendance fees of $7,500
for each regular joint meeting and $1,000 for each special joint meeting.
Committee chairs receive an annual retainer of $5,000. Committee members receive
an annual retainer of $1,000 and $1,000 for each special meeting attended.
Two-thirds of the Trustee fees are allocated among the Colonial Funds based on
each Fund's relative net assets, and one-third of the fees are divided equally
among the Colonial Funds.
TRUSTEES' FEES
For the fiscal year ended October 31, 1997, and the calendar year ended
December 31, 1997, the Trustees received the following compensation for serving
as Trustees(a):
<TABLE>
<CAPTION>
TOTAL COMPENSATION FROM FUND AND
AGGREGATE COMPENSATION FROM FUND COMPLEX PAID TO THE TRUSTEES FOR
FUND FOR THE YEAR ENDED THE CALENDAR YEAR ENDED
TRUSTEE OCTOBER 31, 1997 DECEMBER 31, 1997(B)
------- --------------------------- -------------------------------------
<S> <C> <C>
Robert J. Birnbaum..................... $1,042 $ 93,949
Tom Bleasdale.......................... 1,191(c) 106,432(d)
Lora S. Collins........................ 1,045 93,949
James E. Grinnell...................... 1,076(e) 94,698(f)
</TABLE>
5
<PAGE> 51
<TABLE>
<CAPTION>
TOTAL COMPENSATION FROM FUND AND
AGGREGATE COMPENSATION FROM FUND COMPLEX PAID TO THE TRUSTEES FOR
FUND FOR THE YEAR ENDED THE CALENDAR YEAR ENDED
TRUSTEE OCTOBER 31, 1997 DECEMBER 31, 1997(B)
- ------- --------------------------- -------------------------------------
<S> <C> <C>
William D. Ireland, Jr.(g)............. 1,133 101,445
Richard W. Lowry....................... 1,050 94,698
William E. Mayer....................... 994 89,949
James L. Moody, Jr..................... 1,097(h) 98,447(i)
John J. Neuhauser...................... 1,053 94,948
George L. Shinn(g)..................... 1,159 103,443
Robert L. Sullivan..................... 1,114 99,945
Sinclair Weeks, Jr.(g)................. 1,132 101,445
</TABLE>
- ---------------
<TABLE>
<S> <C>
(a) The Fund does not currently provide pension or retirement
plan benefits to the Trustees. Ms. Anne-Lee Verville was
recently elected as a Trustee of the Fund and, therefore,
has no historical data to report.
(b) At December 31, 1997, the Colonial Funds complex consisted
of 39 open-end and 5 closed-end management investment
company portfolios (together, the "Colonial Funds").
(c) Includes $697 payable in later years as deferred
compensation.
(d) Includes $57,454 payable in later years as deferred
compensation.
(e) Includes $28 payable in later years as deferred
compensation.
(f) Includes $4,797 payable in later years as deferred
compensation.
(g) Effective April 24, 1998, Messrs. Ireland, Shinn and Weeks
retired as Trustees of the Fund.
(h) Includes $1,097 payable in later years as deferred
compensation.
(i) Total compensation of $98,447 for the calendar year ended
December 31, 1997 will be payable in later years as deferred
compensation.
</TABLE>
The following table sets forth the amount of compensation paid to Messrs.
Birnbaum, Grinnell and Lowry in their capacities as Trustees or Directors of the
Liberty All-Star Equity Fund and of the Liberty All-Star Growth Fund, Inc.
(formerly known as The Charles Allmon Trust, Inc.) (together, the "Liberty
Funds") for service during the calendar year ended December 31, 1997:
<TABLE>
<CAPTION>
TOTAL COMPENSATION FROM
LIBERTY FUNDS FOR THE CALENDAR
TRUSTEE YEAR ENDED DECEMBER 31, 1997(J)
------- -------------------------------
<S> <C>
Robert J. Birnbaum................................. $26,800
James E. Grinnell.................................. 26,800
Richard W. Lowry................................... 26,800
</TABLE>
- ---------------
(j) The Liberty Funds are advised by Liberty Asset Management Company ("LAMCO").
LAMCO is an indirect wholly owned subsidiary of Liberty Financial Companies,
Inc. ("Liberty Financial") (an intermediate parent of the Adviser).
OWNERSHIP OF THE FUND
At April 30, 1998, the officers and Trustees of the Fund as a group owned
less than 1% of the outstanding shares of the Fund.
At April 30, 1998, The Depository Trust Company (Cede & Co.), 7 Hanover
Square, New York, New York 10004, owned of record 13,016,987 shares representing
86.94% of the Fund's outstanding shares.
6
<PAGE> 52
MANAGEMENT OF THE FUND
The Adviser is the investment adviser to each of the Colonial Funds (except
for Colonial Municipal Money Market Fund, Colonial Global Utilities Fund,
Newport Tiger Fund, Colonial Newport Tiger Cub Fund, Newport Japan Opportunities
Fund and Newport Greater China Fund, for each of which the Adviser serves as
Administrator). The Adviser is a subsidiary of The Colonial Group, Inc. ("TCG"),
One Financial Center, Boston, Massachusetts 02111. TCG is a direct subsidiary of
Liberty Financial Companies, Inc. ("Liberty Financial"), which in turn is a
direct subsidiary of LFC Holdings, Inc., which in turn is a direct subsidiary of
Liberty Mutual Equity Corporation, which in turn is a wholly-owned subsidiary of
Liberty Mutual Insurance Company ("Liberty Mutual"). Liberty Mutual is an
underwriter of workers' compensation insurance and a property and casualty
insurer in the U.S. Liberty Financial's address is 600 Atlantic Avenue, Boston,
Massachusetts 02210. Liberty Mutual's address is 175 Berkeley Street, Boston,
Massachusetts 02117.
Under a Management Agreement (the "Agreement"), the Adviser has agreed to
furnish the Fund with investment research and recommendations, and office space,
equipment and other facilities at the Adviser's expense. For these services and
facilities, the Fund pays a monthly fee equal, on an annual basis, to 0.65% of
the average weekly net assets of the Fund (which, for the purposes of
determining such fee, shall mean the average weekly value of the total assets of
the Fund, minus the sum of accrued liabilities of the Fund). The Fund pays
operating costs, including auditing, legal, administration, custodian, Trustees,
shareholder services and transfer and dividend paying agent and registrar fees
and expenses.
Under the Agreement, any liability of the Adviser to the Fund and its
shareholders is limited to situations involving the Adviser's own willful
misfeasance, bad faith, gross negligence or reckless disregard of duties.
The Agreement may be terminated at any time on 60 days' notice by the
Adviser or by the Trustees of the Fund or by vote of a majority of the
outstanding voting securities of the Fund. The Agreement will automatically
terminate upon any assignment thereof and will continue in effect after two
years from the date of its execution only so long as such continuance is
approved at least annually (i) by the Trustees of the Fund or by 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 Act) of the Adviser or the Fund, cast in person at a meeting called for
the purpose of voting on such approval.
The Adviser also provides the Fund with bookkeeping and pricing services,
and for these services, the Fund pays the Adviser a monthly fee of $2,250 for
the first $50 million of Fund assets, plus a monthly percentage fee at the
following annual rates: .035% on the next $950 million; .025% on the next $1
billion; .015% on the next $1 billion; and .001% on the excess over $3 billion
of the average net assets of the Fund for such month.
The Adviser also acts as investment adviser to the other Colonial Funds
(described under "Trustees and Officers"). Various officers and Trustees of the
Fund also serve as officers, directors or trustees of other Funds advised by the
Adviser and of other corporate or fiduciary clients of the Adviser. The other
investment companies and clients advised by the Adviser 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.
CUSTODIAN
The Chase Manhattan Bank (the "Custodian") 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. The Custodian's address is 4 Chase MetroTech Center, Brooklyn, New
York 11245.
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INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP are the Fund's independent accountants providing audit
and tax return preparation services and assistance and consultation in
connection with the review of various Securities and Exchange Commission
filings. The address of Price Waterhouse LLP is 160 Federal Street, Boston,
Massachusetts 02110. The financial statements incorporated by reference in this
SAI have been so incorporated, and the financial highlights included in the
Prospectus have been so included, in reliance upon the report of Price
Waterhouse LLP given on the authority of said firm as experts in accounting and
auditing.
The financial statements and Report of Independent Accountants appearing in
the October 31, 1997 Annual Report are incorporated in this SAI by reference.
INCORPORATION OF FINANCIAL STATEMENTS BY REFERENCE
The Fund's Annual Report, which includes financial statements for the
fiscal year ended October 31, 1997 and which either accompanies the Prospectus
or has previously been provided to persons to whom the Prospectus has been sent,
is incorporated herein by reference with respect to all information other than
the information set forth in the Letter to Shareholders included therein. Any
statement contained in the Fund's Annual Report that was incorporated herein
shall be deemed modified or superseded for purposes of the Prospectus or this
SAI to the extent a statement contained in the Prospectus or this SAI varies
from such statement. Any such statement so modified or superseded shall not,
except as so modified or superseded, be deemed to constitute a part of the
Prospectus or this SAI. The Fund will furnish, without charge, a copy of its
Annual Report, upon request to Colonial Investors Service Center, Inc., P.O. Box
1722, Boston, Massachusetts 02105-1722, telephone (800) 345-6611 Monday through
Friday from 9:00 a.m. to 5:00 p.m.
DETERMINATION OF NET ASSET VALUE
Net asset value ("NAV") of the Fund's shares will be determined as of the
close of regular trading on the Exchange (generally 4:00 p.m. New York City
time) on the last Business Day of each week (generally Friday), and at such
other times as the Fund may authorize. It will be determined by dividing the
value of the net assets of the Fund (for the purpose of determining the net
asset value per share, the value of the Fund's net assets shall be deemed to
equal the value of the Fund's assets less the Fund's liabilities (including the
outstanding principal amount of the Term Note and unpaid interest on the Term
Note)) by the total number of shares outstanding. 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 Adviser 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.
Debt securities generally are valued by a pricing service which determines
valuations based upon market transactions for normal, institutional-size trading
units of similar securities. However, in circumstances where such prices are not
available or where the Adviser deems it appropriate to do so, an
over-the-counter or exchange bid quotation is used. Securities listed on an
exchange or on NASDAQ are valued at the last sale price. Listed securities for
which there were no sales during the day and unlisted securities are valued at
the last quoted bid price. Options are valued at the last sale price or, in the
absence of a sale, the mean between the last quoted bid and offering prices.
Short-term obligations with a maturity of 60 days or less are valued at
amortized cost pursuant to procedures adopted by the Trustees. The values of
foreign securities quoted in foreign currencies are translated into U.S. dollars
at the exchange rate for that day. Portfolio positions for which there are no
such valuations and other assets are valued at fair value as determined by the
Adviser in good faith under the direction of the Fund's Trustees.
Generally, trading in certain securities (such as foreign securities) is
substantially completed each day at various times prior to the close of regular
trading on the Exchange. Trading on certain foreign securities markets may not
take place on all business days in New York, and trading on some foreign
securities markets takes place on days which are not business days in New York
and on which the Fund's NAV is not calculated.
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The values of these securities used in determining the NAV are computed as of
such times. Also, because of the amount of time required to collect and process
trading information as to large numbers of securities, the values of certain
securities (such as convertible bonds, U.S. government securities and tax-exempt
securities) are determined based on market quotations collected earlier in the
day at the latest practicable time prior to the close of regular trading on the
Exchange. Occasionally, events affecting the value of such securities may occur
between such times and the close of the Exchange which will not be reflected in
the computation of each of the Fund's NAV. If events materially affecting the
value of such securities occur during such period, then these securities will be
valued at their fair value following procedures approved by the Fund's Trustees.
PORTFOLIO TRANSACTIONS
The Adviser 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 Adviser is
required to give primary consideration to obtaining the most favorable price and
efficient execution. This means that the Adviser 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 Adviser, 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 Adviser 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
Adviser will consider research and investment services provided by brokers and
dealers who effect or are parties to portfolio transactions with the Fund, the
Adviser or the Adviser'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 Adviser 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 Adviser 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 Adviser 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 Adviser may cause the Fund to pay a broker-dealer
which provides "brokerage and research services" (as defined in the 1934 Act) to
the Adviser, 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.
For the fiscal years ended October 31, 1995, 1996 and 1997, the Fund paid
no brokerage commissions for the execution of portfolio transactions. The rate
of portfolio turnover for each of the fiscal years ended October 31, 1995, 1996
and 1997 was 92%.
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MISCELLANEOUS INVESTMENT PRACTICES
SHORT-TERM TRADING
In seeking the Fund's objective, the Adviser will buy or sell portfolio
securities whenever the Adviser believes it appropriate to do so. In deciding
whether to sell a portfolio security, the Adviser does not consider how long the
Fund has owned the security. From time to time the Fund will 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 gains, such gains 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 Adviser considers a change in the Fund's
portfolio.
LOWER-RATED SECURITIES
The Fund may invest all or any portion of its assets in lower-rated
securities (commonly known as "high yield," high risk securities or "junk
bonds"). 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 Investors Service, Inc. 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 the Appendix to the Prospectus 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 Adviser will
monitor the investment to determine whether its retention will assist in meeting
the Fund's investment objective.
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
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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 Adviser and its affiliates, holds all or a major portion
of the securities outstanding. Although the Adviser 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
Adviser 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.
Zero-coupon bonds are issued at a significant discount from their principal
amount in lieu of paying interest periodically. Payment-in-kind bonds allow the
issuer, at its option, to make current interest payments on the bonds either in
cash or in additional bonds. Because zero-coupon and payment-in-kind bonds do
not pay current interest in cash, their value is subject to greater fluctuation
in response to changes in market interest rates than bonds that pay interest
currently. Both zero-coupon and payment-in-kind bonds allow an issuer to avoid
the need to generate cash to meet current interest payments. Accordingly, such
bonds may involve greater credit risks than bonds paying interest currently in
cash. The Fund is required to accrue interest income on such investments and to
distribute such amounts at least annually to shareholders even though such bonds
do not pay current interest in cash. Thus, it may be necessary at times for the
Fund to liquidate investments in order to satisfy its dividend distribution
requirements.
To the extent the Fund invests in securities in the lower rating
categories, the achievement of the Fund's goals is more dependent on the
Adviser's investment analysis than would be the case if the Fund were investing
in securities in the higher rating categories.
PRIVATE PLACEMENTS
The Fund may invest in securities that are purchased in private placements
and, accordingly, are 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
Adviser 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
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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 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
Adviser 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.
SECURITIES LOANS
The Fund may make secured loans of its portfolio securities, on either a
short-term or long-term basis, thereby realizing additional income. The risks in
lending portfolio securities, as with other extensions of credit, consist of
possible delay in recovery of the securities or possible loss of rights in the
collateral should the borrower fail financially. As a matter of policy,
securities loans are made to broker-dealers pursuant to agreements requiring
that the loans be continuously secured by collateral consisting of cash or
short-term debt obligations at least equal at all times to the value of the
securities on loan, "marked-to-market" daily. The borrower pays to the Fund an
amount equal to any dividends or interest received on securities loaned. The
Fund retains all or a portion of the interest received on investment of the cash
collateral or receives a fee from the borrower. Although voting rights, or
rights to consent, with respect to the loaned securities may pass to the
borrower, the Fund retains the right to call the loans at any time on reasonable
notice, and it will do so to enable the Fund to exercise voting rights on any
matters materially affecting the investment. The Fund may also call such loans
in order to sell the securities.
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
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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 Adviser 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.
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 Adviser 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 Colonial 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 Adviser 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.
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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 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 Adviser to forecast interest rate and market movements correctly. For
example, if the Fund were to write a call option based on the Adviser'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 Adviser'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.
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The effective use of options also depends on the Fund's ability to
terminate option positions at times when the Adviser 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 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.
Foreign-traded options are subject to many of the same risks presented by
foreign securities. In addition, because of time differences between the United
States and various foreign countries, and because different holidays are
observed in different countries, foreign options markets may be open for trading
during hours or on days when U.S. markets are closed. As a result, option
premiums may not reflect the current prices of the underlying interest in the
United States.
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
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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.
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 Adviser's ability to
predict movements in various factors affecting securities
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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 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 Adviser'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.
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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 Adviser 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
Adviser'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.
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 Adviser 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.
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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 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.
FOREIGN INVESTMENTS
The Fund may invest in securities of foreign issuers that are not actively
traded in U.S. markets. These foreign investments involve certain special risks
described below.
Foreign securities are normally denominated and traded in foreign
currencies. As a result, the value of the Fund's foreign investments and the
value of its shares may be affected favorably or unfavorably by changes in
currency exchange rates relative to the U.S. dollar. There may be less
information publicly available about a foreign issuer than about a U.S. issuer,
and foreign issuers are not generally subject to accounting, auditing and
financial reporting standards and practices comparable to those in the United
States. The securities of some foreign issuers are less liquid and at times more
volatile than securities of comparable U.S. issuers. Foreign brokerage
commissions and other fees are also generally higher than in the United States.
Foreign settlement procedures and trade regulations may involve certain risks
(such as delay in payment or delivery of securities or in the recovery of the
Fund's assets held abroad) and expenses not present in the settlement of
investments in U.S. markets.
In addition, the Fund's investments in foreign securities may be subject to
the risk of nationalization or expropriation of assets, imposition of currency
exchange controls or restrictions on the repatriation of foreign currency,
confiscatory taxation, political or financial instability and diplomatic
developments which could affect the value of the Fund's investments in certain
foreign countries. Dividends or interest on, or proceeds from the sale of,
foreign securities may be subject to foreign withholding taxes, and special U.S.
tax considerations may apply.
Legal remedies available to investors in certain foreign countries may be
more limited than those available with respect to investments in the United
States or in other foreign countries. The laws of some
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foreign countries may limit the Fund's ability to invest in securities of
certain issuers organized under the laws of those foreign countries.
The risks described above, including the risks of nationalization or
expropriation of assets, are typically increased in connection with investments
in "emerging markets." For example, political and economic structures in these
countries may be in their infancy and developing rapidly, and such countries may
be in their infancy and developing rapidly, and such countries may lack the
social, political and economic stability characteristic of more developed
countries. Certain of these countries have in the past failed to recognize
private property rights and have at times nationalized and expropriated the
assets of private companies. High rates of inflation or currency devaluations
may adversely affect the economies and securities markets of such countries.
Investments in emerging markets may be considered speculative.
In addition, unanticipated political or social developments may affect the
value of the Fund's investments in emerging markets and the availability to the
Fund of additional investments in these markets. The small size, limited trading
volume and relative inexperience of the securities markets in these countries
may make the Fund's investments in securities traded in emerging markets
illiquid and more volatile than investments in securities traded in more
developed countries, and the Fund may be required to establish special custodial
or other arrangements before making investments in securities traded in emerging
markets. There may be little financial or accounting information available with
respect to issuers of emerging market securities, and it may be difficult as a
result to assess the value of prospects of an investment in such securities.
Certain of the foregoing risks may also apply to some extent to securities
of U.S. issuers that are denominated in foreign currencies or that are traded in
foreign markets, or securities of U.S. issuers having significant foreign
operations.
FOREIGN CURRENCY TRANSACTIONS
The Fund may engage without limit in currency exchange transactions,
including purchasing and selling foreign currency, foreign currency options,
foreign currency forward contracts and foreign currency futures contracts and
related options, to protect against uncertainty in the level of future currency
exchange rates. In addition, the Fund may write covered call and put options on
foreign currencies for the purpose of increasing its current return.
Generally, the Fund may engage in both "transaction hedging" and "position
hedging." When it engages in transaction hedging, the Fund enters into foreign
currency transactions with respect to specific receivables or payables,
generally arising in connection with the purchase or sale of portfolio
securities. The Fund will engage in transaction hedging when it desires to "lock
in" the U.S. dollar price of a security it has agreed to purchase or sell, or
the U.S. dollar equivalent of a dividend or interest payment in a foreign
currency. By transaction hedging the Fund will attempt to protect itself against
a possible loss resulting from an adverse change in the relationship between the
U.S. dollar and the applicable foreign currency during the period between the
date on which the security is purchased or sold, or on which the dividend or
interest payment is earned, and the date on which such payments are made or
received.
The Fund may purchase or sell a foreign currency on a spot (or cash) basis
at the prevailing spot rate in connection with the settlement of transactions in
portfolio securities denominated in that foreign currency. If conditions
warrant, for transaction hedging purposes the Fund may also enter into contracts
to purchase or sell foreign currencies at a future date ("forward contracts")
and purchase and sell foreign currency futures contracts. A foreign currency
forward contract is a negotiated agreement to exchange currency at a future time
at a rate or rates that may be higher or lower than the spot rate. Foreign
currency futures contracts are standardized exchange-traded contracts and have
margin requirements. In addition, for transaction hedging purposes the Fund may
also purchase or sell exchange-listed and over-the-counter call and put options
on foreign currency futures contracts and on foreign currencies. The Fund may
also enter into contracts to purchase or sell foreign currencies at a future
date ("forward contracts") and purchase and sell foreign currency futures
contracts.
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For transaction hedging purposes the Fund may also purchase exchange-listed
and over-the-counter call and put options on foreign currency futures contracts
and on foreign currencies. A put option on a futures contract gives the Fund the
right to assume a short position in the futures contract until the expiration of
the option. A put option on a currency gives the Fund the right to sell the
currency at an exercise price until the expiration of the option. A call option
on a futures contract gives the Fund the right to assume a long position in the
futures contract until the expiration of the option. A call option on a currency
gives the Fund the right to purchase the currency at the exercise price until
the expiration of the option.
The Fund may engage in position hedging to protect against a decline in the
value relative to the U.S. dollar of the currencies in which its portfolio
securities are denominated or quoted (or an increase in the value of the
currency in which the securities the Fund intends to buy are denominated, when
the Fund holds cash or short-term investments). For position hedging purposes,
the Fund may purchase or sell foreign currency futures contracts, foreign
currency forward contracts and options on foreign currency futures contracts and
on foreign currencies on exchanges or in over-the-counter markets. In connection
with position hedging, the Fund may also purchase or sell foreign currency on a
spot basis.
It is impossible to forecast with precision the market value of portfolio
securities at the expiration or maturity of a forward or futures contract.
Accordingly, it may be necessary for the Fund to purchase additional foreign
currency on the spot market (and bear the expense of such purchase) if the
market value of the security or securities being hedged is less than the amount
of foreign currency the Fund is obligated to deliver and a decision is made to
sell the security or securities and make delivery of the foreign currency.
Conversely, it may be necessary to sell on the spot market some of the foreign
currency received upon the sale of the portfolio security or securities if the
market value of such security or securities exceeds the amount of foreign
currency the Fund is obligated to deliver.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which the Fund owns or intends to purchase
or sell. They simply establish a rate of exchange which one can achieve at some
future point in time. Additionally, although these techniques tend to minimize
the risk of loss due to a decline in the value of the hedged currency, they tend
to limit any potential gain which might result from the increase in value of
such currency.
The Fund may seek to increase its current return or to offset some of the
costs of hedging against fluctuations in current exchange rates by writing
covered call options and covered put options on foreign currencies. The Fund
receives a premium from writing a call or put option, which increases the Fund's
current return if the option expires unexercised or is closed out at a net
profit. 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 option having the same terms as the option written. See "Risk Factors in
Options Transactions" above.
The Fund's currency hedging transactions may call for the delivery of one
foreign currency in exchange for another foreign currency and may at times not
involve currencies in which its portfolio securities are then denominated. The
Adviser will engage in such "cross hedging" activities when it believes that
such transactions provide significant hedging opportunities for the Fund. Cross
hedging transactions by the Fund involve the risk of imperfect correlation
between changes in the values of the currencies to which such transactions
relate and changes in the value of the currency or other asset or liability
which is the subject of the hedge.
The value of any currency, including U.S. dollars and foreign currencies,
may be affected by complex political and economic factors applicable to the
issuing country. In addition, the exchange rates of foreign currencies (and
therefore the values of foreign currency options, forward contracts and futures
contracts) may be affected significantly, fixed, or supported directly or
indirectly by U.S. and foreign government actions. Government intervention may
increase risks involved in purchasing or selling foreign currency options,
forward contracts and futures contracts, since exchange rates may not be free to
fluctuate in response to other market forces.
The value of a foreign currency option, forward contract or futures
contract reflects the value of an exchange rate, which in turn reflects relative
values of two currencies, the U.S. dollar and the foreign currency
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in question. Because foreign currency transactions occurring in the interbank
market involve substantially larger amounts than those that may be involved in
the exercise of foreign currency options, forward contracts and futures
contracts, investors may be disadvantaged by having to deal in an odd-lot market
for the underlying foreign currencies in connection with options at prices that
are less favorable than for round lots. Foreign governmental restrictions or
taxes could result in adverse changes in the cost of acquiring or disposing of
foreign currencies.
There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
round-lot transactions in the interbank market and thus may not reflect exchange
rates for smaller odd-lot transactions (less than $1 million) where rates may be
less favorable. The interbank market in foreign currencies is a global, around-
the-clock market. To the extent that options markets are closed while the
markets for the underlying currencies remain open, significant price and rate
movements may take place in the underlying markets that cannot be reflected in
the options markets.
The decision as to whether and to what extent the Fund will engage in
foreign currency exchange transactions will depend on 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 foreign currency exchange transactions at
any given time or from time to time.
CURRENCY FORWARD AND FUTURES CONTRACTS. A forward foreign currency
contract involves an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date of the contract
as agreed by the parties, at a price set at the time of the contract. In the
case of a cancelable forward contract, the holder has the unilateral right to
cancel the contract at maturity by paying a specified fee. The contracts are
traded in the interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. A forward contract
generally has no deposit requirement, and no commissions are charged at any
stage for trades. A foreign currency futures contract is a standardized contract
for the future delivery of a specified amount of a foreign currency at a price
set at the time of the contract. Foreign currency futures contracts traded in
the United States are designed by and traded on exchanges regulated by the CFTC,
such as the New York Mercantile Exchange.
Forward foreign currency exchange contracts differ from foreign currency
futures contracts in certain respects. For example, the maturity date of a
forward contract may be any fixed number of days from the date of the contract
agreed upon by the parties, rather than a predetermined date in a given month.
Forward contracts may be in any amounts agreed upon by the parties rather than
predetermined amounts. Also, forward foreign exchange contracts are traded
directly between currency traders so that no intermediary is required. A forward
contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, the Fund may either
accept or make delivery of the currency specified in the contract, or at or
prior to maturity enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract. Closing transactions with respect to futures
contracts are effected on a commodities exchange; a clearing corporation
associated with the exchange assumes responsibility for closing out such
contracts.
Positions in the foreign currency futures contracts may be closed out only
on an exchange or board of trade which provides a secondary market in such
contracts. Although the Fund intends to purchase or sell foreign currency
futures contracts only on exchanges or boards of trade where there appears to be
an active secondary market, there is no assurance that a secondary market on an
exchange or board of trade will exist for any particular contract or at any
particular time. In such event, it may not be possible to close a futures
position and, in the event of adverse price movements, the Fund would continue
to be required to make daily cash payments of variation margin.
FOREIGN CURRENCY OPTIONS. In general, options on foreign currencies
operate similarly to options on securities and are subject to many of the risks
described above. Foreign currency options are traded primarily
22
<PAGE> 68
in the over-the-counter market, although options on foreign currencies are also
listed on several exchanges. Options are traded not only on the currencies of
individual nations, but also on the European Currency Unit ("ECU"). The ECU is
composed of amounts of a number of currencies, and is the official medium of
exchange of the European Community's European Monetary System.
The Fund will only purchase or write foreign currency options when the
Adviser believes that a liquid secondary market exists for such options. There
can be no assurance that a liquid secondary market will exist for a particular
option at any specific time. Options on foreign currencies are affected by all
of those factors which influence foreign exchange rates and investments
generally.
SETTLEMENT PROCEDURES. Settlement procedures relating to the Fund's
investments in foreign securities and to the Fund's foreign currency exchange
transactions may be more complex than settlements with respect to investments in
debt or equity securities of U.S. issuers, and may involve certain risks not
present in the Fund's domestic investments. For example, settlement of
transactions involving foreign securities or foreign currencies may occur within
a foreign country, and the Fund may be required to accept or make delivery of
the underlying securities or currency in conformity with any applicable U.S. or
foreign restrictions or regulations, and may be required to pay any fees, taxes
or charges associated with such delivery. Such investments may also involve the
risk that an entity involved in the settlement may not meet its obligations.
FOREIGN CURRENCY CONVERSION. Although foreign exchange dealers do not
charge a fee for currency conversion, they do realize a profit based on the
difference (the "spread") between prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
RULE 144A SECURITIES
The Fund may purchase securities that have been privately placed but that
are eligible for purchase and sale under Rule 144A under the Securities Act of
1933 (the "1933 Act"). That Rule permits certain qualified institutional buyers,
such as the Fund, to trade in privately placed securities that have not been
registered for sale under the 1933 Act. In some instances, these investments may
be less liquid (and consequently harder to value) than securities that were
issued in a public offering.
TAXES
The following discussion offers only a brief outline of the federal income
tax consequences of investing in the Fund's shares. Potential investors should
consult their own tax advisers for more detailed information regarding the
impact of federal, state, local and foreign taxes upon such an investment.
FEDERAL INCOME TAX TREATMENT OF THE FUND
The Fund has elected and has qualified and intends to continue to qualify
to be treated as a regulated investment company under the Internal Revenue Code.
To qualify as a regulated investment company, the Fund must, among other things,
(a) derive in each taxable year at least 90% of its gross income from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stock, securities or foreign currencies, or other income
derived with respect to its business of investing in stocks, securities or
currencies (including, but not limited to, gains from options, futures and
forward contracts); and (b) diversify its holdings so that, at the end of each
quarter of each taxable year, (i) at least 50% of the market value of the Fund's
assets is represented by cash, cash items, U.S. Government securities,
securities of other regulated investment companies and other securities, with
such other securities of any one issuer limited for the purposes of this
calculation to an amount not greater than 5% of the value of the Fund's total
assets and 10% of the outstanding voting securities of such issuer and (ii) not
more than 25% of the value of its total assets is invested in the securities of
any one issuer (other than U.S. Government securities or the securities of other
regulated investment companies).
As a regulated investment company, in any fiscal year with respect to which
the Fund distributes at least 90% of its investment company taxable income
(which includes, among other items, dividends and interest but
23
<PAGE> 69
excludes net long-term capital gains in excess of net short-term capital
losses), the Fund (but not its shareholders) generally will be relieved of U.S.
federal income tax on its net investment income and net capital gains (i.e., net
long-term capital gains in excess of the sum of net short-term capital losses
and capital loss carryovers from prior years, if any) that it distributes to
shareholders. To the extent the Fund retains its net capital gains for
investment, it will be subject under current tax rates to a federal income tax
at a maximum effective rate of 35% on the amount retained. See "Federal Income
Tax Treatment of Holders of Shares" below. Amounts not distributed on a timely
basis in accordance with a calendar year distribution requirement are subject to
a nondeductible 4% excise tax payable by the Fund. To avoid this tax, the Fund
must distribute, or be deemed to have distributed, during each calendar year an
amount equal to the sum of (1) at least 98% of its ordinary income (not taking
into account any capital gains or losses) for the calendar year, (2) at least
98% of its capital gains in excess of its capital losses (adjusted for certain
ordinary losses) for the twelve-month period ending on October 31 of the
calendar year, and (3) all ordinary income and capital gains for previous years
that were not distributed during such years. See "Risk Factors and Special
Considerations--Dividends and Distributions" in the Prospectus.
If in any taxable year the Fund fails to qualify as a regulated investment
company under the Internal Revenue Code, the Fund will be taxed in the same
manner as an ordinary corporation, and distributions to its shareholders will
not be deductible by the Fund in computing its taxable income. In addition, in
the event of the failure to qualify, the Fund's distributions, to the extent
derived from the Fund's current or accumulated earnings and profits, will
constitute dividends (eligible for the corporate dividends-received deduction,
subject to certain requirements) which are taxable to shareholders as ordinary
income, even though the gains generating those distributions might otherwise (at
least in part) have been treated in the shareholders' hands as long-term capital
gains. If the Fund fails to qualify as a regulated investment company or fails
to satisfy the 90% distribution requirement for any year, it generally must pay
out its earnings and profits attributable to non-regulated investment company
years less an interest charge to the U.S. Treasury on 50% of such earnings and
profits before it can again qualify as a regulated investment company.
If the Fund does not meet the asset coverage requirements of the Act, it
will be required to suspend distributions to the holders of shares until the
asset coverage is restored. See "Description of Shares of Beneficial
Interest--Dividends and Distributions" in the Prospectus. Such a suspension of
distributions might prevent the Fund from distributing 90% of its investment
company taxable income, as is required in order to qualify for taxation as a
regulated investment company, or cause the Fund to incur a tax liability or a
non-deductible 4% excise tax on its undistributed taxable income (including
gain), or both.
Upon any failure to meet the asset coverage requirements of the Act, the
Fund intends to repurchase or redeem the Term Note in order to maintain or
restore the requisite asset coverage and avoid failing to remain qualified as a
regulated investment company. The determination to repurchase or redeem the Term
Note will be made in the sole discretion of the Fund. Furthermore, the Fund will
be required to make mandatory partial redemptions of the Term Note that in the
event its failure to maintain Act Asset Coverage is not cured in a timely
manner. See "Description of Term Note--Restrictive Covenants" in the Prospectus.
Use of the Fund's cash to repurchase or redeem the Term Note may adversely
affect the Fund's ability to distribute annually at least 90% of its investment
company taxable income, which distribution is required to qualify for taxation
as a regulated investment company. In order to fund repurchases or redemptions
of the Term Note, the Fund may have to sell assets (including assets that the
Fund otherwise would have continued to hold) and any income generated by such
sales will be included in the Fund's income that is subject to the distribution
requirements described above. Depending on the size of the Fund's assets
relative to its outstanding senior securities, redemption of the Term Note might
restore asset coverage. Payment of distributions after restoration of asset
coverage could requalify (or avoid a disqualification of) the Fund as a
regulated investment company, depending upon the facts and circumstances.
The Fund's portfolio may include zero coupon bonds. Zero coupon bonds are
original issue discount bonds which pay no current interest. Original issue
discount is the excess (if any) of the stated redemption price at maturity of a
debt instrument over the issue price of the instrument. Original issue discount
on a taxable obligation is required to be currently included in the income of
the holder of the obligation generally
24
<PAGE> 70
on a constant interest rate basis resembling the economic accrual of interest.
The tax basis of the holder of an original issue discount debt instrument is
increased by the amount of original issue discount thereon properly included in
the holder's gross income as determined for federal income tax purposes. Current
inclusion in gross income of original issue discount on a taxable debt
instrument is required, even though no cash is received at the time the original
issue discount is required to be included in gross income. Because such income
may not be matched by a corresponding receipt of cash by the Fund, the Fund may
be required to borrow money or dispose of other securities to be able to make
required distributions to the holders of shares.
The Fund's transactions in foreign currencies, forward contracts, options
and futures contracts (including options and futures contracts on foreign
currencies) will be subject to special provisions of the Internal Revenue Code
(including constructive sale, mark-to-market, straddle, wash sale and short sale
rules) that, among other things, may affect the character of gains and losses
realized by the Fund (i.e., may affect whether gains or losses are ordinary or
capital), accelerate recognition of income to the Fund, defer Fund losses, and
affect the determination of whether capital gains and losses are characterized
as long-term or short-term capital gains or losses. These rules could therefore
affect the character, amount and timing of distributions to shareholders. These
provisions also may require the Fund to mark-to-market certain types of the
positions in its portfolio (i.e, treat them as if they were disposed of at their
fair market value at the close of the taxable year) which may cause the Fund to
recognize income or gain without receiving cash with which to make distributions
in amounts necessary to satisfy the 90% and 98% distribution requirements for
avoiding income and excise taxes. The Fund will monitor its transactions and
will make the appropriate tax elections and appropriate entries in its books and
records when it acquires any foreign currency, option, futures contract, forward
contract, or hedged investment in order to mitigate the effect of these rules
and prevent disqualification of the Fund as a regulated investment company and
minimize the imposition of income and excise taxes.
The Fund may acquire stock of a "passive foreign investment company" (a
"PFIC"). A PFIC is a foreign corporation that, in general, meets either of the
following tests: (1) at least 75% of its gross income is passive income or (2)
an average of at least 50% of its assets produce, or are held for the production
of, passive income. Under certain circumstances, the Fund will be subject to
federal income tax on a portion of any "excess distribution" received on shares
of PFIC stock or of any gain from the disposition of such stock (collectively,
"PFIC income"), plus interest thereon, even if the Fund distributes the PFIC
income as a taxable dividend to its shareholders. The balance of the PFIC income
will be included in the Fund's taxable income and, accordingly, will not be
taxable to the extent that income is distributed to its shareholders. If the
Fund invests in a PFIC and elects to treat the PFIC as a "qualified electing
fund," then in lieu of the foregoing tax and interest obligation, the Fund will
be required to include in income each year its pro rata share of the qualified
electing fund's annual ordinary earnings and net capital gains, even if such
amounts are not distributed to the Fund. These amounts likely would have to be
distributed to satisfy the requirements for avoiding income and excise taxes. In
most instances it will be very difficult, if not impossible, to make this
election because of certain requirements.
As an alternative to making the above-described election to treat the PFIC
as a qualified electing fund, the Fund may make an election to annually
mark-to-market certain publicly traded PFIC stock (a "PFIC Mark-to-Market
Election"). "Marking-to-Market," in this context, means recognizing as ordinary
income (and, to a limited extent, loss) each year an amount equal to the
difference between the Fund's adjusted tax basis in such PFIC stock and its fair
market value. The PFIC Mark-to-Market Election applies to the taxable year for
which made and to all subsequent taxable years, unless the PFIC stock ceases to
be publicly traded or the Internal Revenue Service consents to revocation of the
election. By making the PFIC Mark-to-Market Election, the Fund could ameliorate
the adverse tax consequences arising from its ownership of PFIC stock, but in
any particular year may be required to recognize income in excess of the
distributions it receives from the PFIC and proceeds from the dispositions of
PFIC stock.
FEDERAL INCOME TAX TREATMENT OF HOLDERS OF SHARES
For any period during which the Fund qualifies as a regulated investment
company for federal income tax purposes, dividends paid out of the Fund's net
investment income and short-term capital gains to holders of shares will be
taxable as ordinary income. It is expected that dividends paid to by corporate
shareholders will
25
<PAGE> 71
not be eligible for the dividends received deduction. Distributions of net
capital gains designated by the Fund as "capital gain dividends," if any, are
taxable as long-term capital gains, regardless of how long the shareholder has
held the Fund's shares. See the discussion below for a summary of the capital
gains rates applicable to capital gain dividends. Capital gain dividends are not
eligible for the corporate dividends received deduction. Dividends and
distributions of capital gain dividends will be taxable to shareholders as if
actually distributed, even if they are reinvested in additional shares of the
Fund. Shareholders receiving distributions in the form of newly issued shares
will have a cost basis in each share received equal to the fair market value of
a share of the Fund on the distribution date.
Generally, dividends paid by the Fund are treated as received in the
taxable year in which the distribution is made; however, any dividend declared
by the Fund in October, November or December of any calendar year, payable to
shareholders of record on a specified date in any such month and actually paid
during January of the following year, will be treated as received on December 31
of the year in which declared.
Any distribution by the Fund to a holder of shares not made out of the
Fund's current or accumulated earnings and profits will be treated as a return
of capital to such holder of shares, will reduce the basis of each share or
shares with respect to which it is distributed and will be subject to tax as
capital gain to the extent that the distribution exceeds the basis of the share
or shares with respect to which it is distributed. Potential investors should
carefully consider the tax implications of buying shares just prior to a
distribution, as the price of shares purchased at this time may reflect the
amount of the forthcoming distribution which will, except in unusual
circumstances, be taxable when received.
In the event the Fund retains any net capital gains, it may designate such
retained amounts as undistributed capital gains in a notice to its shareholders.
In the event such a designation is made, the Fund will be subject to tax at a
35% rate on the undistributed amounts and shareholders subject to U.S. federal
income tax will be required to include in income, as long-term capital gains,
their proportionate share of such undistributed amounts, but will be allowed a
credit or refund, as the case may be, for their proportionate share of the 35%
tax paid by the Fund. If the designation is made, for U.S. federal income tax
purposes, the tax basis of shares owned by a shareholder will be increased by an
amount equal to the difference between (i) the amount included in such
shareholder's income as long-term capital gains and (ii) such shareholder's
proportionate share of the tax paid by the Fund.
After the close of each taxable year, the Fund will notify its shareholders
of the amounts of dividends and capital gain dividends paid (or deemed paid) in
such taxable year, and undistributed capital gains designated for that year. The
information regarding capital gain dividends and undistributed capital gains
will designate the portion thereof subject to the different maximum rates of tax
applicable to non-corporate taxpayers' net capital gain as discussed below.
The Internal Revenue Code allows certain miscellaneous itemized deductions
by individuals, including deductions of investment expenses, only to the extent
the aggregate of such deductions exceeds 2% of an individual's adjusted gross
income as determined for federal income tax purposes. The Internal Revenue Code
and the regulations promulgated thereunder treat such expenses incurred by a
regulated investment company as being indirectly incurred by its shareholders.
Shareholder expenses indirectly incurred through publicly offered regulated
investment companies are exempted from the application of the 2% floor. Thus,
the limitation will not apply with respect to indirect deductions through the
Fund. Shareholders of the Fund that are corporations are not subject to the 2%
floor with respect to their expenses indirectly incurred through the Fund.
If the Fund suffers a net taxable loss in any taxable year, its
shareholders will not be permitted to utilize that loss in their tax returns.
Generally, gain recognized by a shareholder on the sale of shares held for
more than one year will be taxable as long-term capital gain. If a shareholder
holds shares primarily for sale to customers in the ordinary course of business
rather than for investment, any gain recognized on the sale of those shares
would be taxable as ordinary income. Any loss realized on a sale or exchange
will be disallowed to the extent the shares disposed of are replaced within a
period of 61 days beginning 30 days before and ending 30 days after the date on
which
26
<PAGE> 72
shares are disposed. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss. Any loss recognized by a shareholder on
a disposition of Fund shares held by the shareholder for six months or less will
be treated as a long-term capital loss to the extent of any distributions of
capital gain dividends received or treated as having been received by the
shareholder with respect to such shares. Shareholders who acquire shares on
multiple dates should consult their tax advisers to determine how to allocate
the cost of shares for basis purposes.
Under the Taxpayer Relief Act of 1997 (the "1997 Tax Act"), the maximum tax
rate applicable to net capital gains recognized by individuals and other
non-corporate taxpayers is (i) the same as the maximum ordinary income tax rate
for capital assets held for one year or less, (ii) 28% for capital assets held
for more than one year but not more than 18 months and (iii) 20% for capital
assets held for more than 18 months. Shareholders should consult their own tax
advisors regarding the availability and effect of a certain tax election to
mark-to-market shares of the Fund held on January 1, 2001. Capital gains or
losses recognized by corporate shareholders are subject to tax at the ordinary
income tax rates applicable to corporations. The new tax rates for capital gains
under the 1997 Tax Act described above will apply to distributions of capital
gain dividends by the Fund (if, as expected, the Fund designates capital gain
dividends as 28% rate gain distributions or 20% rate gain distributions, in
accordance with its holding periods for the securities that generated such
capital gain dividends) as well as to sales and exchanges of shares in the Fund.
With respect to capital losses recognized on dispositions of shares held six
months or less where such losses are treated as long term capital losses to the
extent of prior capital gain dividends received on such shares, it is unclear
how such capital losses offset the capital gains referred to above. Holders of
shares should consult their own tax advisers as to the application of the new
capital gains rates to their particular circumstances.
In general, federal withholding taxes at a 30% rate or a lower rate
established by treaty will apply to distributions to shareholders (except to
those distributions designated by the Fund as capital gain dividends) that are
nonresident aliens or foreign partnerships, trusts or corporations to the extent
that such income is not "effectively connected" with a U.S. trade or business
carried on by such shareholders.
The U.S. Treasury Department and the Internal Revenue Service recently
issued Treasury regulations, generally effective for payments made after
December 31, 1999, concerning the withholding of tax and reporting for certain
amounts paid to nonresident aliens and foreign corporations (the "Final
Withholding Regulations"). Among other things, the Final Withholding Regulations
may require shareholders that are not United States persons within the meaning
of the Internal Revenue Code to furnish new certification of their foreign
status after December 31, 1999. Investors should consult their tax advisers
concerning the applicability and effect of the Final Withholding Regulations on
an investment in shares of the Fund.
BACKUP WITHHOLDING
The Fund may be required to withhold for U.S. federal income taxes 31% of
all taxable distributions paid to shareholders who (i) fail to provide the Fund
with their correct taxpayer identification number, (ii) fail to make required
certifications or (iii) have been notified or with respect to whom the Fund has
been notified by the U.S. Internal Revenue Service that distributions to such
shareholder are subject to backup withholding. Corporate shareholders and
certain other shareholders specified in the Internal Revenue Code are exempt
from such backup withholding. Backup withholding is not an additional tax. Any
amounts withheld may be credited against the shareholder's U.S. federal income
tax liability.
OTHER TAXATION
Investors are advised to consult their own tax advisers with respect to the
application to their own circumstances of the above-described general taxation
rules and with respect to the federal, state, local or foreign tax consequences
to them of an investment in shares of the Fund.
SHAREHOLDER LIABILITY
Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of the Fund. However, the
Agreement and Declaration of Trust of the Fund (the "Declara-
27
<PAGE> 73
tion") 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.
28
<PAGE> 74
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(1) Financial Statements:
Included in Part A
Fee Table
Financial Highlights
Included in Part B
Incorporated by reference into Part B are the financial
statements contained in the Registrant's Annual Report dated
October 31, 1997 (which were previously filed electronically
pursuant to Section 30(b)(2) of the Investment Company Act
of 1940 - Accession Number: 0000883163-98-000004):
The Financial Statements contained in the Registrant's
Annual Report are as follows:
Investment portfolio, October 31, 1997; Statement of assets
and liabilities, October 31, 1997; Statement of operations,
October 31, 1997; Statement of changes in net assets, Years
ended October 31, 1996 & 1997; Notes to Financial
Statements; Financial Highlights; Report of Independent
Accountants
(2) Exhibits
(a)(1) Agreement and Declaration of Trust (1)
(a)(2) Amendment No. 1 to Agreement and Declaration of
Trust (1)
(b) By-Laws, as amended (1)
(c) Not applicable
(d)(1) Form of specimen share certificate for Shares of
Beneficial Interest, without par value (1)
(d)(2) Form of Subscription Certificate
(d)(3) Form of Notice of Guaranteed Delivery
(d)(4) Form of Nominee Holder Over-Subscription Exercise
Form
(d)(5) Form of Beneficial Owner Listing Certification
(e) Dividend Reinvestment Plan (1)
(f) Not applicable
(g) Management Agreement with Colonial Management
Associates, Inc. (1)
(h) Form of Dealer Manager Agreement with
PaineWebber Incorporated
(i) Not applicable
(j)(1) Custody Agreement with The Chase Manhattan Bank
(incorporated herein by reference to Exhibit 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
October 27, 1997)
<PAGE> 75
(k)(1) Transfer Agency and Registrar Agreement
(k)(1)(a) Amendment No 1. to Transfer Agency and Registrar
Agreement
(k)(1)(b) Consent to Assignment to TBC Shareholders
Services Inc.(now known as First Data Investor
Services Group, Inc.)
(k)(2) Pricing and Bookkeeping Agreement with Colonial
Management Associates, Inc. (1)
(k)(3) Credit Line Agreement with Bank of America
Illinois (1)
(k)(4) Form of Subscription Agent Agreement with
First Data Investor Services Group, Inc.
(k)(5) Form of Information Agent Agreement with
Shareholder Communications Corporation
(l) Opinion of counsel (including consent of counsel)
(m) Not applicable
(n) Consent of independent accountants (1)
(o) Not applicable
(p) Not applicable
(q) Not applicable
(r) Financial Data Schedule (1)
- --------------------------------
(1) Previously filed with the Securities and Exchange
Commission on April 15, 1998.
Item 25. Marketing Arrangements.
See 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 $ 12,000
National Association of Securities Dealers, Inc. Fees 6,000
New York Stock Exchange listing fee 20,000
Printing (other than stock certificates) 52,000
Accounting fees and expense 20,000
Legal fees and expenses 125,000
Dealer Managers' expense reimbursement 100,000
Information Agent fees and expenses 47,000
Subscription Agent fees and expenses 40,000
Miscellaneous 78,000
--------
Total $500,000
========
Item 27. Persons controlled by or under Common Control with Registrant.
None
Item 28. Number of Holders of Securities
Number of Record Holders
Title of Class as of April 30, 1998
-------------- ------------------------
Shares of Beneficial Interest 1,317
Item 29. Indemnification
The Agreement and Declaration of Trust, as amended, filed as
Exhibit(a)(1) to this Registration Statement provides for
Indemnification to each of the Registrant's Trustees and
officers against all liabilities and expenses incurred in
acting 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.
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
issued.
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.
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 Adviser" in the Prospectus forming part of
this Registration Statement. The following sets forth Colonial
Management Associates, Inc.
<PAGE> 76
ITEM 30
- -------
Registrant's investment adviser/administrator, Colonial Management
Associates, Inc. ("Colonial"), is registered as an investment adviser under the
Investment Advisers Act of 1940 (1940 Act). Colonial Advisory Services, Inc.
(CASI), an affiliate of Colonial, is also registered as an investment adviser
under the 1940 Act. As of the end of its fiscal year, December 31, 1996, CASI
had one institutional, corporate or other account under management or
supervision, the market value of which was approximately $42.0 million. As of
the end of its fiscal year, December 31, 1997, Colonial was the investment
adviser, sub-adviser and/or administrator to 50 Colonial mutual funds (including
funds sub-advised by Colonial, the market value of which investment companies
was approximately $17,319.00 million. Liberty Financial Investments, Inc., a
subsidiary of Colonial Management Associates, Inc., is the principal underwriter
and the national distributor of all of the funds in the Colonial Mutual Funds
complex, including the Registrant.
The following sets forth the business and other connections of each
director and officer of Colonial Management Associates, Inc.:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(1) (2) (3) (4)
Name and principal
business
addresses* Affiliation
of officers and with Period is through 11/01/97. Other
directors of investment business, profession, vocation or
investment adviser adviser employment connection Affiliation
- ------------------ ---------- -------------------------------- -----------
Allard, Laurie V.P.
Archer, Joseph A. V.P.
Ballou, William J. V.P., Colonial Trusts I through VII 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.
LFC Utilities Trust Asst. Sec.
Berliant, Allan V.P.
Bertocci, Bruno V.P. Stein Roe Global Capital Mngmt. Principal
Boatman, Bonny E. Sr.V.P.; Colonial Advisory Services, Inc. Exec. V.P.
IPC Mbr.
Bunten, Walter V.P.
Campbell, Kimberly V.P.
Carnabucci,
Dominick V.P.
Carroll, Sheila A. Sr.V.P.;
Citrone, Frank V.P.
Cogger, Harold W. Dir.; The Colonial Group, Inc. Dir.;
Chairman; Chrm.
IPC Mbr.; Colonial Trusts I through VII Pres.
Colonial High Income
Municipal Trust Pres.
Colonial InterMarket Income
Trust I Pres.
Colonial Intermediate High
</TABLE>
<PAGE> 77
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Income Fund Pres.
Colonial Investment Grade
Municipal Trust Pres.
Colonial Municipal Income
Trust Pres.
LFC Utilities Trust Pres.
Liberty Financial Exec V.P.;
Companies, Inc. Dir.
Stein Roe & Farnham Dir.
Incorporated
Conlin, Nancy L. Sr. V.P.; Colonial Trusts I through VII 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
LFC Utilities Trust Secretary
Liberty Financial Investments,
Inc. Dir., Clerk
Colonial Investors Service
Center, Inc. Clerk, Dir.
The Colonial Group, Inc. V.P., Gen.
Counsel and
Clerk
Colonial Advisory Services,
Inc. Dir., Clerk
AlphaTrade Inc. Dir., Clerk
Connaughton,
J. Kevin V.P.; Colonial Trust I through VII CAO; Controller
Controller LFC Utilities 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
Daniszewski, V.P.
Joseph J.
Desilets, Marian V.P. Liberty Financial Investments,
Inc. V.P.
DiSilva-Begley, V.P. Colonial Advisory Services, Compliance
Linda IPC Mbr. Inc. Officer
Ericson, Carl C. Sr.V.P. Colonial Intermediate High
IPC Mbr. Income Fund V.P.
Colonial Advisory Services,
Inc. Exec. V.P.
Evans, C. Frazier Sr.V.P. Liberty Financial Investments,
Inc. Mng. Director
Feingold, Andrea S. V.P. Colonial Intermediate High
Income Fund V.P.
Colonial Advisory Services,
Inc. Sr. V.P.
Feloney, Joseph L. V.P.
Asst. Treasurer
</TABLE>
<PAGE> 78
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Finnemore, V.P. Colonial Advisory Services,
Leslie W. Inc. Sr. V.P.
Franklin, Sr. V.P. AlphaTrade Inc. President
Fred J. IPC Mbr.
Gibson, Stephen E. Dir.; Pres.; The Colonial Group, Inc. Dir.;
CEO; Pres.; CEO;
Exec. Cmte. Mbr.
Liberty Financial Investments, Dir.; Chm.
Inc.
Colonial Advisory Services, Dir.; Chm.
Inc.
Colonial Investors Service Dir.; Chm.
Center, Inc.
AlphaTrade Inc. Dir.
Hanson, Loren Sr. V.P.
Harasimowicz, V.P.
Stephen
Harris, David V.P. Stein Roe Global Capital Mngmt Principal
Hartford, Brian V.P.
Haynie, James P. V.P. Colonial Advisory Services,
Inc. Sr. V.P.
Hernon, Mary V.P.
Hill, William V.P.
Iudice, Jr. Philip V.P.; The Colonial Group, Inc. Controller,
Controller CAO, Asst.
Asst. Treas.
Treasurer Liberty Financial Investments, CFO,
Inc. Treasurer
Colonial Advisory Services,
Inc. Controller;
Asst. Treas.
AlphaTrade Inc. CFO, Treas.
Jacoby, Timothy J. Sr. V.P.; The Colonial Group, Inc. V.P., Treasr.,
CFO; CFO
Treasurer Colonial Trusts I through VII 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
LFC Utilities Trust
Treasr.,CFO
Colonial Advisory Services,
Inc. CFO, Treasr.
Johnson, Gordon V.P.
Knudsen, Gail V.P.
Lasher, Ben V.P.
Lennon, John E. V.P. Colonial Advisory Services,
Inc. V.P.
</TABLE>
<PAGE> 79
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Lenzi, Sharon V.P.
Lessard, Kristen V.P.
Loring, William C. V.P.
MacKinnon,
Donald S. Sr.V.P.
Marcus, Harold V.P.
Muldoon, Bob V.P.
Newman, Maureen V.P.
O'Brien, David V.P.
Ostrander, Laura V.P.
Peterson, Ann T. V.P. Colonial Advisory Services,
Inc. V.P.
Rao, Gita V.P.
Reading, John V.P.; Colonial Investors Service
Asst. Center, Inc. Asst. Clerk
Sec.; The Colonial Group, Inc. Asst. Clerk
Asst Colonial Advisory Services,
Clerk and Inc. Asst. Clerk
Counsel Liberty Financial Investments,
Inc. Asst. Clerk
AlphaTrade Inc. Asst. Clerk
Colonial Trusts I through VII 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
Municipal Trust Asst. Sec.
Colonial Municipal Income
Trust Asst. Sec.
LFC Utilities Trust Asst. Sec.V.P.
Rega, Michael V.P. Colonial Advisory Services
Inc. Vice President
Scoon, Davey S. Dir.; Colonial Advisory Services,
Exe.V.P.; Inc. Dir.
IPC Mbr.; Colonial High Income
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.
Colonial Trusts I through VII V.P.
LFC Utilities Trust V.P.
Colonial Investors Service Dir; Pres.
Center, Inc.
The Colonial Group, Inc. COO; Ex. V.P.
Liberty Financial Investments,
Inc. Director
AlphaTrade Inc. Director
Seibel, Sandra L. V.P.
</TABLE>
<PAGE> 80
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Spanos, Gregory Sr. V.P.
Stern, Arthur O. Exe.V.P.; The Colonial Group, Inc. Exec. V.P.
Steck, Nicholas V.P.
Stevens, Richard V.P.
Stoeckle, Mark V.P. Colonial Advisory Services,
Inc. V.P.
Swayze, Gary V.P.
Wallace, John V.P.
Asst.Treasurer
Ware, Elizabeth V.P.
</TABLE>
- ------------------------------------------------
*The Principal address of all of the officers and directors of the investment
adviser is One Financial Center, Boston, MA 02111.
<PAGE> 81
- ------------------------------------------------
*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 Intermediate High Income Fund
One Financial Center
Boston, Massachusetts 02111-2621
Investment Adviser: Colonial Management Associates, Inc.
One Financial Center
Boston, Massachusetts 02111-2621
Custodian: The Chase Manhattan Bank
4 Chase MetroTech Center
Brooklyn, New York 11245
Transfer Agent: First Data Investor Services Group, Inc.
P.O. Box 1376
Boston, Massachusetts 02104
Item 32. Management Services.
Not applicable.
Item 33. Undertakings.
(1) The Registrant undertakes to suspend the offering of shares
covered hereby until it amends its prospectus contained herein
if (i) subsequent to the effective date of this Registration
Statement, its net asset value per share declines more than 10
percent from its net asset value per share as of the effective
date of this Registration Statement, or (ii) its net asset value
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.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration
Statement;
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of this Registration Statement
(or the most recent post-effective amendment thereof) which,
individually or in aggregate, represent a fundamental change in
the information set forth in the Registration Statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in this
Registration Statement or any material change to such
information in the Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of a post-effective
<PAGE> 82
amendment any of the securities being registered which remain
unsold at the termination of the offering.
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
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 18th day of May, 1998.
COLONIAL INTERMEDIATE HIGH
INCOME FUND
By: /s/ HAROLD W. COGGER
-----------------------
Harold W. Cogger
President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement on Form N-2 has been signed below by the following persons in their
capacities as officers and Trustees of the Registrant.
SIGNATURES TITLE DATE
- ---------- ----- ----
/s/ HAROLD W. COGGER President (chief May 18, 1998
- ------------------------ executive officer)
Harold W. Cogger
/s/ J. KEVIN CONNAUGHTON Controller and Chief May 18, 1998
- ------------------------ Accounting Officer
J. Kevin Connaughton
/s/ TIMOTHY J. JACOBY Treasurer and Chief May 18, 1998
- ------------------------ Financial Officer
Timothy J. Jacoby
/s/ ROBERT J. BIRNBAUM*
- ------------------------- Trustee
Robert J. Birnbaum
/s/ TOM BLEASDALE*
- ------------------------- Trustee
Tom Bleasdale
/s/ LORA S. COLLINS*
- ------------------------- Trustee
Lora S. Collins
/s/ JAMES E. GRINNELL*
- ------------------------- Trustee
James E. Grinnell
<PAGE> 83
/s/ RICHARD W. LOWRY*
- --------------------- Trustee
Richard W. Lowry
/s/ WILLIAM E. MAYER*
- --------------------- Trustee
William E. Mayer
/s/ JAMES L. MOODY, JR. *
- --------------------- Trustee *WILLIAM J. BALLOU
James L. Moody, Jr. -------------------
William J. Ballou
Attorney-in-fact
May 18, 1998
/s/ JOHN J. NEUHAUSER*
- --------------------- Trustee
John J. Neuhauser
/s/ ROBERT L. SULLIVAN*
- --------------------- Trustee
Robert L. Sullivan
- --------------------- Trustee
Anne-Lee Verville
INDEX OF EXHIBITS
(d)(2) Form of Subscription Certificate
(d)(3) Form of Notice of Guaranteed Delivery
(d)(4) Form of Nominee Holder Over-Subscription Exercise Form
(d)(5) Form of Beneficial Owner Listing Certification
(h) Form of Dealer Manager Agreement
(k)(1) Transfer Agency and Registrar Agreement
(k)(1)(a) Amendment No. 1 to Transfer Agency and Registrar Agreement
(k)(1)(b) Consent of Assignment
(k)(4) Form of Subscription Agent Agreement
(k)(5) Form of Information Agent Agreement
(1) Opinion of Counsel (including consent of counsel)
<PAGE> 1
Exhibit (d)(2)
Control No. _______ Maximum Primary Subscription Shares Available _________
THE OFFER EXPIRES AT 5:00 P.M., NEW YORK CITY TIME, ON JUNE 19, 1998*
COLONIAL INTERMEDIATE HIGH INCOME FUND
RIGHTS TO SUBSCRIBE FOR SHARES OF BENEFICIAL INTEREST
Subscription Certificate
Colonial Intermediate High Income Fund (the "Fund") issued to its shareholders
of record ("Record Date Shareholders"), as of the close of business on May 26,
1998 (the "Record Date"), transferable rights ("Rights") entitling the holders
thereof to subscribe for shares ("Shares") of the Fund's shares of beneficial
interest, no par value (the "Shares"), at a rate of one Share for every three
Rights held (1-for-3). The terms and conditions of the Rights offer (the
"Offer") are set forth in the Fund's May 19, 1998 Prospectus (the "Prospectus")
incorporated herein by reference. The owner of this Subscription Certificate, or
assignee, is entitled to the number of Rights shown on this Subscription
Certificate and is entitled to subscribe for the number of Shares shown on this
Subscription Certificate. Record Date Shareholders who have fully exercised
their Rights pursuant to the Primary Subscription (other than those Rights which
cannot be exercised because they represent the right to subscribe for less than
one Share) are entitled to subscribe for additional Shares pursuant to the
Over-Subscription Privilege, subject to certain limitations and allotment, as
described in the Prospectus. Capitalized terms not defined herein have the
meanings attributed to them in the Prospectus. The Fund will not offer or sell
in connection with the Offer any Shares which are not subscribed for pursuant to
the Primary Subscription or the Over-Subscription Privilege.
SAMPLE CALCULATION
- --------------------------------------------------------------------------------
PRIMARY SUBSCRIPTION ENTITLEMENT (1-for-3)
No. of shares owned on the Record Date 302 / 3 = 100 new shares
(equals no. of (ignore
Rights issued) fractions)
- --------------------------------------------------------------------------------
THE RIGHTS ARE TRANSFERABLE
The Rights are transferable until the Expiration Date (June 19, 1998). The
Rights will be listed for trading on the New York Stock Exchange under the
symbol "CIF RT". If you wish to sell all or a portion of your Rights through the
Subscription Agent, the Rights must be received by the Subscription Agent at or
prior to 5:00 p.m., New York City time, on June 17, 1998, two business days
prior to the Expiration Date.
<PAGE> 2
SUBSCRIPTION PRICE
The Subscription Price will be $6.75 per share.
METHOD OF EXERCISE OF RIGHTS
IN ORDER TO EXERCISE YOUR RIGHTS, YOU MUST EITHER (i) COMPLETE AND SIGN THIS
SUBSCRIPTION CERTIFICATE ON THE BACK AND RETURN IT TOGETHER WITH PAYMENT OF THE
SUBSCRIPTION PRICE FOR THE SHARES SUBSCRIBED, OR (ii) PRESENT A PROPERLY
COMPLETED NOTICE OF GUARANTEED DELIVERY, IN EITHER CASE TO THE SUBSCRIPTION
AGENT, FIRST DATA INVESTOR SERVICES GROUP, INC., BEFORE 5:00 P.M., NEW YORK CITY
TIME, ON JUNE 19, 1998 ("THE EXPIRATION DATE")*.
Full payment of the Subscription Price per Share for all Shares subscribed for
pursuant to both the Primary Subscription and, for Record Date Shareholders
only, the Over-Subscription Privilege must accompany this Subscription
Certificate and must be made payable in United States dollars by money order or
check drawn on a bank located in the United States payable to Colonial
Intermediate High Income Fund. Because uncertified personal checks may take at
least five business days to clear, we recommend you pay, or arrange for payment,
by means of certified or cashier's check or money order. Alternatively, if a
Notice of Guaranteed Delivery is used, a properly completed and executed
Subscription Certificate, and full payment, as described in such notice, must be
received by the Subscription Agent no later than the close of business on the
third business day (June 24, 1998) after the Expiration Date (June 19, 1998).
For additional information, see the Prospectus.
Certificates for the Shares acquired pursuant to the Primary Subscription will
be mailed promptly after the expiration of the Offer and full payment for the
Shares subscribed for has been received and cleared. Certificates representing
Shares acquired pursuant to the Over-Subscription Privilege will be mailed as
soon as practicable after full payment has been received and cleared and all
allocations have been effected. Any excess payment to be refunded by the Fund to
a shareholder will be mailed by the Subscription Agent to such shareholder as
promptly as possible.
Account #:
Control #:
Number of Rights Issued:
CUSIP #:
(continued on back)
-2-
<PAGE> 3
<TABLE>
<S> <C> <C>
BY FIRST CLASS: BY OVERNIGHT COURIER: BY HAND:
First Data Investor Services Group, Inc. First Data Investor Services Group, Inc. First Data Investor Services Group, Inc.
c/o BankBoston N.A. c/o BankBoston N.A. c/o BankBoston N.A.
Corporate Reorganization Corporate Reorganization Securities Transfer and
P.O. Box 9061 70 Campanelli Drive Reporting Services, Inc.
Boston, Massachusetts 02205-8686 Braintree, Massachusetts 02184 55 Broadway -- 3rd Floor
U.S.A. U.S.A. New York, New York 10006
U.S.A.
</TABLE>
Delivery to an address other than one of the addresses listed above will
not constitute valid delivery.
PLEASE PRINT ALL INFORMATION CLEARLY AND LEGIBLY
SECTION 1: OFFERING INSTRUCTIONS (check the appropriate boxes)
IF YOU WISH TO SUBSCRIBE FOR YOUR FULL ENTITLEMENT:
[ ] I apply for ALL of my entitlement of new shares
pursuant to the Primary Subscription ____________________ x $6.75 = $_____
(no. of new shares)
[ ] I apply for new shares pursuant to the
Over-Subscription Privilege** ____________________________ x $6.75 = $_____
(no. of additional shares)
IF YOU DO NOT WISH TO APPLY FOR YOUR FULL ENTITLEMENT:
[ ] I apply for ______________________________________________ x $6.75 = $_____
(no. of new shares)
Amount of check enclosed ____________________
[ ] Sell any remaining Rights
[ ] Sell ALL of my Rights
Note: If I apply for ALL of my entitlement of new shares pursuant to the
Primary Subscription, I hereby authorize the Subscription Agent, in
accordance with the procedures described in the Prospectus, to sell any
Rights I am unable to exercise because such Rights represent the right to
subscribe for less than one share. If I have checked either box
pertaining to a sale of Rights, I authorize the sale of Rights by the
Subscription Agent according to the procedures described in the
Prospectus.
SECTION 2: SUBSCRIPTION AUTHORIZATION
I acknowledge that I have received the Prospectus for this Offer and I
hereby irrevocably subscribe for the number of shares indicated above on the
terms and conditions specified in the Prospectus relating to the Primary
Subscription and the Over-Subscription Privilege.
I hereby agree that if I fail to pay in full for the shares for which I
have subscribed, the Fund may exercise any of the remedies set forth for in the
Prospectus.
Signature of subscriber(s)_________________________________________________
_________________________________________________
_________________________________________________
Telephone number (including area code)( ) _________________________________
-3-
<PAGE> 4
If you wish to have your shares and refund check (if any) delivered to an
address other than that listed on this Subscription Certificate you must have
your signature guaranteed by a member of the New York Stock Exchange or a bank
or trust company. Please provide the delivery address above and note if it is a
permanent change.
SECTION 3: TRANSFER NOTIFICATION (except pursuant to a sale through the
Subscription Agent)
For value received, I request ________ Rights (in a number evenly divisible
by three) represented by the Subscription Certificate be assigned to:
Name of Assignee: ______________________________________________________________
Address of Assignee: ___________________________________________________________
Signature of Assignor: _________________________________________________________
IMPORTANT: The Signature(s) must correspond with the name(s) printed on your
Subscription Certificate. Your signature must be guaranteed by: a commercial
bank or trust company, or a member firm of a domestic stock exchange, or a
savings bank or credit union.
Signature guaranteed by: _______________________________________________________
PROCEEDS FROM THE SALE OF RIGHTS MAY BE SUBJECT TO WITHHOLDING OF U.S. TAXES
UNLESS THE SELLER'S CERTIFIED U.S. TAXPAYER IDENTIFICATION NUMBER (OR
CERTIFICATION REGARDING FOREIGN STATUS) IS ON FILE WITH THE SUBSCRIPTION AGENT
AND THE SELLER IS NOT OTHERWISE SUBJECT TO U.S. BACKUP WITHHOLDING.
SECTION 4: DESIGNATION OF BROKER-DEALER
The following broker-dealer is hereby designated as having been instrumental in
the exercise of the Rights hereby exercised:
FIRM: ________________________________________
REPRESENTATIVE NAME: _________________________
REPRESENTATIVE NUMBER: _______________________
- ----------
* Unless the Offer is extended.
** You can only participate in the Over-Subscription Privilege if you are a
Record Date Shareholder and have subscribed for your full entitlement of
new Shares pursuant to the Primary Subscription.
Any questions regarding this Subscription Certificate and the Offer may be
directed to the Information Agent, Shareholder Communications Corporation,
toll-free at (800) 733-8481, ext. 486
-4-
<PAGE> 1
Exhibit (d)(3)
NOTICE OF GUARANTEED DELIVERY FOR SHARES OF
BENEFICIAL INTEREST OF COLONIAL INTERMEDIATE HIGH INCOME FUND
SUBSCRIBED FOR PURSUANT TO THE PRIMARY SUBSCRIPTION
AND THE OVER-SUBSCRIPTION PRIVILEGE
Colonial Intermediate High Income Fund Rights Offering
As set forth in the Prospectus dated May 19, 1998 (the "Prospectus")
under "The Offer -- Payment for Shares," this form or one substantially
equivalent hereto may be used as a means of effecting subscription and payment
for all shares of Colonial Intermediate High Income Fund shares of Beneficial
Interest (the "Shares") subscribed for by exercise of Rights pursuant to the
Primary Subscription and the Over-Subscription Privilege. Such form may be
delivered by hand or sent by facsimile transmission, overnight courier or mail
to the Subscription Agent and must be received prior to 5:00 p.m. New York City
time on June 19, 1998 (the "Expiration Date"), unless extended by the Fund. The
terms and conditions of the Offer set forth in the Prospectus are incorporated
by reference herein. Capitalized terms not defined hereby have the meanings
attributed to them in the Prospectus.
The Subscription Agent is:
FIRST DATA INVESTOR SERVICES GROUP, INC.
c/o BankBoston N.A.
<TABLE>
<S> <C>
BY FACSIMILE: BY FIRST CLASS:
(TELECOPIES) First Data Investor Services Group, Inc.
(781) 794-6333 c/o BankBoston N.A.
Confirm by telephone to: Corporate Reorganization
(781) 794-6388 P.O. Box 9573
Boston, Massachusetts 02205-8686
U.S.A.
BY OVERNIGHT BY HAND:
COURIER: First Data Investor Services Group, Inc.
First Data Investor Services Group, Inc. c/o BankBoston N.A.
c/o BankBoston N.A. Securities Transfer and
Corporate Reorganization Reporting Services, Inc.
70 Campanelli Drive 55 Broadway -- 3rd Floor
Braintree, Massachusetts 02184 New York, New York 10006
U.S.A. U.S.A.
</TABLE>
<PAGE> 2
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION OF INSTRUCTIONS
VIA A TELECOPY OR FACSIMILE NUMBER, OTHER THAN AS SET FORTH ABOVE,
DOES NOT CONSTITUTE A VALID DELIVERY.
The New York Stock Exchange member firm or bank or trust company which
completes this form must communicate the guarantee and the number of Shares
subscribed for under both the Primary Subscription and the Over-Subscription
Privilege to the Subscription Agent and must deliver this Notice of Guaranteed
Delivery guaranteeing delivery of (i) payment in full for all subscribed Shares
and (ii) a properly completed and executed Subscription Certificate to the
Subscription Agent prior to 5:00 p.m., New York City time, on the Expiration
Date. The Subscription Certificate and full payment must then be delivered to
the Subscription Agent by the close of business on June 24, 1998, which is the
third business day after the Expiration Date, unless extended by the Fund.
Failure to do so will result in a forfeiture of the Rights.
-2-
<PAGE> 3
GUARANTEE
The undersigned, a member firm of the New York Stock Exchange or a bank
or trust company guarantees delivery of payment to the Subscription Agent by the
close of business (5:00 p.m., New York City time) on the third business day
(June 24, 1998) after the Expiration Date (June 19, 1998, unless extended by the
Fund) of (i) a properly completed and executed Subscription Certificate and (ii)
payment of the full Subscription Price for shares subscribed for in the Primary
Subscription and pursuant to the Over-Subscription Privilege, if applicable, as
subscription for such shares is indicated herein or in the Subscription
Certificate.
<TABLE>
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1. Primary Subscription Number of Number of Primary Payment to
Rights to Shares requested be made in
be exercised for which you are connection
_____ Rights guaranteeing with Primary
delivery of Shares
Rights and Payment
_________ Shares $___________
(Rights / by 3)
- --------------------------------------------------------------------------------
2. Over-Subscription Number of Over- Payment to
Subscription be made in
Shares requested connection
for which you with Over-
are guaranteeing Subscription
payment Shares
_______ Shares
$___________
- --------------------------------------------------------------------------------
3. Totals Total Number
of Rights to
be Delivered
_______Rights
$____________
Total Payment
- --------------------------------------------------------------------------------
</TABLE>
Method of Delivery of Rights A. Through The Depository Trust
(circle one) Company ("DTC")*
B. Direct to the Subscription Agent
-3-
<PAGE> 4
Please note that if you are guaranteeing for Over-Subscription Shares and
are a DTC participant, you must also execute and forward to First Data Investor
Services Group, Inc. a Nominee Holder Over-Subscription Exercise Form.
___________________________________ ___________________________________
Name of Firm Authorized Signature
___________________________________ ___________________________________
Address Title
___________________________________ ___________________________________
Zip Code Name (Please Type or Print)
___________________________________
Name of Registered Holder
(If Applicable)
___________________________________ ___________________________________
Telephone Number Date
* IF THE RIGHTS ARE TO BE DELIVERED THROUGH DTC, CALL THE SUBSCRIPTION AGENT
TO OBTAIN A PROTECT IDENTIFICATION NUMBER, WHICH NEEDS TO BE COMMUNICATED
BY YOU TO DTC.
-4-
<PAGE> 1
Exhibit (d)(4)
DTC PARTICIPANT OVER-SUBSCRIPTION EXERCISE FORM
NOMINEE HOLDER OVER-SUBSCRIPTION EXERCISE FORM
Colonial Intermediate High Income Fund
Rights Offering for Shares of Beneficial Interest
This form is to be used only by nominee holders or by the Depository
Trust Company ("DTC") participants to exercise the Over-Subscription Privilege
in respect of Rights with respect to which the Primary Subscription Privilege
was exercised in full and delivered through the facilities of a common
depository or DTC. All other exercises of Over-Subscription Privileges must be
effected by the delivery of the Subscription Certificate.
The terms and conditions of the Rights Offering are set forth in the
Fund's Prospectus dated May 19, 1998 (the "Prospectus") and are incorporated
herein be reference. Copies of the Prospectus are available upon request from
the Information Agent.
PLEASE COMPLETE ALL APPLICABLE INFORMATION
Void unless received by the Subscription Agent with payment in full or
with a properly completed Notice of Guaranteed Delivery before 5:00 p.m. New
York City time, on June 19, 1998 (the "Expiration Date"), unless extended by the
Fund.
<TABLE>
<S> <C>
BY FACSIMILE: BY FIRST CLASS:
(TELECOPIES) First Data Investor Services Group, Inc.
(781) 794-6333 c/o BankBoston N.A.
Confirm by telephone to: Corporate Reorganization
(781) 794-6388 P.O. Box 9573
Boston, Massachusetts 02205-9573
U.S.A.
BY OVERNIGHT BY HAND:
COURIER: First Data Investor Services Group, Inc.
First Data Investor Services Group, Inc. c/o BankBoston N.A.
c/o BankBoston N.A. Securities Transfer and
Corporate Reorganization Reporting Services, Inc.
70 Campanelli Drive 55 Broadway -- 3rd Floor
Braintree, Massachusetts 02184 New York, New York 10006
U.S.A. U.S.A.
</TABLE>
1. The undersigned hereby certifies to the Subscription Agent that it is
a participant in ______________________ [Name of Depository] (the "Depository")
and that it has either (i) exercised the Primary Subscription in respect of the
Rights and delivered such exercised Rights to the Subscription Agent by means of
transfer to the Depository Account of the Fund or (ii)
<PAGE> 2
delivered to the Subscription Agent a Notice of Guaranteed Delivery in respect
of the exercise of the Primary Subscription Privilege and will deliver the
Rights called for in such Notice of Guaranteed Delivery to the Subscription
Agent by means of transfer to such Depository Account of the Fund.
2. The undersigned hereby exercises the Over-Subscription Privilege to
purchase, to the extent available, ___________ shares of beneficial interest
(the "Shares") and certifies to the Subscription Agent that such
Over-Subscription Privilege is being exercised for the account or accounts of
persons (which may include the undersigned) on whose behalf all Primary
Subscription Rights have been exercised.
3. The undersigned understands that payment of the Subscription Price of
$6.75 per Share for each Share subscribed for pursuant to the Over-Subscription
Privilege must be received by the Subscription Agent before 5:00 p.m., New York
City time, on the Expiration Date, unless a Notice of Guaranteed Delivery is
used, in which case, payment in full must be received by the Subscription Agent
not later than the close of business on the third business day after the
Expiration Date. The undersigned represents that such payment, in the aggregate
amount of $_______________, either
(check appropriate box):
[ ] has been or is being delivered to the Subscription Agent pursuant to the
Notice of Guaranteed Delivery referred to above
or
[ ] is being delivered to the Subscription Agent herewith
or
[ ] has been delivered separately to the Subscription Agent;
________________________________________ ________________________________
Primary Subscription Confirmation Number Name of Nominee Holder
________________________________________ ________________________________
Depository Participant Number Address
________________________________________ ________________________________
Contact Name City State Zip Code
-2-
<PAGE> 3
Phone Number_______________________ By: _______________________________
Dated: ____________, 1998 Name: _____________________________
Title: ____________________________
PLEASE ATTACH A BENEFICIAL OWNER LISTING CONTAINING THE RECORD DATE POSITION OF
RIGHTS OWNED, THE NUMBER OF PRIMARY SHARES SUBSCRIBED AND THE NUMBER OF
OVER-SUBSCRIPTION SHARES, IF APPLICABLE, REQUESTED BY EACH SUCH OWNER.
PLEASE NOTE: THIS FORM WILL NOT BE ACCEPTED AS VALID UNLESS THE FOLLOWING
INFORMATION IS PROVIDED FOR THE ALLOCATION OF OVER-SUBSCRIPTION SHARES.
The positions below pertain to those persons on whose behalf the
Over-Subscription is being exercised:
_______________________________ Total number of record date shares
_______________________________ Total number of primary rights exercised
-3-
<PAGE> 1
Exhibit (d)(5)
BENEFICIAL OWNER LISTING CERTIFICATION
Colonial Intermediate High Income Fund Rights Offering
The undersigned, a bank, broker or other nominee holder of rights
("Rights") to purchase shares of beneficial interest, no par value (the
"Shares"), of Colonial Intermediate High Income Fund (the "Fund") pursuant to
the Rights Offering (the "Offer") described and provided for in the Fund's
Prospectus dated May 19, 1998 (the "Prospectus"), hereby certifies to the Fund
and to First Data Investor Services Group, Inc., as Subscription Agent for such
Offer, that for each numbered line filled in below, the undersigned has
exercised, on behalf of the beneficial owner thereof (which may be the
undersigned), the number of Rights specified on such line pursuant to the
Primary Subscription (as defined in the Prospectus) and such beneficial owner
wishes to subscribe for the purchase of additional Shares pursuant to the
Over-Subscription Privilege (as defined in the Prospectus), in the amount set
forth in the third column of such line.
<TABLE>
<CAPTION>
Number of Record Date NUMBER OF RIGHTS NUMBER OF SHARES
Shares Owned Exercised Pursuant to the Requested Pursuant to the
Primary Subscription Over-Subscription Privilege
<S> <C> <C>
1 ____________________ _________________________ ____________________________
2 ____________________ _________________________ ____________________________
3 ____________________ _________________________ ____________________________
4 ____________________ _________________________ ____________________________
5 ____________________ _________________________ ____________________________
6 ____________________ _________________________ ____________________________
7 ____________________ _________________________ ____________________________
8 ____________________ _________________________ ____________________________
9 ____________________ _________________________ ____________________________
10 ____________________ _________________________ ____________________________
_____________________________ vested
</TABLE>
<PAGE> 2
Name of Nominee Holder
By: _____________________________
Name: _______________________
Title: ______________________
Dated: ____________________, 1998
Provide the following information, if applicable:
_______________________________________ Name of Broker: ______________
Depository Trust Corporation ("DTC")
Participant Number
_______________________________________ Address: _____________________
DTC Primary Subscription Confirmation
Number(s)
-2-
<PAGE> 1
Exhibit (h)
COLONIAL INTERMEDIATE HIGH INCOME FUND
__________ Shares of Beneficial Interest
Issuable Upon Exercise of Transferable Rights
to Subscribe for such Shares
DEALER MANAGER AGREEMENT
New York, New York
________ __, 1998
PaineWebber Incorporated
1285 Avenue of the Americas
New York, New York 10019
Ladies and Gentlemen:
Each of Colonial Intermediate High Income Fund, a Massachusetts
business trust (the "Fund"), and Colonial Management Associates, Inc., a
Massachusetts corporation (the "Investment Adviser"), hereby confirms the
agreement with and appointment of PaineWebber Incorporated to act as dealer
manager (the "Dealer Manager") in connection with the issuance by the Fund to
the holders of record (the "Holders") at the close of business on the record
date set forth in the Prospectus (as defined herein) (the "Record Date") of
transferable rights entitling such Holders to subscribe for up to ________
shares (each a "Share" and, collectively, the "Shares") of the Fund's shares of
beneficial interest, without par value (the "Common Shares"), of the Fund (the
"Offer"). Pursuant to the terms of the Offer, the Fund is issuing each Holder
one transfer able right (each a "Right" and, collectively, the "Rights") for
each Common Share held by such Holder on the Record Date. Such Rights entitle
holders to acquire during the subscription period set forth in the Prospectus
(the "Subscription Period"), at the price set forth in such Prospectus (the
"Subscription Price"), one Share for each _____ Rights exercised (except that
any Holder who is issued fewer than _____ Rights will be able to subscribe for
one full Share pursuant to the primary subscription), on the terms and
conditions set forth in such Prospectus. No fractional shares will be issued.
Any
<PAGE> 2
Holder who fully exercises all Rights initially issued to such Holder (other
than those Rights that cannot be exercised because they represent the right to
acquire less than one Share) will be entitled to subscribe for, subject to
allocation, additional Shares (the "Over-Subscription Privilege") on the terms
and conditions set forth in the Prospectus. The Rights are transferable and are
expected to be listed on the New York Stock Exchange, Inc. under the symbol
"CIF.RT".
The Fund has filed with the Securities and Exchange Commission
(the "Commission") a registration statement on Form N-2 (Nos. 333-50141 and
811-05567) and a related preliminary prospectus and preliminary statement of
additional information under the Investment Company Act of 1940, as amended (the
"Investment Company Act"), the Securities Act of 1933, as amended (the
"Securities Act"), and the rules and regulations of the Commission under the
Investment Company Act and the Securities Act (the "Rules and Regulations"), and
has filed such amendments to such registration statement on Form N-2, if any,
and such amended preliminary prospectuses and preliminary statements of
additional information as may have been required to the date hereof. If the
registration statement has not become effective, a further amendment to such
registration statement, including forms of a final prospectus and final
statement of additional information necessary to permit such registration
statement to become effective will promptly be filed by the Fund with the
Commission. If the registration statement has become effective and any
prospectus or statement of additional information contained therein omits
certain information at the time of effectiveness pursuant to Rule 430A of the
Rules and Regulations, a final prospectus and final statement of additional
information containing such omitted information will promptly be filed by the
Fund with the Commission in accordance with Rule 497(h) of the Rules and
Regulations. The term "Registration Statement" means the registration statement,
as amended, at the time it becomes or became effective, including financial
statements and all exhibits and all documents, if any, incorporated therein by
reference, and any information deemed to be included by Rule 430A. The term
"Prospectus" means the final prospectus and final statement of additional
information in the forms filed with the Commission pursuant to Rule 497(c), (e),
(h) or (j) of the Rules and Regulations, as the case may be, as from time to
time amended or supplemented pursuant to the Securities Act.
2
<PAGE> 3
The Prospectus and letters to beneficial owners of Common Shares of the Fund,
subscription certificates and other forms used to exercise rights, brochures,
wrappers, any letters from the Fund to securities dealers, commercial banks and
other nominees and any newspaper announcements, press releases and other
offering materials and information that the Fund may use, approve, prepare or
authorize for use in connection with the Offer, are collectively referred to
hereinafter as the "Offering Materials".
1. Representations and Warranties.
a. Each of the Fund and the Investment Adviser represents and
warrants to, and agrees with, the Dealer Manager as of the
date hereof, as of the date of the commencement of the Offer
(such later date being hereinafter referred to as the
"Representation Date") and as of the Expiration Date (as
defined below) that:
i. the Fund meets the requirements for use of Form N-2
under the Securities Act and the Investment Company Act
and the Rules and Regulations. At the time the
Registration Statement became or becomes effective, the
Registration Statement did or will contain all
statements required to be stated therein in accordance
with and did or will comply in all material respects
with the requirements of the Securities Act, the
Investment Company Act and the Rules and Regulations
and did not or will not contain an untrue statement of
a material fact or omit to state any material fact
required to be stated therein or necessary to make the
statements therein not misleading. From the time the
Registration Statement became or becomes effective
through the expiration date of the Offer set forth in
the Prospectus (the "Expiration Date"), the Prospectus
and the other Offering Materials will not contain an
untrue statement of a material fact or omit to state
any material fact required to be stated therein or
necessary in order to make the statements therein, in
the light of the circumstances under which they were
made, not misleading; provided, however, that the
representations and warranties in this subsection
shall not apply to statements in or omissions from
the Registration Statement, Prospectus or Offering
Materials made in reliance upon and in conformity with
information furnished to the Fund in writing by the
Dealer Manager expressly for use in the Registration
Statement, Prospectus or Offering Materials.
3
<PAGE> 4
ii. the Fund has been duly organized and is validly
existing as a Massachusetts business trust in good
standing under the laws of the Commonwealth of
Massachusetts, has full power and authority (corporate
and other) to conduct its business as described in the
Registration Statement and the Prospectus, currently
maintains all governmental licenses, permits, consents,
orders, approvals, and other authorizations
(collectively, the "Licenses and Permits") necessary to
carry on its business as contemplated in the
Prospectus, and is duly qualified to do business in
each jurisdiction wherein it owns or leases real
property or in which the conduct of its business
requires such qualification, except where the failure
to be so qualified does not involve a material adverse
effect upon the Fund's business, properties, financial
position or results of operations. The Fund has no
subsidiaries.
iii. the Fund is duly registered with the Commission under
the Investment Company Act as a closed-end, diversified
management investment company, no order of suspension
or revocation of such registration has been issued or
proceedings therefor initiated or, to the knowledge of
the Fund or the Investment Adviser, threatened by the
Commission, all required action has been taken under
the Securities Act, the Investment Company Act and any
state securities laws to make the public offering and
consummate the issuance of the Rights and the issuance
and sale of the Shares by the Fund upon exercise of the
Rights, and the provisions of the Fund's declaration of
trust and by-laws comply as to form in all material
respects with the requirements of the Investment
Company Act and the rules and regulations thereunder.
iv. Price Waterhouse LLP, the accountants who certified the
financial statements of the Fund set forth or
incorporated by reference in the Registration Statement
and the Prospectus, are independent public accountants
as required by the Investment Company Act and the Rules
and Regulations.
4
<PAGE> 5
v. the financial statements of the Fund set forth or
incorporated by reference in the Registration Statement
and the Prospectus present fairly in all material
respects the financial condition of the Fund as of the
dates or for the periods indicated in conformity with
generally accepted accounting principles applied on a
consistent basis; and the information set forth in the
Prospectus under the headings "Fee Table" and
"Financial Highlights" presents fairly in all material
respects the information stated therein.
vi. the Fund has an authorized capitalization as set forth
in the Prospectus; the outstanding Common Shares have
been duly authorized and are validly issued, fully
paid and non-assessable and conform in all material
respects to the description thereof in the Prospectus
under the heading "Description of Shares of Beneficial
Interest"; the Rights have been duly authorized by all
requisite action on the part of the Fund for issuance
pursuant to the Offer; the Shares have been duly
authorized by all requisite action on the part of the
Fund for issuance and sale pursuant to the terms of the
Offer and, when issued and delivered by the Fund
pursuant to the terms of the Offer against payment of
the consideration set forth in the Prospectus, will be
validly issued, fully paid and non-assessable; the
Shares and the Rights conform in all material respects
to all statements relating thereto contained in the
Registration Statement, the Prospectus and the other
Offering Materials; and the issuance of each of the
Rights and the Shares is not subject to any preemptive
rights.
vii. the Fund has authorized the presently outstanding debt
leverage set forth in the Prospectus; the outstanding
Term Note with Bank of America Illinois, due June 14,
1999 (the "Note"), has been duly authorized and
conforms in all material respects to the description
thereof in the Prospectus under the heading
"Description of Term Note".
viii. except as set forth in the Prospectus, subsequent to
the respective dates as of which information is given
in the Registration Statement and the Prospectus, (A)
the Fund has not incurred any liabilities or
obligations, direct or contingent, or entered into any
transactions, other than in the ordinary course of
business, that
5
<PAGE> 6
are material to the Fund, (B) there has not been any
material change in the Common Shares or long-term
debt of the Fund, or any material adverse change, or
any development involving a prospective material
adverse change, in the condition (financial or
other), business, prospects, net worth or results of
operations of the Fund (excluding fluctuations in the
Fund's net asset value due to investment activities
in the ordinary course of business) and (C) except
for the regular monthly dividend on the outstanding
Common Shares, there have been no dividends or
distributions paid or declared in respect of the
Fund's common shares.
ix. each of this agreement (the "Agreement"), the
Subscription Agency Agreement (the "Subscription Agency
Agreement") dated as of May __, 1998 between the Fund
and First Data Investor Services Group, Inc. (the
"Subscription Agent"), the Information Agent Agreement
(the "Information Agent Agreement") dated as of May __,
1998 between the Fund and Shareholder Communications
Corporation (the "Information Agent"), the Management
Agreement dated as of March 27, 1995 between the Fund
and the Investment Adviser (the "Management
Agreement"), the Pricing and Bookkeeping Agreement
dated as of November 1, 1991 between the Fund and the
Investment Adviser (the "Bookkeeping Agreement"), the
Global Custody Agreement dated as of August 17, 1997
between the Fund, The Chase Manhattan Bank and the
other parties thereto (the "Custodian Agreement"), the
Transfer Agency and Registrar Agreement dated as of
July 18, 1988 between the Fund and First Data Investor
Services Group, Inc., as successor to Boston Safe
Deposit and Trust Company (the "Transfer Agency
Agreement"), the Credit Agreement dated as of June 12,
1996 between the Fund and Bank of America Illinois (the
"Credit Agreement") and the Note dated as of June 14,
1996 between the Fund and Bank of America Illinois
(collectively, all the foregoing are the "Fund
Agreements"), has been duly authorized, executed and
delivered by the Fund; each of the Fund Agreements
complies with all applicable provisions of the
Investment Company Act, the Investment Advisers Act of
1940, as amended (the "Advisers Act") and the rules and
regulations under such Acts; and, assuming due
authorization, execution and delivery by the other
parties thereto, each of the Fund Agreements
constitutes a legal, valid,
6
<PAGE> 7
binding and enforceable obligation of the Fund,
subject to the qualification that the enforceability
of the Fund'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).
x. neither the issuance of the Rights, nor the issuance
and sale of the Shares, nor the execution, delivery,
performance and consummation by the Fund of any other
of the transactions contemplated in the Fund
Agreements, or any sub-custodial arrangements entered
into pursuant to the Custodian Agreement, nor the
consummation of the transactions contemplated therein
or in the Registration Statement nor the fulfillment of
the terms thereof will conflict with or violate the
declaration of trust, by-laws or similar organizational
documents of the Fund, or conflict with, result in a
breach or violation of, or constitute a default or an
event of default under, or result in the creation or
imposition of any lien, charge or encumbrance upon any
properties or assets of the Fund under the declaration
of trust, by-laws or similar organizational documents
of the Fund, or the terms and provisions of any
agreement, indenture, mortgage, loan agreement, note,
insurance or surety agreement, lease or other
instrument to which the Fund is a party or by which it
may be bound or to which any of the property or assets
of the Fund is subject, nor will such action result in
any violation of any order, law, rule or regulation of
any court or governmental agency or body having
jurisdiction over the Fund or any of its properties.
xi. except as set forth in the Registration Statement and
the Prospectus, there is no pending or, to the
knowledge of the Fund or the Investment Adviser,
threatened action, suit or proceeding affecting the
Fund or to which the Fund is a party before or by any
court or governmental agency, authority or body or any
arbitrator which might result in any material adverse
change in the condition (financial or other), business
prospects, net worth or operations of the Fund, or
which might materially and adversely
7
<PAGE> 8
affect the properties or assets thereof of a character
required to be disclosed in the Registration Statement
or the Prospectus.
xii. there are no franchises, contracts or other documents
of the Fund required to be described in the
Registration Statement or the Prospectus, or to be
filed or incorporated by reference as exhibits which
are not described or filed or incorporated by reference
therein as permitted by the Securities Act, the
Investment Company Act or the Rules and Regulations.
xiii. no consent, approval, authorization, notification or
order of, or filing with, any court or governmental
agency or body is required for the consummation by the
Fund of the transactions contemplated by the Fund
Agreements or the Registration Statement, except (a)
such as have been obtained, or (b) if the registration
statement filed with respect to the Shares is not
effective under the Securities Act as of the time of
execution hereof, such as may be required (and shall be
obtained as provided in this Agreement) under the
Investment Company Act, the Securities Act, the
Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and state securities laws, or (c)
where the failure to obtain such consent, approval,
authorization, notification, or order or to make such
filing would not have a material adverse effect upon
the Fund's business, properties, financial position or
operations.
xiv. the Common Shares have been duly listed on the New York
Stock Exchange, Inc. and prior to their issuance the
Shares and the Rights will have been duly approved for
listing, subject to official notice of issuance, on the
New York Stock Exchange, Inc.
xv. the Fund (A) has not taken, directly or indirectly, any
action designed to cause or to result in, or that has
constituted or which might reasonably be expected to
constitute, the stabilization or manipulation of the
price of any security of the Fund to facilitate the
issuance of the Rights or the sale or resale of the
Rights and the Shares, (B) has not since the filing of
the Registration Statement sold, bid for or purchased,
or paid anyone any
8
<PAGE> 9
compensation for soliciting purchases of, Common
Shares of the Fund (except for the solicitation of
exercises of the Rights pursuant to this Agreement)
and (C) will not, until the later of the expiration
of the Rights or the completion of the distribution
(within the meaning of the anti-manipulation rules
under the Exchange Act) of the Shares, sell, bid for
or purchase, pay or agree to pay to any person any
compensation for soliciting another to purchase any
other securities of the Fund (except for the
solicitation of exercises of the Rights pursuant to
this Agreement); provided that any action in
connection with the Fund's dividend reinvestment plan
will not be deemed to be within the terms of this
Section 1.a.xv.
xvi. the Fund has complied in all previous tax years, and
intends to direct the investment of the proceeds of the
offering described in the Registration Statement and
the Prospectus in such a manner as to continue to
comply, with the requirements of Subchapter M of the
Internal Revenue Code of 1986, as amended ("Subchapter
M of the Code"), and has qualified and intends to
continue to qualify as a regulated investment company
under Subchapter M of the Code.
xvii. the Fund has complied in all previous years, and
intends to direct the investment of the proceeds of the
offering described in the Registration Statement and
the Prospectus in such a manner as to continue to
comply, with the diversification, liquidity, investment
guidelines and asset coverage requirements, if any, of
the Credit Agreement (for so long as any guidelines or
requirements of such Credit Agreement remain in effect)
and the Investment Company Act.
b. The Investment Adviser represents and warrants to, and agrees
with, the Dealer Manager as of the date hereof, as of the
Representation Date and as of the Expiration Date that:
i. the Investment Adviser has been duly incorporated and
is validly existing as a corporation in good standing
under the laws of the Commonwealth of Massachusetts,
has full power and authority (corporate and other) to
own its properties and conduct its busi-
9
<PAGE> 10
ness as described in the Registration Statement and
the Prospectus, currently maintains all governmental
licenses, permits, consents, orders, approvals and
other authorizations to conduct its business and to
enable the Investment Adviser to continue to
supervise investments in securities as contemplated
in the Prospectus and is duly qualified to do
business as a foreign corporation in each
jurisdiction wherein it owns or leases real property
or in which the conduct of its business requires such
qualification, except where the failure to be so
qualified does not involve a material adverse effect
upon the Investment Adviser's business, properties,
financial position or operations.
ii. the Investment Adviser is duly registered as an
investment adviser under the Advisers Act, and is not
prohibited by the Advisers Act or the Investment
Company Act, or the rules and regulations under such
Acts, from acting as an investment adviser for the Fund
as contemplated in the Prospectus and the Investment
Management Agreement.
iii. each of this Agreement, the Management Agreement and
any other Fund Agreement to which the Investment
Adviser is a party has been duly authorized, executed
and delivered by the Investment Adviser, and complies
with all applicable provisions of the Investment
Company Act, the Advisers Act and the rules and
regulations under such Acts, and is, assuming due
authorization, execution and delivery by the other
parties thereto, a legal, valid, binding and
enforceable obligation of the Investment Adviser,
subject to the qualification that the enforceability of
the Investment Adviser'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).
iv. neither the execution, delivery, performance and
consummation by the Investment Adviser of its
obligations under this Agreement, the Management
Agreement or any other Fund Agreement to which the
Investment Adviser is a party nor the
10
<PAGE> 11
consummation of the transactions contemplated therein
or in the Registration Statement nor the fulfillment
of the terms thereof will conflict with or violate
the charter, by-laws or similar organizational
documents of the Investment Adviser, or conflict
with, result in a breach or violation of, or
constitute a default or an event of default under, or
result in the creation or imposition of any lien,
charge or encumbrance upon any properties or assets
of the Investment Adviser under the charter, bylaws
or similar organizational document, the terms and
provisions of any agreement, indenture, mortgage,
loan agreement, note, insurance or surety agreement,
lease or other instrument to which the Investment
Adviser is a party or by which it may be bound or to
which any of the property or assets of the Investment
Adviser is subject, nor will such action result in
any violation of any order, law, rule or regulation
of any court or governmental agency or body having
jurisdiction over the Investment Adviser or any of
its properties.
v. except as set forth in the Registration Statement and
Prospectus, there is no pending or, to the knowledge of
the Investment Adviser, threatened action, suit or
proceeding affecting the Investment Adviser or to which
the Investment Adviser is a party before or by any
court or governmental agency, authority or body or any
arbitrator which might result in any material adverse
change in the Investment Adviser's condition (financial
or other), business prospects, net worth or operations,
or which might materially and adversely affect the
properties or assets thereof of a character required to
be disclosed in the Registration Statement or
Prospectus.
vi. no consent, approval, authorization, notification or
order of, or filing with, any court or governmental
agency or body is required for the consummation by the
Investment Adviser of the transactions contemplated by
this Agreement, the Management Agreement or any other
Fund Agreement to which the Investment Adviser is a
party, except where the failure to obtain such consent,
approval, authorization, notification, or order, or
make such filing would not have a material adverse
effect on the
11
<PAGE> 12
Investment Adviser's business, properties, financial
position, or operations.
vii. the Investment Adviser (A) has not taken, directly or
indirectly, any action designed to cause or to result
in, or that has constituted or which might reasonably
be expected to constitute, the stabilization or
manipulation of the price of any security of the Fund
to facilitate the issuance of the Rights or the sale or
resale of the Rights and the Shares, (B) has not since
the filing of the Registration Statement sold, bid for
or purchased, or paid anyone any compensation for
soliciting purchases of, Common Shares of the Fund
(except for the solicitation of exercises of the Rights
pursuant to this Agreement) and (C) will not, until the
later of the expiration of the Rights or the completion
of the distribution (within the meaning of the
anti-manipulation rules under the Exchange Act) of the
Shares, sell, bid for or purchase, pay or agree to pay
any person any compensation for soliciting another to
purchase any other securities of the Fund (except for
the solicitation of exercises of the Rights pursuant to
this Agreement); provided that any action in
connection with the Fund's dividend reinvestment plan
will not be deemed to be within the terms of this
Section 1.b.vii.
c. Any certificate required by this Agreement that is signed by
any officer of the Fund, or the Investment Adviser and
delivered to the Dealer Manager or counsel for the Dealer
Manager shall be deemed a representation and warranty by the
Fund or the Investment Adviser, as the case may be, to the
Dealer Manager, as to the matters covered thereby.
2. Agreement to Act as Dealer Manager.
a. On the basis of the representations and warranties contained
herein, and subject to the terms and conditions of the Offer:
i. The Fund hereby appoints the Dealer Manager to solicit
the exercise of Rights and authorizes the Dealer
Manager to sell Shares purchased by the Dealer Manager
from the Fund though the exercise of Rights as
described herein; the Fund hereby authorizes the Dealer
Manager to form and manage a group of
12
<PAGE> 13
selling broker-dealers (each a "Selling Group Member"
and collectively the "Selling Group") that enter into
a Selling Group Agreement with the Dealer Manager in
the form attached hereto as Exhibit A to solicit the
exercise of Rights and to sell Shares purchased by
the Selling Group Member from the Dealer Manager as
described herein; and the Fund hereby authorizes
other soliciting broker-dealers (each a "Soliciting
Dealer" and collectively the "Soliciting Dealers")
that enter into a Soliciting Dealer Agreement with
the Dealer Manager in the form attached hereto as
Exhibit B to solicit the exercise of Rights. The
Dealer Manager hereby agrees to solicit the exercise
of Rights in accordance with the Securities Act, the
Investment Company Act and the Exchange Act, and its
customary practice subject to the terms and
conditions of this Agreement, the procedures
described in the Registration Statement, the
Prospectus and, where applicable, the terms and
conditions of such Selling Group Agreement or
Soliciting Dealer Agreement; and the Dealer Manager
hereby agrees to form and manage the Selling Group to
solicit the exercise of Rights and to sell Shares to
the Selling Group purchased by the Dealer Manager
from the Fund through the exercise of Rights as
described herein in accordance with the Securities
Act, the Investment Company Act and the Exchange Act,
and its customary practice subject to the terms and
conditions of this Agreement, the procedures
described in the Registration Statement, the
Prospectus and, where applicable, the terms and
conditions of the Selling Group Agreement.
ii. The Fund hereby authorizes the Dealer Manager to buy
and exercise Rights, including unexercised Rights
delivered to the Subscription Agent for resale and
Rights of "Foreign Record Date Shareholders" (as
defined in the Prospectus) held by the Subscription
Agent for which no instructions are received, on the
terms and conditions set forth in such Prospectus, and
to sell Shares to the public or to Selling Group
Members at the offering price set by the Dealer Manager
from time to time. Sales of Shares by the Dealer
Manager or Selling Group Members shall not be at a
price higher than the offering price set by the Dealer
Manager from time to time.
13
<PAGE> 14
b. The Fund agrees to furnish, or cause to be furnished, to the
Dealer Manager, lists, or copies of those lists, showing the
names and addresses of, and number of Common Shares held by,
Holders as of the Record Date, and the Dealer Manager agrees
to use such information only in connection with the Offer, and
not to furnish the information to any other person except for
securities brokers and dealers that have been requested by
the Dealer Manager to solicit exercises of Rights.
c. The Dealer Manager agrees to provide to the Fund, in addition
to the services described in paragraph 2.a., financial
advisory and marketing services in connection with the Offer.
No advisory fee, other than the fees provided for in Section 3
of this Agreement and the reimbursement of the Dealer
Manager's out-of-pocket expenses as described in Section 5 of
this Agreement, will be payable by the Fund, or any other
party hereto, to the Dealer Manager in connection with the
financial advisory and marketing services provided by the
Dealer Manager pursuant to this Section 2.c.
d. The Fund and the Dealer Manager agree that the Dealer Manager
is an independent contractor with respect to the solicitation
of the exercise of Rights and the performance of financial
advisory and marketing services for the Fund contemplated by
this Agreement.
e. In rendering the services contemplated by this Agreement, the
Dealer Manager will not be subject to any liability to the
Fund or the Investment Adviser or any of their affiliates, for
any act or omission on the part of any soliciting broker or
dealer (except with respect to the Dealer Manager acting in
such capacity) or any other person, and the Dealer Manager
will not be liable for acts or omissions in performing its
obligations under this Agreement, except for any losses,
claims, damages, liabilities and expenses that are finally
judicially determined to have resulted primarily from the bad
faith, willful misconduct or gross negligence of the Dealer
Manager or by reason of the reckless disregard of the
obligations and duties of the Dealer Manager under this
Agreement.
3. Dealer Manager Fees. In full payment for the financial advisory,
marketing and soliciting services rendered and to be rendered hereunder
by the Dealer Manager, the Fund agrees to pay the Dealer Manager a fee
(the "Dealer Manager Fee") equal to 3.75% of the aggregate Subscription
Price for the
14
<PAGE> 15
Shares issued pursuant to the exercise of Rights and the
Over-Subscription Privilege. In full payment for the soliciting efforts
to be rendered, the Dealer Manager agrees to reallow selling fees (the
"Selling Fees") to Selling Group Members equal to 2.50% of the
Subscription Price per Share for each Share issued pursuant to either
(a) the exercise of Rights and the Over-Subscription Privilege where
such Selling Group Member is so designated on the subscription form or
(b) the purchase for resale from the Dealer Manager in accordance with
the Selling Group Agreement. In full payment for the soliciting efforts
to be rendered, the Dealer Manager agrees to reallow soliciting fees
(the "Soliciting Fees") to Soliciting Dealers equal to 0.50% of the
Subscription Price per Share for each Share issued pursuant to the
exercise of Rights and the Over-Subscription Privilege where such
Soliciting Dealer is so designated on the subscription form, subject to
a maximum fee based on the number of Common Shares held by such
Soliciting Dealer through The Depository Trust Company ("DTC") on the
Record Date. The Dealer Manager agrees to pay the Selling Fees or
Solicitation Fees, as the case may be, to the broker-dealer designated
on the applicable portion of the form used by the holder to exercise
Rights and the Over- Subscription Privilege, and if no broker-dealer is
so designated or a broker-dealer is otherwise not entitled to receive
compensation pursuant to the terms of the Selling Group Agreement or
Soliciting Dealer Agreement, then the Dealer Manager shall retain such
Selling Fee or Solicitation Fee for Shares issued pursuant to the
exercise of Rights and the Over-Subscription Privilege. Payment to the
Dealer Manager by the Fund will be in the form of a wire transfer of
same day funds to an account or accounts identified by the Dealer
Manager. Such payment will be made on each date on which the Fund
issues Shares after the Expiration Date. Payment to a Selling Group
Member or Soliciting Dealer will be made by the Dealer Manager directly
to such Selling Group Member by check to an address identified by such
broker-dealer. Such payments shall be made on or before the tenth
business day following the day the Fund issues Shares after the
Expiration Date.
4. Other Agreements.
a. The Fund covenants with the Dealer Manager as follows:
i. The Fund will use its best efforts to cause the
Registration Statement to become effective and
maintain its effectiveness under the Securities Act,
and will advise the Dealer Manager promptly as to the
time at which the Registration Statement and any
15
<PAGE> 16
amendments thereto (including any post-effective
amendment) becomes so effective.
ii. The Fund will notify the Dealer Manager immediately (A)
of the effectiveness of the Registration Statement and
any amendment thereto (including any post-effective
amendment), (B) of the receipt of any comments from
the Commission, (C) of any request by the Commission
for any amendment to the Registration Statement or any
amendment or supplement to the Prospectus or for
additional information, (D) of the issuance by the
Commission of any stop order suspending the
effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose, and (E)
of the suspension of the qualification of the Shares or
the Rights for offering or sale in any jurisdiction.
The Fund will make every reasonable effort to prevent
the issuance of any stop order described in subsection
(D) hereunder and, if any such stop order is issued, to
obtain the lifting thereof at the earliest possible
moment.
iii. The Fund will give the Dealer Manager notice of its
intention to file any amendment to the Registration
Statement (including any post-effective amendment) or
any amendment or supplement to the Prospectus
(including any revised prospectus which the Fund
proposes for use by the Dealer Manager in connection
with the Offer, which differs from the prospectus on
file at the Commission at the time the Registration
Statement becomes effective, whether or not such
revised prospectus is required to be filed pursuant to
Rule 497(c), (e) or Rule 497(h) of the Rules and
Regulations), whether pursuant to the Investment
Company Act, the Securities Act, or otherwise, and will
furnish the Dealer Manager with copies of any such
amendment or supplement a reasonable amount of time
prior to such proposed filing or use, as the case may
be, and will not file any such amendment or supplement
to which the Dealer Manager or counsel for the Dealer
Manager shall reasonably object.
iv. The Fund will, without charge, deliver to the Dealer
Manager, as soon as practicable, the number of copies
(one of which is manually executed) of the Registration
Statement as originally
16
<PAGE> 17
filed and of each amendment thereto as it may
reasonably request, in each case with the exhibits
filed therewith.
v. The Fund will, without charge, furnish to the Dealer
Manager, from time to time during the period when the
Prospectus is required to be delivered under the
Securities Act, such number of copies of the Prospectus
(as amended or supplemented) as the Dealer Manager may
reasonably request for the purposes contemplated by the
Securities Act or the Rules and Regulations.
vi. If any event shall occur as a result of which it is
necessary, in the reasonable opinion of counsel for the
Dealer Manager, to amend or supplement the Registration
Statement or the Prospectus in order to make the
Prospectus not misleading in the light of the
circumstances existing at the time it is delivered to a
Holder, the Fund will forthwith amend or supplement the
Prospectus by preparing and filing with the Commission
(and furnishing to the Dealer Manager a reasonable
number of copies of) an amendment or amendments of the
Registration Statement or an amendment or amendments of
or a supplement or supplements to the Prospectus (in
form and substance satisfactory to counsel for the
Dealer Manager), at the Fund's expense, which will
amend or supplement the Registration Statement or the
Prospectus so that the Prospectus will not contain an
untrue statement of a material fact or omit to state a
material fact required to be stated therein or
necessary in order to make the statements therein, in
the light of the circumstances existing at the time the
Prospectus is delivered to a Holder, not misleading.
vii. The Fund will endeavor, in cooperation with the Dealer
Manager and its counsel, to qualify the Rights and the
Shares for offering and sale under the applicable
securities laws of such states and other jurisdictions
of the United States as the Dealer Manager may
designate and maintain such qualifications in effect
for the duration of the Offer; provided, however, that
the Fund will not be obligated to file any general
consent to service of process, or to qualify as a
foreign corporation or as a dealer in securities in any
jurisdiction in which it is not now so qualified. The
Fund will file such statements and reports as may be
required by the
17
<PAGE> 18
laws of each jurisdiction in which the Rights and the
Shares have been qualified as above provided.
viii. The Fund will make generally available to its security
holders as soon as practicable, but no later than 60
days after the end of the Fund's fiscal semi-annual or
fiscal year-end period covered there by, an earnings
statement (which need not be audited) (in form
complying with the provisions of Rule 158 of the Rules
and Regulations of the Securities Act) covering a
twelve-month period beginning not later than the first
day of the Fund's fiscal semi-annual period next
following the "effective" date (as defined in said Rule
158) of the Registration Statement.
ix. For a period of 180 days from the date of this
Agreement, the Fund will not, without the prior consent
of the Dealer Manager, offer or sell, or enter into any
agreement to sell, any equity or equity related
securities of the Fund or securities convertible into
such securities, other than the Rights and the Shares
and the Common Shares issued in reinvestment of
dividends or distributions.
x. The Fund will use the net proceeds from the Offer as
set forth under "Use of Proceeds" in the Prospectus.
xi. The Fund will use its best efforts to cause the Rights
and the Shares to be duly authorized for listing by the
New York Stock Exchange, Inc. prior to the time the
Shares are issued.
xii. The Fund will use its best efforts to maintain its
qualification as a regulated investment company under
Subchapter M of the Code.
xiii. The Fund will use its best efforts to apply the net
proceeds from the Offer consistent with the
diversification, liquidity, investment guidelines and
asset coverage requirements, if any, of the
Prospectus, Credit Agreement (for so long as any
guidelines or requirements of such Credit Agreement
remains in effect) and the Investment Company Act.
18
<PAGE> 19
xiv. The Fund will advise or cause the Subscription Agent
(A) to advise the Dealer Manager and, only where
specifically noted, each Selling Group Member who
specifically requests, from day to day during the
period of, and promptly after the termination of, the
Offer, as to the names and addresses of all Holders
exercising Rights, the total number of Rights exercised
by each Holder during the immediately preceding day,
indicating the total number of Rights verified to be in
proper form for exercise, rejected for exercise and
being processed and, for the Dealer Manager and each
Selling Group Member, the number of Rights exercised on
subscription certificates indicating the Dealer Manager
or such Selling Group Member, as the case may be, as
the broker-dealer with respect to such exercise, and as
to such other information as the Dealer Manager may
reasonably request; and will notify the Dealer Manager
and each Selling Group Member, not later than 5:00
P.M., New York City time, on the first business day
following the Expiration Date, of the total number of
Rights exercised and Shares related thereto, the total
number of Rights verified to be in proper form for
exercise, rejected for exercise and being processed
and, for the Dealer Manager and each Selling Group
Member, the number of Rights exercised on subscription
certificates indicating the Dealer Manager or such
Selling Group Member, as the case may be, as the
broker-dealer with respect to such exercise, and as to
such other information as the Dealer Manager may
reasonably request; (B) to sell any Rights received for
resale from Holders exclusively to or through the
Dealer Manager, which may, at its election, purchase
such Rights as principal or act as agent for the resale
thereof; and (C) to issue Shares upon the Dealer
Manager's exercise of Rights no later than the close of
business on the business day following the day that
full payment for such Shares has been received by the
Subscription Agent.
b. Neither the Fund nor the Investment Adviser will take,
directly or indirectly, any action designed to cause or to
result in, or that has constituted or which might reasonably
be expected to constitute, the stabilization or manipulation
of the price of any security of the Fund to facilitate the
issuance of the Rights or the sale or resale of the Rights or
the Shares; provided that any action in connection with the
Fund's dividend rein-
19
<PAGE> 20
vestment plan will not be deemed to be within the meaning of
this Section 4.b.
5. Payment of Expenses.
a. The Fund will pay all expenses incident to the performance of
its obligations under this Agreement, including, but not
limited to, expenses relating to (i) the printing and filing
of the Registration Statement as originally filed and of each
amendment thereto, (ii) the preparation, issuance and delivery
of the certificates for the Shares and subscription
certificates relating to the Rights, (iii) the fees and
disbursements of the Fund's counsel (including the fees and
disbursements of local counsel) and accountants, (iv) the
qualification of the Rights and the Shares under securities
laws in accordance with the provisions of Section 4.a.vii. of
this Agreement, including filing fees, (v) the printing or
other production and delivery to the Dealer Manager of copies
of the Registration Statement as originally filed and of each
amendment thereto and of the Prospectus and any amendments or
supplements thereto, (vi) the fees and expenses incurred with
respect to filing with the National Association of Securities
Dealers, Inc., (vii) the fees and expenses incurred in
connection with the listing of the Shares on the New York
Stock Exchange, Inc., (viii) the printing or other production,
mailing and delivery expenses incurred in connection with
Offering Materials and (ix) the fees and expenses incurred
with respect to the Subscription Agent and the Information
Agent.
b. In addition to any fees that may be payable to the Dealer
Manager under this Agreement, the Fund agrees to reimburse the
Dealer Manager upon request made from time to time for its
reasonable expenses incurred in connection with its activities
under this Agreement, including the reason able fees and
disbursements of its legal counsel (excluding Blue Sky filing
fees which are paid directly by the Fund), in an amount up to
$100,000.
c. If this Agreement is terminated by the Dealer Manager in
accordance with the provisions of Section 6 or Section 9.a.i.,
9.a.ii. or 9.a.iii., the Fund agrees to reimburse the Dealer
Manager for all of its reasonable out-of-pocket expenses
incurred in connection with its performance hereunder,
including the reasonable fees and disbursements of counsel
20
<PAGE> 21
for the Dealer Manager. In the event the transactions
contemplated hereunder are not consummated, the Fund agrees to
pay all of the costs and expenses set forth in paragraphs 5.a.
and 5.b. which the Fund would have paid if such transactions
had been consummated.
6. Conditions of the Dealer Manager's Obligations. The obligations of the
Dealer Manager hereunder are subject to the accuracy of the respective
representations and warranties of the Fund and the Investment Adviser
contained herein, to the performance by the Fund and the Investment
Adviser of their respective obligations hereunder, and to the
following further conditions:
a. The Registration Statement shall have become effective not
later than 5:30 P.M., New York City time, on the Record Date,
or at such later time and date as may be approved by the
Dealer Manager; the Prospectus and any amendment or
supplement thereto shall have been filed with the Commission
in the manner and within the time period required by Rule
497(c), (e), (h) or (j), as the case may be, under the
Securities Act; no stop order suspending the effectiveness of
the Registration Statement or any amendment thereto shall
have been issued, and no proceedings for that purpose shall
have been instituted or threatened or, to the knowledge of the
Fund, the Investment Adviser or the Dealer Manager, shall be
contemplated by the Commission; and the Fund shall have
complied with any request of the Commission for additional
information (to be included in the Registration Statement, the
Prospectus or other wise).
b. On the Representation Date and the Expiration Date, the Dealer
Manager shall have received:
i. The favorable opinions, dated the Representation Date
and the Expiration Date, of Ropes & Gray, counsel for
the Fund, in form and substance satisfactory to counsel
for the Dealer Manager to the effect that:
(1) the Fund has been duly organized and is validly
existing as a Massachusetts business trust in
good standing under the laws of the Commonwealth
of Massachusetts, has full power and authority
(corporate and other) to conduct its business as
described in the Registration Statement
21
<PAGE> 22
and the Prospectus, and to the knowledge of such
counsel, is duly qualified to do business under
the laws of each jurisdiction in which the Fund
has informed such counsel that it owns or leases
real property or in which it conducts material
operations.
(2) the Fund is duly registered with the Commission
under the Investment Company Act as a closed-end,
diversified management investment company and, to
the knowledge of such counsel after due inquiry,
no order of suspension or revocation of such
registration has been issued or proceedings
therefor initiated or threatened by the
Commission; all required action has been taken
under the Securities Act and the Investment
Company Act to make the public offering and
consummate the issuance of the Rights and the
issuance and sale of the Shares by the Fund upon
exercise of the Rights, and the provisions of the
Fund's declaration of trust and by-laws comply as
to form in all material respects with the
requirements of the Investment Company Act and
the rules and regulations thereunder.
(3) the Fund's authorized capitalization is as set
forth in the Prospectus; the outstanding Common
Shares have been duly authorized and are validly
issued, fully paid and (except as described in
the Prospectus under the caption "Shareholder
Liability") non-assessable and conform in all
material respects to the description thereof in
the Prospectus under the heading "Description of
Shares of Beneficial Interest"; the Rights have
been duly authorized by all requisite action on
the part of the Fund for issuance pursuant to the
Offer; the Shares have been duly authorized by
all requisite action on the part of the Fund for
issuance and sale pursuant to the terms of the
Offer and, when issued and delivered by the Fund
pursuant to the terms of the Offer against
payment of the consideration set forth in the
Prospectus, will be validly issued, fully paid
and non-assessable (except as described in the
Prospectus under the caption "Shareholder
Liability");
22
<PAGE> 23
the Shares and the Rights conform in all material
respects to all statements relating thereto
contained in the Registration Statement and the
Prospectus; and the issuance of each of the
Rights and the Shares is not subject to any
preemptive rights.
(4) the Fund has authorized the presently outstanding
debt leverage set forth in the Prospectus; the
outstanding Note has been duly authorized and
conforms in all material respects to the
description thereof in the Prospectus under the
heading "Description of Term Note".
(5) each of this Agreement, the Management Agreement,
the Custody Agreement and the Credit Agreement
complies with all applicable provisions of the
Investment Company Act, the Advisers Act and the
rules and regulations under such Acts; (except
that such counsel need express no opinion as to
the reasonableness or fairness of compensation
paid under such agreements) and, assuming due
authorization, execution and delivery by the
other parties thereto, each of this Agreement,
the Subscription Agent Agreement and the
Information Agent Agreement (except as to the
indemnification obligations contained in this
Agreement) constitutes a legal, valid, binding
and enforceable obligation of the Fund, subject
to the qualification that the enforceability of
the Fund'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).
(6) neither the issuance of the Rights, nor the
issuance and sale of the Shares, nor the
execution, delivery, performance and
consummation by the Fund of any other of the
transactions contemplated in this Agreement, the
Subscription Agent Agreement and the Information
Agent Agreement, nor the consummation of the
trans-
23
<PAGE> 24
actions contemplated therein or in the
Registration Statement nor the fulfillment of
the terms thereof will violate the declaration of
trust, bylaws or similar organizational documents
of the Fund, or will result in a breach or
violation of, or constitute a default or an event
of default under, or result in the creation or
imposition of any lien, charge or encumbrance
upon any properties or assets of the Fund under
the trust, by-laws or similar organizational
documents of the Fund, or the terms and
provisions of any agreement or other instrument
listed as an exhibit to the Registration
Statement, nor, to the knowledge of such counsel
after due inquiry, will such action result in any
violation of any order, law, rule or regulation
of any United States federal or Massachusetts
state court or governmental agency or body having
jurisdiction over the Fund or any of its
properties (except that such counsel need express
no opinion as to state securities or "blue sky"
laws of or as to compliance with the antifraud
provisions of federal and state securities laws).
(7) except as set forth in the Registration Statement
and Prospectus, to the knowledge of such counsel,
there is no pending or threatened action, suit or
proceeding affecting the Fund or to which the
Fund is a party before or by any court or
governmental agency, authority or body or any
arbitrator which might result in any material
adverse change in the condition (financial or
other), business prospects, net worth or
operations of the Fund, or which might materially
and adversely affect the properties or assets
thereof of a character required to be disclosed
in the Registration Statement or the Prospectus.
(8) to the knowledge of such counsel after due
inquiry, there are no franchises, contracts or
other documents of the Fund required to be
described in the Registration Statement or the
Prospectus, or to be filed or incorporated by
reference as exhibits which are not described or
filed or incorporated by reference therein as
permitted by the
24
<PAGE> 25
Securities Act, the Investment Company Act or the
Rules and Regulations.
(9) no consent, approval, authorization, notification
or order of, or filing with, any United States
federal or Massachusetts state court or
governmental agency or body is required for the
issuance of the Rights or the issuance and sale
of the Shares or performance by the Fund of this
Agreement and the Subscription Agent Agreement,
except (A) such as have been obtained and (B)
such as may be required under the blue sky laws
of any jurisdiction in connection with the
transactions contemplated hereby.
(10) the Common Shares have been duly listed on the
New York Stock Exchange, Inc. and the Shares and
the Rights have been duly approved for listing,
subject to official notice of issuance, on the
New York Stock Exchange, Inc.
(11) the Registration Statement is effective under the
Securities Act; any required filing of the
Prospectus or any supplement thereto pursuant to
Rule 497(c), (e), (h) or (j) required to be made
prior to the date hereof has been made in the
manner and within the time period required by
Rule 497(c), (e), (h) or (j), as the case may be;
to the knowledge of such counsel after due
inquiry no stop order suspending the
effectiveness of the Registration Statement has
been issued, and no proceedings for that purpose
have been instituted or threatened; and the
Registration Statement, the Prospectus and each
amendment thereof or supplement thereto (other
than the financial statements, schedules, the
notes thereto and the schedules and other
financial, economic and statistical data
contained or incorporated by reference therein or
omitted therefrom, as to which such counsel need
express no opinion) as of their respective
effective or issue date complied 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.
25
<PAGE> 26
(12) the statements in the Prospectus under the
heading "Federal Taxation" fairly present the
information disclosed therein in all material
respects.
In rendering such opinion, such counsel may rely as to
matters of fact, to the extent they deem proper, on
certificates of responsible officers of the Fund and
public officials.
Such counsel shall also have stated that, while they
have not themselves checked the accuracy and
completeness of or otherwise verified, and are not
passing upon and assume no responsibility for the
accuracy or completeness of, the statements contained
in the Registration Statement or the Prospectus, in the
course of their review and discussion of the contents
of the Registration Statement and Prospectus with
certain officers and employees of the Fund and its
independent accountants, no facts have come to their
attention which cause them to believe that the
Registration Statement, on the date it became
effective, contained any untrue statement of a
material fact or omitted to state any material fact
required to be stated therein or necessary to make the
statements contained therein not misleading or that the
Prospectus, as of its date and on the Representation
Date or the Expiration Date, as the case may be,
contained any untrue statement of a material fact or
omitted to state any material fact required to be
stated therein or necessary to make the statements
therein, in the light of the circumstances under which
they were made, not misleading. Such counsel need not
express any opinion as to the financial statements,
including the notes and schedules thereto, or any other
financial or accounting information set forth or
referred to in the Registration Statement or the
Prospectus.
ii. The favorable opinions, dated the Representation Date
and the Expiration Date, of Nancy L. Conlin, Senior
Vice President and General Counsel for the Investment
Adviser, in form and sub stance satisfactory to counsel
for the Dealer Manager to the effect that:
26
<PAGE> 27
(1) the Investment Adviser has been duly incorporated
and is validly existing as a corporation in good
standing under the laws of The Commonwealth of
Massachusetts, has full power and authority
(corporate and other) to own its properties and
conduct its business as described in the
Registration Statement and the Prospectus, to
such counsel's knowledge, currently maintains all
govern mental licenses, permits, consents,
orders, approvals, and other authorizations to
conduct its business and to enable the Investment
Adviser to continue to supervise investment in
securities as contemplated in the Prospectus, and
to such counsel's knowledge is duly qualified to
do business as a foreign corporation in each
jurisdiction wherein it owns or leases real
property or in which the conduct of its business
requires such qualification, except where the
failure to be so qualified does not involve a
material ad verse effect upon the Investment
Adviser's business, properties, financial
position or operations.
(2) the Investment Adviser is duly registered as an
investment adviser under the Advisers Act, and
is not prohibited by the Advisers Act or the
Investment Company Act, or the rules and
regulations under such Acts, from acting as an
investment adviser for the Fund as contemplated
in the Prospectus and the Investment Management
Agreement.
(3) each of this Agreement, the Investment Management
Agreement and any other Fund Agreement to which
the Investment Adviser is a party has been duly
authorized, executed and delivered by the
Investment Adviser, and is, assuming due
authorization, execution and delivery by the
other parties thereto, a legal, valid, binding
and enforceable obligation of the Investment
Adviser, subject to the qualification that the
enforceability of the Investment Adviser'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
27
<PAGE> 28
(regardless of whether enforceability is
considered in a proceeding in equity or at law).
(4) neither the execution, delivery, performance and
consummation by the Investment Adviser of its
obligations under this Agreement, the Investment
Management Agreement or any other Fund Agreement
to which the Investment Adviser is a party nor
the consummation of the transactions contemplated
therein or in the Registration Statement nor the
fulfillment of the terms thereof will conflict
with or violate the charter, by-laws or similar
organizational documents of the Investment
Adviser, or to the knowledge of such counsel,
conflict with, result in a breach or violation
of, or constitute a default or an event of
default under, or result in the creation or
imposition of any lien, charge or encumbrance
upon any properties or assets of the Investment
Adviser under the charter, by-laws or similar
organizational documents of the Investment
Adviser, the terms and provisions of any material
agreement, indenture, mortgage, loan agreement,
note, insurance or surety agreement, lease or
other instrument to which the Investment Adviser
is a party or by which it may be bound or to
which any of the property or assets of the
Investment Adviser is subject, nor will such
action result in any violation of any material
order, law, rule or regulation of any court or
govern mental agency or body, having jurisdiction
over the Investment Adviser or any of its
properties (except that such counsel need express
no opinion as to state securities or "blue sky"
laws).
(5) except as set forth in the Registration Statement
and Prospectus, there is no pending or, to the
knowledge of such counsel, threatened action,
suit or proceeding affecting the Investment
Adviser or to which the Investment Adviser is a
party before or by any United States federal or
Massachusetts state court or governmental agency,
authority or body or any arbitrator which might
result in any material adverse change in the
Investment
28
<PAGE> 29
Adviser's condition (financial or other),
business prospects, net worth or operations or
which might materially and adversely affect the
properties or assets thereof of a character
required to be disclosed in the Registration
Statement or Prospectus.
(6) no consent, approval, authorization, notification
or order of, or filing with any United States
federal or Massachusetts state court or
governmental agency or body is required for the
consummation by the Investment Adviser of the
transactions contemplated by this Agreement or
the Investment Management Agreement.
In rendering such opinion, such counsel may rely
as to matters of fact, to the extent such counsel
deems proper, on certificates of responsible
officers of the Investment Adviser and public
officials.
Such counsel shall also have stated that, while
they have not themselves checked the accuracy and
completeness of or otherwise verified, and are
not passing upon and assume no responsibility for
the accuracy or complete ness of, the statements
contained in the Registration Statement or the
Prospectus, in the course of their review and
discussion of the contents of the Registration
Statement and Prospectus with certain officers
and employees of the Investment Adviser, no facts
have come to her attention which has led her to
believe that the Registration Statement, on the
date it became effective, contained any untrue
statement of a material fact or omitted to state
any material fact required to be stated therein
or necessary to make the statements contained
therein not misleading or that the Prospectus,
as of its date and on the Representation Date or
the Expiration Date, as the case may be,
contained any untrue statement of a material fact
or omitted to state any material fact required to
be stated therein or necessary to make the
statements therein, in the light of the
circumstances under which they were made, not
misleading. Such counsel need not express
29
<PAGE> 30
any opinion as to the financial statements,
including the notes and schedules thereto, or any
other financial or accounting information set
forth or referred to the Registration Statement
or the Prospectus.
c. The Dealer Manager shall have received from Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel for the Dealer
Manager, such opinion or opinions, dated the Representation
Date and the Expiration Date, with respect to the Offer, the
Registration Statement, the Prospectus and other related
matters as the Dealer Manager may reasonably require, and the
Fund shall have furnished to such counsel such documents as
they reasonably request for the purpose of enabling them to
pass upon such matters.
d. The Fund shall have furnished to the Dealer Manager
certificates of the Fund, signed by the President, the
Treasurer, the Assistant Treasurer, the Secretary, the
Assistant Secretary or a Vice President of the Fund, dated the
Representation Date and the Expiration Date, to the effect
that the signer(s) of such certificate carefully examined the
Registration Statement, the Prospectus, any supplement to the
Prospectus and this Agreement and that, to the best of their
knowledge:
i. the representations and warranties of the Fund in this
Agreement are true and correct in all material respects
on and as of the Representation Date or the Expiration
Date, as the case may be, with the same effect as if
made on the Representation Date or the Expiration Date,
as the case may be, and the Fund has complied with all
the agreements and satisfied all the conditions on its
part to be performed or satisfied at or prior to the
Representation Date or the Expiration Date, as the case
may be;
ii. no stop order suspending the effectiveness of the
Registration Statement has been issued and no
proceedings for that purpose have been instituted or,
to the Fund's knowledge, threatened;
iii. since the date of the most recent balance sheet
included or incorporated by reference in the
Prospectus, there has been no material adverse change
in the condition (financial or other), earnings,
business, prospects, net worth or results of operations
30
<PAGE> 31
of the Fund (excluding fluctuations in the Fund's net
asset value due to investment activities in the
ordinary course of business), except as set forth in or
contemplated in the Prospectus; and
iv. as of the most recent calculation dates as required by
each of the Credit Agreement, the Fund complied with
the diversification, liquidity, investment guidelines
and asset coverage requirements, if any, of the Credit
Agreement and the Investment Company Act.
e. The Investment Adviser shall have furnished to the Dealer
Manager certificates of the Investment Adviser, signed by the
President, Treasurer, Secretary or Vice President, dated the
Representation Date and the Expiration Date, to the effect
that the signer of such certificate has read the Registration
Statement, the Prospectus, any supplement to the Prospectus
and this Agreement and, to the best knowledge of such signer,
the representations and warranties of the Investment Adviser
in this Agreement are true and correct in all material
respects on and as of the Representation Date or the
Expiration Date, as the case may be, with the same effect as
if made on the Representation Date or the Expiration Date, as
the case may be.
f. Price Waterhouse LLP shall have furnished to the Dealer
Manager letters, dated the Representation Date and the
Expiration Date, in form and substance satisfactory to the
Dealer Manager stating in effect that:
i. they are independent accountants with respect to the
Fund within the meaning of the Securities Act and the
applicable Rules and Regulations;
ii. in their opinion, the audited financial statements
examined by them and included or incorporated by
reference in the Registration Statement comply as to
form in all material respects with the applicable
accounting requirements of the Securities Act and the
Investment Company Act and the respective Rules and
Regulations with respect to registration statements on
Form N-2;
iii. they have performed specified procedures, not
constituting an audit in accordance with generally
accepted auditing standards,
31
<PAGE> 32
including a reading of the latest available unaudited
financial information of the Fund, a reading of the
minute books of the Fund, and inquiries of officials
of the Fund responsible for financial and accounting
matters and on the basis of such inquiries and
procedures nothing came to their attention that
caused them to believe that at a specified date not
more than five business days prior to the
Representation Date or the Expiration Date, as the
case may be, there was any change in the Common
Shares, any decrease in net assets or any increase in
long-term debt of the Fund as compared with amounts
shown in the most recent statement of assets and
liabilities included or incorporated by reference in
the Registration Statement, except as the
Registration Statement discloses has occurred or may
occur, or they shall state any specific changes,
increases or decreases;
iv. in addition to the procedures referred to in clause
iii. above, they have compared certain dollar amounts
(or percentages as derived from such dollar amounts)
and other financial information regarding the
operations of the Fund appearing in the Registration
Statement, which have previously been specified by the
Dealer Manager and which shall be specified in such
letter, and have found such items to be in agreement
with, the accounting and financial records of the Fund.
g. Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, there
shall not have been (i) any change, increase or decrease
specified in the letter or letters referred to in paragraph
6.f., or (ii) any change, or any development involving a
prospective change, in or affecting the business or properties
of the Fund, the effect of which, in any case referred to in
clause (i) or (ii) above, is, in the reasonable judgment of
the Dealer Manager, so material and adverse as to make it
impractical or inadvisable to proceed with the Offer as
contemplated by the Registration Statement and the Prospectus.
h. Prior to the Representation Date, the Fund shall have
furnished to the Dealer Manager such further information,
certificates and documents as the Dealer Manager may
reasonably request.
32
<PAGE> 33
i. If any of the conditions specified in this Section 6 shall not
have been fulfilled in all material respects when and as
provided in this Agreement or waived by the Dealer Manager, or
if any of the opinions and certificates mentioned above or
elsewhere in this Agreement shall not be in all material
respects satisfactory in form and substance to the Dealer
Manager and its counsel, this Agreement and all obligations of
the Dealer Manager hereunder may be canceled at, or at any
time prior to, the Expiration Date by the Dealer Manager.
Notice of such cancellation shall be given to the Fund in
writing or by telephone confirmed in writing.
7. Indemnification and Contribution.
a. Each of the Fund and the Investment Adviser, jointly and
severally, will indemnify and hold harmless the Dealer
Manager, the directors, officers, employees and agents of the
Dealer Manager and each person, if any, who controls the
Dealer Manager within the meaning of Section 15 of the
Securities Act and Section 20 of the Exchange Act from and
against any and all losses, claims, liabilities, expenses and
damages (including, but not limited to, any and all
investigative, legal and other expenses reasonably incurred in
connection with, and any and all amounts paid in settlement
of, any action, suit or proceeding between any of the
indemnified parties and any indemnifying parties or between
any indemnified party and any third party, or otherwise, or
any claim asserted), to which the Dealer Manager or any such
person, or any of them, may become subject under the
Securities Act, the Exchange Act, the Investment Company Act,
the Advisers Act or other U.S. federal or state statutory law
or regulation, at common law or otherwise insofar as such
losses, claims, liabilities, expenses or damages arise out of
or are based on (i) any untrue statement or alleged untrue
statement of a material fact contained in the Registration
Statement, the Prospectus or Offering Materials, or any
amendment or supplement to the Registration Statement, the
Prospectus or Offering Materials, or in any documents deemed
to be incorporated by reference into the Registration
Statement or the Prospectus, (ii) the omission or alleged
omission to state, in any or all such documents, a material
fact required to be stated therein or necessary to make the
statements therein not misleading (in the case of the
Prospectus, in light of the circumstances under which such
statements were made) or (iii) any act or failure to act or
any alleged act or
33
<PAGE> 34
failure to act by the Dealer Manager in connection with, or
relating in any manner to, the Rights or the Shares or the
offering contemplated hereby, and which is included as part of
or referred to in any loss, claim, liability, expense or
damage arising out of or based upon matters covered by clause
(i) or (ii) above (provided, however, that neither the Fund
nor the Investment Adviser shall be liable under this clause
(iii) to the extent that such loss, claim, liability, expense
or damage resulted directly from any such acts or failures to
act undertaken or omitted to be taken by such Dealer Manager
through its gross negligence or willful misconduct); provided
that neither the Fund nor the Investment Adviser will be
liable to the extent that such losses, claims, liabilities,
expenses or damages (A) are based on an untrue statement or
omission or alleged untrue statement or omission or alleged
untrue statement or omission made in reliance on and in
conformity with information relating to the Dealer Manager
furnished in writing to the Fund by the Dealer Manager
expressly for inclusion in the Registration Statement or the
Prospectus or (B) if it is proved by the Fund and the
Investment Adviser a copy of the Prospectus was not delivered
to the purchaser of Shares or Rights at or before the written
confirmation of the sale to such person in any case where such
delivery is required by the Securities Act, the Investment
Company Act or the Rules and Regulations. This indemnity
agreement will be in addition to any liability that the Fund
or the Investment Adviser might otherwise have.
b. The Dealer Manager will indemnify and hold harmless the Fund
and the Investment Adviser, each person, if any, who controls
the Fund or the Investment Adviser within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange
Act, each trustee of the Fund and each officer of the Fund to
the same extent as the foregoing indemnity from the Fund or
the Investment Adviser to the Dealer Manager, but only insofar
as losses, claims, liabilities, expenses or damages arise out
of or are based on any untrue statement or omission or alleged
untrue statement or omission made in reliance on and in
conformity with information relating to the Dealer Manager
furnished in writing to the Fund by the Dealer Manager
expressly for use in the Registration Statement or Prospectus.
This indemnity will be in addition to any liability that the
Dealer Manager might otherwise have.
34
<PAGE> 35
c. Any party that proposes to assert the right to be indemnified
under this Section 7 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 7, 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 will not relieve it from any liability that
it may have to any indemnified party under the foregoing
provision of this Section 7 unless, and only to the extent
that, such omission results in the forfeiture of substantive
rights or defenses by the indemnifying party. If any such
action is brought against any indemnified party and it
notifies the indemnifying party of its commencement, the
indemnifying party will be entitled to participate in and, to
the extent that it elects by delivering written notice to the
indemnified party promptly after receiving notice of the
commencement of the action from the indemnified party, jointly
with any other indemnifying party similarly notified, to
assume the defense of the action, with counsel reasonably
satisfactory to the indemnified party, and after notice from
the indemnifying party to the indemnified party of its
election to assume the defense, the indemnifying party will
not be liable to the indemnified party for any legal or other
expenses except as provided below and except for the
reasonable costs of investigation subsequently incurred by the
indemnified party in connection with the defense. The
indemnified party will have the right to employ its own
counsel in any such action, but the fees, disbursements and
other charges of such counsel will be at the expense of such
indemnified party unless (1) the employment of counsel by the
indemnified party has been authorized in writing by the
indemnifying party, (2) the indemnified party has reasonably
concluded (based on the advice of counsel) that there may be
legal defenses available to it or other indemnified parties
that are different from or in addition to those available to
the indemnifying party, (3) a conflict or potential conflict
exists (based on advice of counsel to the indemnified party)
between the indemnified party and the indemnifying party (in
which case the indemnifying party will not have the right to
direct the defense of such action on behalf of the indemnified
party) or (4) the indemnifying party has not in fact employed
counsel to assume the defense of such action within a
reasonable time after receiving notice of the commencement of
the action, in each of which cases the reasonable fees
disbursements and other charges of counsel will be at the
expense of the indemnifying party
35
<PAGE> 36
or parties. All such fees, disbursements and other charges
will be reimbursed by the indemnifying party promptly as they
are incurred. It is understood that the indemnifying party or
parties shall not, in connection with any proceeding or
related proceedings in the same jurisdiction, be liable for
the reasonable fees, disbursements and other charges of more
than one separate firm admitted to practice in such
jurisdiction at any one time for all such indemnified party or
parties. An indemnifying party will not be liable for any
settlement of any action or claim effected without its written
consent (which consent will not be unreasonably withheld). No
indemnifying party shall, without the prior written consent of
each indemnified party, settle or compromise or consent to the
entry of any judgment in any pending or threatened claim,
action or proceeding relating to the matters contemplated by
this Section 7 (whether or not any indemnified party is a
party thereto), unless such settlement, compromise or consent
includes an unconditional release of each indemnified party
from all liability arising or that may arise out of such
claim, action or proceeding. Notwithstanding any other
provision of this Section 7.c., if at any time an indemnified
party shall have requested an indemnifying party to reimburse
the indemnified party for fees, disbursements and other
charges of counsel, such indemnifying party agrees that it
shall be liable for any settlement effected without its
written consent if (i) such settlement is entered into more
than 45 days after receipt by such indemnifying party of the
aforesaid request, (ii) such indemnifying party shall have
received notice of terms of such settlement at least 30 days
prior to such settlement being entered into and (iii) such
indemnifying party shall not have reimbursed such indemnified
party in accordance with such request prior to the date of
such settlement.
d. In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in the
foregoing paragraph of this Section 7 is applicable in
accordance with its terms but for any reason is held to be
unavailable from the Fund, the Investment Adviser or the
Dealer Manager, the Fund, the Investment Adviser and the
Dealer Manager will contribute to the total losses, claims,
liabilities, expenses and damages (including any
investigative, legal and other expenses reasonably incurred in
connection with, and any amount paid in settlement of, any
action, suit or proceeding or any claim asserted, but after
deducting any contribution received by the Fund and the
Investment
36
<PAGE> 37
Adviser from persons other than the Dealer Manager, such as
persons who control the Fund or the Investment Adviser within
the meaning of the Securities Act or the Exchange Act,
officers of the Fund who signed the Registration Statement and
trustees of the Fund, who may also be liable for contribution)
to which the Fund, the Investment Adviser and the Dealer
Manager may be subject in such proportion as shall be
appropriate to reflect the relative benefits received by the
Fund and the Investment Adviser on the one hand and the Dealer
Manager on the other. The relative benefits received by the
Fund and the Investment Adviser (treated jointly for this
purpose as one person) on the one hand and the Dealer Manager
on the other hand shall be deemed to be in the same proportion
as the total net proceeds from the Offering (before deducting
expenses) received by the Fund bear to the total fees received
by the Dealer Manager. If, but only if, the allocation
provided by the foregoing sentence is not permitted by
applicable law, the allocation of contribution shall be made
in such proportion as is appropriate to reflect not only such
relative benefits referred to in the foregoing sentence but
also the relative fault of the Fund and the Investment Adviser
(treated jointly for this purpose as one person) on the one
hand and the Dealer Manager on the other hand in connection
with respect to the statements or omissions or alleged
statements or omissions that resulted in the losses, claims,
liabilities, expenses or damages (including any
investigative, legal or other expenses reasonably incurred in
connection with, and any amount paid in settlement of, any
action, suit or proceeding or any claim asserted), as well as
any other relevant equitable considerations with respect to
the Offering. Such relative fault of the parties shall be
determined by reference to 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 Fund, the Investment Adviser or
the Dealer Manager, the intent of the parties and their
relative knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Fund, the
Investment Adviser and the Dealer Manager agree that it would
not be just and equitable if contributions pursuant to this
Section 7.d. were to be determined by pro rata allocation or
by any other method of allocation which does not take into
account the equitable considerations referred to herein. The
amount paid or payable by an indemnified party as a result of
the loss, claim, liability, expense or damage , or action in
respect thereof, referred to above in this Section 7.d. shall
be deemed to include, for purposes of
37
<PAGE> 38
this Section 7.d. any legal or other expenses reasonably
incurred by such indemnified party in connection with
investigating or defending any such action or claim.
Notwithstanding any other provisions of this Section 7.d. the
Dealer Manager shall not be required to contribute any amount
in excess of the fees received by it and no person found
guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) will be entitled to
contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section
7.d., any person who controls a party to this Agreement within
the meaning of the Securities Act will have the same rights to
contribution as that party, and each trustee of the Fund and
each officer of the Fund who signed the Registration Statement
will have the same rights to contribution as the Fund, subject
in each case to the provisions hereof. 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
7.d., notify such party or parties from whom contribution may
be sought, but the omission so to notify 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 7.d,
unless such omission results in the forfeiture of substantive
rights or defenses by, or otherwise materially prejudices the
interests of, the party or parties from whom contribution is
being sought. Except for a settlement entered into pursuant to
the last sentence of Section 7.c. 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 indemnity and contribution agreements contained in this
Section 7 and the representations and warranties of the Fund
and the Investment Adviser contained in this Agreement shall
remain operative and in full force and effect regardless of
(i) any investigation made by or on behalf of the Dealer
Manager or (ii) any termination of this Agreement.
f. Notwithstanding any other provisions in this Section 7, no
party shall be entitled to indemnification or contribution
under this Agreement against any loss, claim, liability,
expense or damage arising by reason of such person's willful
misfeasance, bad faith or gross negligence in the performance
of its duties hereunder, or by reason of such person's
reckless disregard of such person's obligations and duties
hereunder.
38
<PAGE> 39
g. The Fund and the Investment Adviser agree to indemnify each
Selling Group Member and Soliciting Dealer and controlling
persons to the same extent and subject to the same conditions
and to the same agreements, including with respect to
contribution, provided for in subsections 7.a., 7.b., 7.c.,
7.d. and 7.e.
h. The Fund and the Investment Adviser acknowledge that the
statements under the caption "The Offer-Distribution
Arrangements" in the Prospectus constitute the only
information furnished in writing to the Fund by the Dealer
Manager expressly for use in such document, and the Dealer
Manager confirms that such statements are correct in all
material respects.
8. Representations, Warranties and Agreements to Survive Delivery. The
respective agreements, representations, warranties, indemnities and
other statements of the Fund or its officers, of the Investment Adviser
and of the Dealer Manager set forth in or made pursuant to this
Agreement shall survive the Expiration Date and will remain in full
force and effect, regardless of any investigation made by or on behalf
of Dealer Manager or the Fund or any of the officers, directors or
controlling persons referred to in Section 7 hereof, and will survive
delivery of and payment for the Shares pursuant to the Offer. The
provisions of Sections 5 and 7 hereof shall survive the termination or
cancellation of this Agreement.
9. Termination of Agreement.
a. This Agreement shall be subject to termination in the absolute
discretion of the Dealer Manager, by notice given to the Fund
prior to the expiration of the Offer, if prior to such time
(i) financial, political, economic, currency, banking or
social conditions in the United States shall have undergone
any material change the effect of which on the financial
markets makes it, in the Dealer Manager's judgment,
impracticable or inadvisable to proceed with the Offer, (ii)
there has occurred any outbreak or material escalation of
hostilities or other calamity or crisis the effect of which on
the financial markets of the United States is such as to make
it, in the Dealer Manager's judgment, impracticable or
inadvisable to proceed with the Offer, (iii) trading in the
Common Shares shall have been suspended by the Commission or
the New York
39
<PAGE> 40
Stock Exchange, Inc., (iv) trading in securities generally on
the New York Stock Exchange, Inc. shall have been suspended or
limited or (v) a banking moratorium shall have been declared
either by Federal or New York State authorities.
b. If this Agreement is terminated pursuant to this Section, such
termination shall be without liability of any party to any
other party except as provided in Section 5.
10. Notices. All communications hereunder will be in writing and effective
only on receipt, and, if sent to the Dealer Manager, will be mailed,
delivered or telegraphed and confirmed to PaineWebber Incorporated,
Attn: Todd Reit, 1285 Avenue of the Americas, New York, New York 10019;
or if sent to the Fund or the Investment Adviser will be mailed, or
delivered or telegraphed and con firmed to them at: Colonial
Intermediate High Income Fund, Attn: ____________________, One
Financial Center, Boston, Massachusetts 02111.
11. Successors. This Agreement will inure to the benefit of and be binding
upon the parties hereto and their respective successors and will inure
to the benefit of the officers and directors and controlling persons
referred to in Section 7 hereof, and no other person will have any
right or obligation hereunder.
12. Applicable Law. This Agreement will be governed by and construed in
accordance with the laws of the State of New York without reference to
the conflict of law principles thereof.
13. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all
of which together shall constitute one and the same instrument.
14. Disclaimer. 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.
40
<PAGE> 41
If the foregoing is in accordance with your understanding of our
agreement, please so indicate in the space provided below for that purpose,
whereupon this letter shall constitute a binding agreement among the Fund, the
Investment Adviser and the Dealer Manager.
Very truly yours,
Colonial Intermediate High Income Fund
By:___________________________________
Name:________________________________
Title:_______________________________
Colonial Management Associates Inc.
By:___________________________________
Name:________________________________
Title:_______________________________
The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.
PaineWebber Incorporated
By:___________________________________
Name:________________________________
Title:_______________________________
<PAGE> 42
EXHIBIT A
COLONIAL INTERMEDIATE HIGH INCOME FUND
__________ Common Shares of Beneficial Interest
Issuable Upon Exercise of Transferable Rights
to Subscribe for Such Shares
SELLING GROUP AGREEMENT
New York, New York
________ __, 199_
PaineWebber Incorporated
1285 Avenue of the Americas
New York, New York 10019
Ladies and Gentlemen:
We understand that Colonial Intermediate High Income Fund, a
Massachusetts business trust (the "Fund"), proposes to issue to holders of
record (the "Holders") at the close of business on the record date set forth in
the Prospectus (as defined herein) (the "Record Date") transferable rights
entitling such Holders to subscribe for up to __________ shares (each a "Share"
and, collectively, the "Shares") of the Fund's common shares of beneficial
interest, without par value (the "Common Shares"), of the Fund (the "Offer").
Pursuant to the terms of the Offer, the Fund is issuing each Holder one
transferable right (each a "Right" and, collectively, the "Rights") for each
Common Share held by such Holder on the Record Date. Such Rights entitle holders
to acquire during the subscription period set forth in the Prospectus (the
"Subscription Period"), at the price set forth in such Prospectus (the
"Subscription Price"), one Share for each _____ Rights (except that any Holder
who is issued fewer than _____ Rights will be able to subscribe for one full
Share pursuant to the primary subscription), on the terms and conditions set
forth in such Prospectus. No fractional shares will be issued. Any Holder who
fully exercises all Rights initially issued to such Holder (other than those
Rights that cannot be exercised because they represent the right to acquire less
than one Share) will be entitled to subscribe for, subject to allocation,
additional Shares (the "Over-Subscription Privilege") on the terms and
conditions set forth in such Prospectus. The Rights are transferable and are
expected to be listed on the New York Stock Exchange, Inc.
<PAGE> 43
COLONIAL INTERMEDIATE HIGH INCOME FUND
Selling Group Agreement - Page 2
Transferable Rights Offer Expiring ________ __, 1998, unless extended
We further understand that the Fund has appointed PaineWebber
Incorporated to act as the dealer manager (the "Dealer Manager") in connection
with the Offer and has authorized the Dealer Manager to form and manage a group
of broker-dealers (each a "Selling Group Member" and collectively the "Selling
Group") to solicit the exercise of Rights and to sell Shares purchased by the
Dealer Manager from the Fund through the exercise of Rights.
We hereby express our interest in participating in the Offer as a
Selling Group Member.
We hereby agree with you as follows:
1. We have received and reviewed the Fund's prospectus dated ________
__ (the "Prospectus") relating to the Offer and we understand that
additional copies of the Prospectus (or of the Prospectus as it
may be subsequently supplemented or amended, if applicable) and
any other solicitation materials authorized by the Fund relating
to the Offer ("Offering Materials") will be supplied to us in
reasonable quantities upon our request therefor to you. We agree
that we will not use any solicitation material other than the
Prospectus (as supplemented or amended, if applicable) and such
Offering Materials and we agree not to make any representation,
oral or written, to any shareholders or prospective shareholders
of the Fund that are not contained in the Prospectus, unless
previously authorized to do so in writing by the Fund.
2. From time to time during the period (the "Subscription Period")
commencing on ________ __, 1998 and ending at 5:00 p.m., New York
City time, on the Expiration Date (the term "Expiration Date"
means ________ __, 1998, unless and until the Fund shall, in its
sole discretion, have extended the period for which the Offer is
open, in which event the term "Expiration Date" with respect to
the Offer will mean the latest time and date on which the Offer,
as so extended by the Fund, will expire), we may solicit the
exercise of Rights in connection with the Offer. We will be
entitled to receive fees in the amounts and at the times described
in
<PAGE> 44
COLONIAL INTERMEDIATE HIGH INCOME FUND
Selling Group Agreement - Page 3
Transferable Rights Offer Expiring ________ __, 1998, unless extended
Section 4 of this Agreement with respect to Shares purchased
pursuant to the exercise of Rights and with respect to which
_____________________ (the "Subscription Agent") has received, no
later than 5:00 p.m., New York City time, on the Expiration Date,
either (i) a properly completed and executed Subscription
Certificate identifying us as the broker-dealer having been
instrumental in the exercise of such Rights, and full payment for
such Shares or (ii) a Notice of Guaranteed Delivery guaranteeing
to the Subscription Agent by the close of business of the third
business day after the Expiration Date of a properly completed and
duly executed Subscription Certificate, similarly identifying us,
and full payment for such Shares. We understand that we will not
be paid these fees with respect to Shares purchased pursuant to an
exercise of Rights for our own account or for the account of any
of our affiliates. We also understand and agree that we are not
entitled to receive any fees in connection with the solicitation
of the exercise of Rights other than pursuant to the terms of this
Agreement and, in particular, that we will not be entitled to
receive any fees under the Fund's Soliciting Dealer Agreement. We
agree to solicit the exercise of Rights in accordance with the
Securities Act of 1933, as amended (the "Securities Act"), the
Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and the Investment Company Act of 1940, as amended, and the rules
and regulations under each such Act, any applicable securities
laws of any state or jurisdiction where such solicitations may be
lawfully made, the applicable rules and regulations of any
self-regulatory organization or registered national securities
exchange and customary practice and subject to the terms of the
Subscription Agent Agreement between the Fund and the Subscription
Agent and the procedures described in the Fund's registration
statement on Form N-2 (File Nos. 333- _____ and 811-_____), as
amended (the "Registration Statement").
3. From time to time during the Subscription Period, we may indicate
interest in purchasing Shares from the Dealer Manager. We
understand that from time to time the Dealer Manager intends to
offer Shares obtained or to be obtained by the Dealer Manager
through the exercise of
<PAGE> 45
COLONIAL INTERMEDIATE HIGH INCOME FUND
Selling Group Agreement - Page 4
Transferable Rights Offer Expiring ________ __, 1998, unless extended
Rights to Selling Group Members who have so indicated interest at
prices which shall be determined by the Dealer Manager (the
"Offering Price"). We agree that with respect to any such Shares
purchased by us from the Dealer Manager the sale of such Shares to
us shall be irrevocable and we will offer them to the public at
the Offering Price at which we purchase them from the Dealer
Manager. Shares not sold by us at such Offering Price may be
offered by us after the next succeeding Offering Price is set at
the latest Offering Price set by the Dealer Manager. The Dealer
Manager agrees that, if requested by any Selling Group Member, and
subject to applicable law, the Dealer Manager will set a new
Offering Price prior to 4:00 p.m., New York City time, on any
business day. We agree to advise the Dealer Manager from time to
time upon request, prior to the termination of this Agreement, of
the number of Shares remaining unsold which were purchased by us
from the Dealer Manager and, on the Dealer Manager's request, we
will resell to the Dealer Manager any of such Shares remaining
unsold at the purchase price thereof if in the Dealer Manager's
opinion such Shares are needed to make delivery against sales made
to other Selling Group Members. Any shares purchased hereunder
from the Dealer Manager shall be subject to regular way settlement
through the facilities of the Depository Trust Company.
4. We understand that you will remit to us on or before the tenth
business day following the day the Fund issues Shares after the
Expiration Date, following receipt by you from the Fund of the
Dealer Manager Fee, a selling fee equal to 2.50% of the
Subscription Price per Share for (A) each Share issued pursuant to
the exercise of Rights or the Over-Subscription Privilege pursuant
to each Subscription Certificate upon which we are designated, as
certified to you by the Subscription Agent, as a result of our
solicitation efforts in accordance with Section 2 and (B) each
Share sold by the Dealer Manager to us in accordance with Section
3 less any Shares resold to the Dealer Manager in accordance with
Section 3. Your only obligation with respect to payment of the
foregoing selling fee to us is to remit to us amounts owing to us
and actually received by you from the
<PAGE> 46
COLONIAL INTERMEDIATE HIGH INCOME FUND
Selling Group Agreement - Page 5
Transferable Rights Offer Expiring ________ __, 1998, unless extended
Fund. Except as aforesaid, you shall be under no liability to make
any payments to us pursuant to this Agreement.
5. We agree that you, as Dealer Manager, have full authority to take
such action as may seem advisable to you in respect of all matters
pertaining to the Offer. You are authorized to approve on our
behalf any amendments or supplements to the Registration Statement
or the Prospectus.
6. We represent that we are a member in good standing of the NASD
and, in making sales of Shares, agree to comply with all
applicable rules of the National Association of Securities
Dealers, Inc. (the "NASD") including, without limitation, the
NASD's Interpretation with Respect to Free-Riding and Withholding,
as set forth in IM 2110-1 of the NASD's Conduct Rules, and Rule
2740 of the NASD's Conduct Rules. We understand that no action has
been taken by you or the Fund to permit the solicitation of the
exercise of Rights or the sale of Shares in any jurisdiction
(other than the United States) where action would be required for
such purpose. We agree that we will not, without your approval in
advance, buy, sell, deal or trade in, on a when-issued basis or
otherwise, the Rights or the Shares or any other option to acquire
or sell Shares for our own account or for the accounts of
customers, except as provided in Sections 2 and 3 hereof and
except that we may buy or sell Rights or Shares in brokerage
transactions on unsolicited orders which have not resulted from
activities on our part in connection with the solicitation of the
exercise of Rights and which are executed by us in the ordinary
course of our brokerage business. We will keep an accurate record
of the names and addresses of all persons to whom we give copies
of the Registration Statement, the Prospectus, any preliminary
prospectus (or any amendment or supplement thereto) or any
Offering Materials and, when furnished with any subsequent
amendment to the Registration Statement and any subsequent
prospectus, we will, upon your request, promptly forward copies
thereof to such persons.
7. Nothing contained in this Agreement will constitute the Selling
Group Members partners with the Dealer Manager or with one another
or create
<PAGE> 47
COLONIAL INTERMEDIATE HIGH INCOME FUND
Selling Group Agreement - Page 6
Transferable Rights Offer Expiring ________ __, 1998, unless extended
any association between those parties, or will render the Dealer
Manager or the Fund liable for the obligations of any Selling
Group Member. The Dealer Manager will be under no liability to
make any payment to any Selling Group Member other than as
provided in Section 4 of this Agreement, and will be subject to no
other liabilities to any Selling Group Member, and no obligations
of any sort will be implied. We agree to indemnify and hold
harmless you and each other Selling Group Member and each person,
if any, who controls you and any such Selling Group Member within
the meaning of either Section 15 of the Securities Act or Section
20 of the Exchange Act, against loss or liability caused by any
breach by us of the terms of this Agreement.
8. We agree to pay any transfer taxes which may be assessed and paid
on account of any sales or transfers for our account.
9. All communications to you relating to the Offer will be addressed
to: PaineWebber Incorporated, Attn: Todd Reit, 1285 Avenue of the
Americas, New York, New York 10019; Telephone No.: (212) 713-4908
and Facsimile No.: (212) 713-4205.
10. This Agreement will be governed by the internal laws of the State
of New York.
<PAGE> 48
COLONIAL INTERMEDIATE HIGH INCOME FUND
Selling Group Agreement - Page 7
Transferable Rights Offer Expiring ________ __, 1998, unless extended
A signed copy of this Selling Group Agreement will be promptly returned
to the Selling Group Member at the address set forth below.
Very truly yours,
PaineWebber Incorporated
By:____________________________
Name:________________________
Title:_______________________
PLEASE COMPLETE THE INFORMATION BELOW
_____________________________________ ____________________________________
Printed Firm Name Address
________________________________________________________________________________
Contact at Selling Group Member
_____________________________________ ____________________________________
Authorized Signature Area Code and Telephone
Number
_____________________________________ ____________________________________
Name and Title Facsimile Number
Dated:_______________________________
Payment of the Selling Fee shall be mailed
by check to the following address:
_____________________________________
_____________________________________
<PAGE> 49
COLONIAL INTERMEDIATE HIGH INCOME FUND
Selling Group Agreement - Page 8
Transferable Rights Offer Expiring ________ __, 1998, unless extended
_____________________________________
<PAGE> 50
EXHIBIT B
COLONIAL INTERMEDIATE HIGH INCOME FUND
Rights Offering for Common Shares of Beneficial Interest
SOLICITING DEALER AGREEMENT
THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
________ __, 1998, UNLESS EXTENDED
To Securities Dealers and Brokers:
Colonial Intermediate High Income Fund (the "Fund") is issuing to
its shareholders of record ("Record Date Shareholders") as of the close of
business on ________ __, 1998 (the "Record Date") transferable rights ("Rights")
to subscribe for an aggregate of up to _________ shares (the "Shares") of the
Fund's common shares of beneficial interest, without par value (the "Common
Shares"), of the Fund upon the terms and subject to the conditions set forth in
the Fund's Prospectus (the "Prospectus") dated ________ __, 1998 (the "Offer").
Each such Record Date Shareholder is being issued one Right for each full Common
Share owned on the Record Date. Such Rights entitle holders to acquire during
the Subscription Period (as hereinafter defined) at the Subscription Price (as
hereinafter defined), one Share for each _____ Rights (except that any Record
Date Shareholder who is issued fewer than _____ Rights will be able to subscribe
for one full Share pursuant to the primary subscription), on the terms and
conditions set forth in such Prospectus. No fractional shares will be issued.
Any Record Date Shareholder who fully exercises all Rights initially issued to
such holder (other than those Rights that cannot be exercised because they
represent the right to acquire less than one Share) will be entitled to
subscribe for, subject to allocation, additional Shares (the "Over-Subscription
Privilege") on the terms and conditions set forth in such Prospectus. The Rights
are transferable and are expected to be listed on the New York Stock Exchange,
Inc. The Sub-
<PAGE> 51
COLONIAL INTERMEDIATE HIGH INCOME FUND
Soliciting Dealer Agreement - Page 2
Transferable Rights Offer Expiring January 23, 1998
scription Price will be $____. The Subscription Period will commence on ________
__, 1998 and end at 5:00 p.m., New York City time on the Expiration Date (the
term "Expiration Date" means ________ __, 1998, unless and until the Fund shall,
in its sole discretion, have extended the period for which the Offer is open, in
which event the term "Expiration Date" with respect to the Offer will mean the
latest time and date on which the Offer, as so extended by the Fund, will
expire).
For the duration of the Offer, the Fund has authorized and the
Dealer Manager has agreed to reallow a Solicitation Fee to any qualified broker
or dealer executing a Soliciting Dealer Agreement who solicits the exercise of
Rights and the Over- Subscription Privilege in connection with the Offer and who
complies with the procedures described below (a "Soliciting Dealer"). Upon
timely delivery to _________________, the Fund's Subscription Agent for the
Offer, of payment for Shares purchased pursuant to the exercise of Rights and
the Over-Subscription Privilege and of properly completed and executed
documentation as set forth in this Soliciting Dealer Agreement, a Soliciting
Dealer will be entitled to receive the Solicitation Fee equal to ____% of the
Subscription Price per Share so purchased subject to a maximum fee based on the
number of Common Shares held by such Soliciting Dealer through The Depository
Trust Company ("DTC") on the Record Date; provided, however, that no payment
shall be due with respect to the issuance of any Shares until payment therefor
is actually received. A qualified broker or dealer is a broker or dealer which
is a member of a registered national securities exchange in the United States or
the National Association of Securities Dealers, Inc. ("NASD") or any foreign
broker or dealer not eligible for membership who agrees to conform to the Rules
of Fair Practice of the NASD, including Sections 2730, 2740, 2420 and 2750 there
of, in making solicitations in the United States to the same extent as if it
were a member thereof.
The Fund has authorized and the Dealer Manager has agreed to pay
the Solicitation Fees payable to the undersigned Soliciting Dealer and to
indemnify such Soliciting Dealer on the terms set forth in the Dealer Manager
Agreement, dated ________ __, 1997, among PaineWebber Incorporated as the dealer
manager (the "Dealer Manager"), the Fund and others (the "Dealer Manager
Agreement"). Solicitation and other activities by Soliciting Dealers may be
undertaken only in accordance with the applicable rules and regulations of the
Securities and Exchange Commission and only in those states
<PAGE> 52
COLONIAL INTERMEDIATE HIGH INCOME FUND
Soliciting Dealer Agreement - Page 3
Transferable Rights Offer Expiring January 23, 1998
and other jurisdictions where such solicitations and other activities may
lawfully be undertaken and in accordance with the laws thereof. Compensation
will not be paid for solicitations in any state or other jurisdiction in which
the opinion of counsel to the Fund or counsel to the Dealer Manager, such
compensation may not lawfully be paid. No Soliciting Dealer shall be paid
Solicitation Fees with respect to Shares purchased pursuant to an exercise of
Rights and the Over-Subscription Privilege for its own account or for the
account of any affiliate of the Soliciting Dealer. No Soliciting Dealer or any
other person is authorized by the Fund or the Dealer Manager to give any
information or make any representations in connection with the Offer other than
those contained in the Prospectus and other authorized solicitation material
furnished by the Fund through the Dealer Manager. No Soliciting Dealer is
authorized to act as agent of the Fund or the Dealer Manager in any connection
or transaction. In addition, nothing herein contained shall constitute the
Soliciting Dealers partners with the Dealer Manager or with one another, or
agents of the Dealer Manager or of the Fund, or create any association between
such parties, or shall render the Dealer Manager or the Fund liable for the
obligations of any Soliciting Dealer. The Dealer Manager shall be under no
liability to make any payment to any Soliciting Dealer, and shall be subject to
no other liabilities to any Soliciting Dealer, and no obligations of any sort
shall be implied.
In order for a Soliciting Dealer to receive Solicitation Fees, the
Subscription Agent must have received from such Soliciting Dealer no later than
5:00 p.m., New York City time, on the Expiration Date, either (i) a properly
completed and duly executed Subscription Certificate with respect to Shares
purchased pursuant to the exercise of Rights and the Over-Subscription Privilege
and full payment for such Shares; or (ii) a Notice of Guaranteed Delivery
guaranteeing delivery to the Subscription Agent by close of business on the
third business day after the Expiration Date, of (a) full payment for such
Shares and (b) a properly completed and duly executed Subscription Certificate
with respect to Shares purchased pursuant to the exercise of Rights.
Solicitation Fees will only be paid after receipt by the Subscription Agent of
a properly completed and duly executed Soliciting Dealer Agreement and a
Subscription Certificate designating the Soliciting Dealer in the applicable
portion hereof. In the case of a Notice of Guaranteed Delivery, Solicitation
Fees will only be paid after delivery in accordance with such Notice of
Guaranteed Delivery has been effected. Solicitation Fees will be paid by the
Fund (through the Subscription Agent) to the Soliciting Dealer by check to an
address designated by the Soliciting Dealer
<PAGE> 53
COLONIAL INTERMEDIATE HIGH INCOME FUND
Soliciting Dealer Agreement - Page 4
Transferable Rights Offer Expiring January 23, 1998
below by the tenth business day following the day the Fund issues Shares after
the Expiration Date.
All questions as to the form, validity and eligibility (including
time of receipt) of this Soliciting Dealer Agreement will be determined by the
Fund, in its sole discretion, which determination shall be final and binding.
Unless waived, any irregularities in connection with a Soliciting Dealer
Agreement or delivery thereof must be cured within such time as the Fund shall
determine. None of the Fund, the Dealer Manager, the Subscription Agent, the
Information Agent for the Offer or any other person will be under any duty to
give notification of any defects or irregularities in any Soliciting Dealer
Agreement or incur any liability for failure to give such notification.
The acceptance of Solicitation Fees from the Fund by the
undersigned Soliciting Dealer shall constitute a representation by such
Soliciting Dealer to the Fund that: (i) it has received and reviewed the
Prospectus; (ii) in soliciting purchases of Shares pursuant to the exercise of
the Rights and the Over-Subscription Privilege, it has complied with the
applicable requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), the applicable rules and regulations thereunder, any applicable
securities laws of any state or jurisdiction where such solicitations were made,
and the applicable rules and regulations of any self-regulatory organization or
registered national securities exchange; (iii) in soliciting purchases of Shares
pursuant to the exercise of the Rights and the Over-Subscription Privilege, it
has not published, circulated or used any soliciting materials other than the
Prospectus and any other authorized solicitation material furnished by the Fund
through the Dealer Manager; (iv) it has not purported to act as agent of the
Fund or the Dealer Manager in any connection or transaction relating to the
Offer; (v) the information contained in this Soliciting Dealer Agreement is, to
its best knowledge, true and complete; (vi) it is not affiliated with the Fund;
(vii) it will not accept Solicitation Fees paid by the Fund pursuant to the
terms hereof with respect to Shares purchased by the Soliciting Dealer pursuant
to an exercise of Rights and the Over-Subscription Privilege for its own
account; (viii) it will not remit, directly or indirectly, any part of
Solicitation Fees paid by the Fund pursuant to the terms hereof to any
beneficial owner of Shares purchased pursuant to the Offer; and (ix) it has
agreed to the amount of the Solicitation Fees and the terms and conditions set
forth herein with respect to receiving such Solicitation Fees. By returning a
Soliciting Dealer Agreement and accepting Solicitation Fees, a Soliciting
<PAGE> 54
COLONIAL INTERMEDIATE HIGH INCOME FUND
Soliciting Dealer Agreement - Page 5
Transferable Rights Offer Expiring January 23, 1998
Dealer will be deemed to have agreed to indemnify the Fund and the Dealer
Manager against losses, claims, damages and liabilities to which the Fund may
become subject as a result of the breach of such Soliciting Dealer's
representations made herein and described above. In making the foregoing
representations, Soliciting Dealers are reminded of the possible applicability
of the anti-manipulation rules under the Exchange Act if they have bought, sold,
dealt in or traded in any Shares for their own account since the commencement
of the Offer.
Upon expiration of the Offer, no Solicitation Fees will be payable
to Soliciting Dealers with respect to Shares purchased thereafter.
Capitalized terms not otherwise defined herein shall have the
meanings ascribed to them in the Dealer Manager Agreement or, if not defined
therein, in the Prospectus.
This Soliciting Dealer Agreement will be governed by the laws of
the State of New York.
Please execute this Soliciting Dealer Agreement below accepting
the terms and conditions hereof and confirming that you are a member firm of the
NASD or a foreign broker or dealer not eligible for membership who has conformed
to the Rules of Fair Practice of the NASD, including Sections 2730, 2740, 2420
and 2750 thereof, in making solicitations of the type being undertaken pursuant
to the Offer in the United States to the same extent as if you were a member
thereof, and certifying that you have solicited the purchase of the Shares
pursuant to exercise of the Rights, all as described above, in accordance with
the terms and conditions set forth in this Soliciting Dealer Agreement. Please
forward two executed copies of this Soliciting Dealer Agreement to PaineWebber
Incorporated, Attn: Todd Reit, 1285 Avenue of the Americas, New York, New York
10019; Telephone No.: (212) 713-4908 and Facsimile No.: (212) 713-4205.
<PAGE> 55
COLONIAL INTERMEDIATE HIGH INCOME FUND
Soliciting Dealer Agreement - Page 6
Transferable Rights Offer Expiring January 23, 1998
A signed copy of this Soliciting Dealer Agreement will be promptly
returned to the Soliciting Dealer at the address set forth below.
Very truly yours,
PaineWebber Incorporated
By:____________________________
Name:________________________
Title:_______________________
PLEASE COMPLETE THE INFORMATION BELOW
_____________________________________ ____________________________________
Printed Firm Name Address
________________________________________________________________________________
Contact at Soliciting Dealer
_____________________________________ ____________________________________
Authorized Signature Area Code and Telephone
Number
_____________________________________ ____________________________________
Name and Title Facsimile Number
Dated:_______________________________
Payment of the Solicitation Fee shall be
mailed by check to the following address:
<PAGE> 56
COLONIAL INTERMEDIATE HIGH INCOME FUND
Soliciting Dealer Agreement - Page 7
Transferable Rights Offer Expiring January 23, 1998
_____________________________________
_____________________________________
_____________________________________
<PAGE> 1
Exhibit (k)(1)
TRANSFER AGENCY AND REGISTRAR AGREEMENT
AGREEMENT, dated as of July 18, 1988 between Colonial Intermediate High
Income Fund (the "Fund"), a Massachusetts business trust, and having its
principal place of business at One Financial Center, Boston, Massachusetts,
02111, and BOSTON SAFE DEPOSIT AND TRUST COMPANY (the "Transfer Agent"), a
Massachusetts trust company with principal offices at One Boston Place, Boston,
Massachusetts 02108.
W I T N E S S E T H :
That for and in consideration of the mutual promises hereinafter set
forth, the Fund and the Transfer Agent agree as follows:
1. DEFINITIONS. Whenever used in this Agreement, the following
words and phrases, unless the
context otherwise requires, shall have the following meanings:
(a) "Authorized Person" shall be deemed to include the President, any
Vice President, the Secretary, any Assistant Secretary, Treasurer, or any
Assistant Treasurer, or any other person, whether or not such person is an
officer or employee of the Fund, duly authorized to give Oral Instructions or
Written Instructions on behalf of the Fund as indicated in a certificate
furnished to the Transfer Agent pursuant to Section 4(c) hereof as may be
received by the Transfer Agent from time to time;
(b) "Custodian" refers to the custodian and any sub-custodian of all
securities and other property which the Fund may from time to time deposit, or
cause to be deposited or held under the name or account of such custodian
pursuant to the custodian agreement;
(c) "Declaration of Trust" shall mean the Agreement and Declaration of
Trust dated May 24, 1988 of the Fund as now in effect and as the same may be
amended from time to time.
(d) "Oral Instructions" shall mean instructions, other than written
instructions, actually received by the Transfer Agent from a person reasonably
believed by the Transfer Agent to be an Authorized Person;
(e) "Shares" refers to the Shares of Beneficial Interest of the Fund as
may be issued by the Fund from time to time; and
(f) "Written Instructions" shall mean a written communication signed by
a person reasonably believed by the Transfer Agent to be an Authorized Person
and actually received by the Transfer Agent.
2. APPOINTMENT OF THE TRANSFER AGENT. The Fund hereby appoints and
constitutes the Transfer Agent as transfer agent and registrar for the Shares of
the Fund and as shareholder servicing agent for the Fund. The Transfer Agent
accepts such appointments and agrees to perform the duties hereinafter set
forth.
<PAGE> 2
3. REPRESENTATIONS AND WARRANTIES OF THE TRANSFER AGENT. The Transfer
Agent represents and warrants to the Fund that (a) it is a trust company duly
organized and existing and in good standing under the laws of The Commonwealth
of Massachusetts; (b) it is duly qualified to carry on its business in The
Commonwealth of Massachusetts; (c) it is empowered under applicable laws by its
charter and by-laws to enter into and perform this agreement; (d) all requisite
corporate proceedings have been taken to authorize it to enter into and perform
this Agreement, and (e) it has or will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and obligations under
this Agreement.
4. REPRESENTATIONS-AND WARRANTIES OF THE FUND. The Fund represents and
warrants to the Transfer Agent that (a) it is a business trust duly organized
and existing and in good standing under the laws of The Commonwealth of
Massachusetts; (b) it is empowered under applicable laws and by its Declaration
of Trust and by-laws to enter into and perform this Agreement; (c) all
proceedings required by said Declaration of Trust and by-laws have been taken to
authorize it to enter into and perform this Agreement; and (d) it is a
closed-end, diversified investment company registered under the Investment
Company Act of 1940.
5. COMPENSATION. The Fund will compensate or cause the Transfer Agent to
be compensated for the performance of its obligations hereunder in accordance
with the fees set forth in the Fee Agreement dated July 18, 1988. The Fee
Agreement does not include out-of-pocket disbursements of the Transfer Agent for
which the Transfer Agent shall be entitled to bill the Fund separately. The
Transfer Agent will bill the Fund as soon as practicable after the end of each
calendar month, and said billings will be detailed in accordance with the Fee
Agreement. The Fund will promptly pay to the Transfer Agent the amount of such
billing.
Out-of-pocket disbursements shall include, but shall not be
limited to, the items specified in the written schedule of out-of-pocket charges
annexed hereto as Schedule A and incorporated herein. Schedule A may be modified
by the Transfer Agent upon not less than 30 days prior written notice to the
Fund. Unspecified out-of-pocket expenses shall be limited to those out-of-pocket
expenses reasonably incurred by the Transfer Agent in the performance of its
obligations hereunder. Reimbursement by the Fund for expenses incurred by the
Transfer Agent in any month shall be made as soon as practicable after the
receipt of an itemized bill from the Transfer Agent.
6. DOCUMENTS. In connection with the appointment of the Transfer Agent,
the Fund shall, on or before the date this Agreement goes into effect, but in
any case, within a reasonable period of time for the Transfer Agent to prepare
to perform its duties hereunder, deliver or cause to be delivered to the
Transfer Agent the following documents:
(a) If applicable, specimens of the certificates for the Shares of
the Fund;
(b) All account application forms and other documents relating to
Shareholder accounts or to any plan, program or service offered by the Fund;
(c) Certified copies of each vote of the Trustees of the Fund
designating Authorized Persons and signature cards bearing the signature of any
officer the Fund or other Authorized Person who will sign Written Instructions.
(d) All documents and papers necessary under the laws of Massachusetts,
under the Fund's Declaration of Trust, and as may be required for the due
performance of the Transfer Agent's duties under this Agreement or for the due
performance of additional duties as may from time to time be agreed upon among
the Fund and the Transfer Agent.
2
<PAGE> 3
7. DISTRIBUTIONS PAYABLE IN SHARES. In the event that the Board of
Trustees of the Fund shall declare a distribution payable in Shares, the Fund
shall deliver or cause to be delivered to the Transfer Agent written notice of
such declaration signed on behalf of the Fund by an officer thereof, upon which
the Transfer Agent shall be entitled to rely for all purposes, certifying
(i).the identity of the Shares involved, (ii) the number of Shares involved, and
(iii) that all appropriate action has been taken.
Notwithstanding any of the foregoing provisions of the
Agreement, the Transfer Agent shall be under no duty or obligation to inquire
into, and shall not be liable for: (i) the legality of the issuance or sale of
any Shares or the sufficiency of the amount to be received therefor; (ii) the
legality of the repurchase of any Shares, or the propriety of the amount to be
paid therefor; (iii) the legality of the declaration of any dividend by the
Trustees, or the legality of the issuance of any Shares in payment of any
dividend; or (iv) the legality of any recapitalization or readjustment of the
Shares.
8. DUTIES OF THE TRANSFER AGENT. The Transfer Agent shall be responsible
for administering and/or performing transfer agent functions; for performing all
of the customary services of a registrar; and for performing shareholder account
and administrative agent functions in connection with the issuance, transfer and
repurchase (including coordination with the Custodian) of the Shares consistent
with applicable regulations from time to time in effect. The operating standards
and procedures to be followed shall be determined from time to time by agreement
between the Fund and the Transfer Agent.
9. RECORD KEEPING AND OTHER INFORMATION. The Transfer Agent shall create
and maintain all necessary records in accordance with all applicable laws and
rules and regulations. To the extent required by Section 31 of the Investment
Company Act of 1940, as amended, and the rules thereunder, the Transfer Agent
agrees that all such records prepared or maintained by the Transfer Agent
hereunder are the property of the Fund and will be preserved, maintained and
made available in accordance with such section and rules, and will be
surrendered promptly to the Fund on and in accordance with its request.
The Transfer Agent and the Fund agree that all books, records,
information and data pertaining to the business of the other party which are
exchanged or received pursuant to the negotiation or the carrying out of this
Agreement shall remain confidential, and shall not be voluntarily disclosed to
any other person, except as may be required by law.
In the case of any requests or demands for the inspection of the
shareholder records of the Fund, the Transfer Agent will endeavor to notify the
Fund and to secure instructions from an authorized officer of the Fund as to
such inspection. The Transfer Agent reserves the right, however, to exhibit the
shareholder records to any person whenever it is advised by its counsel that it
may be held liable for failure to exhibit the shareholder records to such
person.
10. OTHER DUTIES. In addition, the Transfer Agent shall perform such
other duties and functions, and shall be paid amounts therefor, as may from time
to time be agreed upon in writing among the Fund and the Transfer Agent.
11. RELIANCE BY TRANSFER AGENT: Instructions.
(a) The Transfer Agent will be protected in acting upon Written or Oral
Instructions believed to have been executed or orally communicated by an
Authorized Person and will not be held to have any notice of any change of
authority of any person until receipt of a Written Instruction thereof from an
officer of the Fund. The Transfer Agent will also be protected in processing
Share certificates which it reasonably believes to bear the proper manual or
facsimile
3
<PAGE> 4
signatures of the officers of the Fund, provided that such Share certificates
bear the proper countersignature of the Transfer Agent.
(b) At any time the Transfer Agent may apply to any Authorized Person of
the Fund for Written Instructions and may seek advice from legal counsel for the
Fund or its own legal counsel, with respect to any matter arising in connection
with this Agreement, and it shall not be liable for any action taken or not
taken or suffered by it in good faith in accordance with such Written
Instructions or in accordance with the opinion of counsel for the Fund or for
the Transfer Agent. Written Instructions requested by the Transfer Agent will be
provided by the Fund within a reasonable period of time. In addition, the
Transfer Agent, its officers, agents or employees, shall accept Oral
Instructions or Written Instructions given to them by any person representing or
acting on behalf of the Fund only if said representative is known by the
Transfer Agent, or its officers, agents or employees, to be an Authorized
Person. The Transfer Agent shall have no duty or obligation to inquire into, nor
shall the Transfer Agent be responsible for, the legality of any act done by it
upon the request or direction of a person reasonably believed by the Transfer
Agent to be an Authorized Person.
12. ACTS OF GOD, ETC. The Transfer Agent will not be liable or
responsible for delays or errors by reason of circumstances beyond its control,
including acts of civil or military authority, national emergencies, labor
difficulties, fire, mechanical breakdown beyond its control, flood or
catastrophe, acts of God, insurrection, war, riots or failure beyond its control
of transportation, communication or power supply.
13. DUTY OF CARE AND INDEMNIFICATION. The Fund will indemnify the
Transfer Agent against and hold it harmless from any and all losses, claims,
damages, liabilities or expenses (including reasonable counsel fees and
expenses) resulting from any claim, demand, action or suit not resulting from
the bad faith, negligence or willful misconduct of the Transfer Agent, and
arising out of, or in connection with, its duties hereunder. In addition, the
Fund will indemnify the Transfer Agent against and hold it harmless from any and
all losses, claims, damages, liabilities or expenses (including reasonable
counsel fees and expenses) resulting from any claim, demand, action or suit as a
result of: (i) any action taken in accordance with written or Oral Instructions,
or any other instructions, or Share certificates reasonably believed by the
Transfer Agent to be genuine and to be signed, countersigned or executed, or
orally communicated by an Authorized Person; (ii) any action taken in accordance
with written or oral advice given by counsel for the Fund or its own counsel; or
(iii) any action taken as a result of any error or omission in any record
(including but not limited to magnetic tapes, computer printouts, hard copies
and microfilm copies) delivered, or caused to be delivered by the Fund to the
Transfer Agent in connection with this Agreement.
The Transfer Agent will indemnify the Fund against and hold it
harmless from any and all losses, claims, damages, liabilities or expenses
(including reasonable counsel fees and expenses) arising out of or attributable
to any action or failure or omission to act by the Transfer Agent as a result of
the Transfer Agent's bad faith, negligence or willful misconduct.
In order that the indemnification provisions contained in this
Section 13 shall apply, upon the assertion of a claim for which either party may
be required to indemnify the other, the party seeking indemnification shall
promptly notify the other party of such assertion, and shall keep the other
party advised of all pertinent facts concerning the situation in questions and
shall use reasonable care to identify and notify the other party promptly
concerning any situation which presents or appears likely to present a claim for
indemnification under this Section 13. The party who may be required to
indemnify shall have the option to participate with the party seeking
indemnification in the defense of such claim.
4
<PAGE> 5
The Fund shall have the option to defend the Transfer Agent
against any claim which may be the subject of this indemnification, and, in the
event that the Fund so elects, such defense shall be conducted by counsel chosen
by the Fund and satisfactory to the Transfer Agent, and thereupon the Fund shall
take over complete defense of the claim and the Transfer Agent shall sustain no
further legal or other expenses in such situation for which it seeks
indemnification under this Section 13. The party seeking indemnification will
not confess any claim or make any compromise in any case in which the other
party will be asked to provide indemnification, except with the other party's
prior written consent. The obligations of the parties hereto under this Section
shall survive the termination of this Agreement.
14. TERM AND TERMINATION. (a) This Agreement shall be effective as of
the date first written above and shall continue until terminated as provided
below.
(b) Either party hereto may terminate this Agreement by giving to the
other party a notice in writing specifying the date of such termination, which
shall be not less than 120 days after the date of receipt of such notice. In the
event such notice is given by the Fund, it shall be accompanied by a resolution
of the Board of Trustees of the Fund, certified by the Secretary of the Fund,
designating a successor transfer agent or transfer agents. Upon such termination
and at the expense of the Fund, the Transfer Agent will deliver to such
successor a certified list of shareholders of the Fund (with names and
addresses), an historical record of the account of each shareholder and the
status thereof, and all other relevant books, records, correspondence, and other
data established or maintained by the Transfer Agent under this Agreement in the
form reasonably acceptable to the Transfer Agent, and will cooperate in the
transfer of such duties and responsibilities, including provisions for
assistance from the Transfer Agent's personnel in the establishment of books,
records and other data by such successor or successors.
15. AMENDMENT. This Agreement may not be amended or modified in any
manner except by a written agreement executed by both parties.
16. SUBCONTRACTING. The Fund agrees that the Transfer Agent may, in its
discretion, subcontract for certain of the services described under this
Agreement or the Schedules hereto; provided that the appointment of any such
subcontractor shall not relieve the Transfer Agent of its responsibilities
hereunder.
17. MISCELLANEOUS.
(a) Any notice or other instrument authorized or required by this
Agreement to be given in writing to the Fund or the Transfer Agent, shall be
sufficiently given if addressed to that party and received by it at its office
set forth below or at such other place as it may from time to time designate in
writing.
To the Fund:
Colonial Intermediate High Income Fund
One Financial Center
Boston, Massachusetts 02111
Attention: Secretary
To the Transfer Agent:
Boston Safe Deposit and Trust Company
One Boston Place
Boston, Massachusetts 02108
Attention: Robert Radin
5
<PAGE> 6
(b) This Agreement shall extend to and shall be binding upon the parties
hereto, and their respective successors and assigns; provided, however, that
this Agreement shall not be assignable without the written consent of the other
party.
(c) This Agreement shall be construed in accordance with the laws of The
Commonwealth of Massachusetts.
(d) This Agreement may be executed in any number of counterparts, each
of which shall be deemed to be an original; but such counterparts shall,
together, constitute only one instrument.
(e) The captions of this Agreement are included for convenience of
reference only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect.
(f) 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 instrument is executed on behalf of the Trustees of the
Fund as Trustees and not individually and that the obligations 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 Fund.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunder duly authorized as of the day
and year first above written.
COLONIAL INTERMEDIATE HIGH INCOME FUND
By: /s/ EVELYN A. MELLEN
-----------------------------------
Evelyn A. Mellen
BOSTON SAFE DEPOSIT AND TRUST COMPANY
By: /s/ JEFFREY P. BEALE
-----------------------------------
Jeffrey P. Beale
6
<PAGE> 7
Schedule A
OUT-OF-POCKET EXPENSES
The Fund shall reimburse the Transfer Agent monthly for the following
out-of-pocket expenses:
- postage
- mailing, including third party labor charges forms telephone if
- applicable, magnetic tape and freight storage fees for the
- retention of records microfilm/microfiche stationery insurance
- if applicable, terminals, transmitting lines and any expenses
- incurred in connection with such terminals and lines
- all other miscellaneous expenses reasonably incurred by the
Transfer Agent
The Fund agrees that postage and mailing expenses will be paid on the
day of or prior to mailing as agreed with the Transfer Agent and the Transfer
Agent agrees to provide the Fund with an estimate of such postage and mailing
expenses five (5) business days prior to any such mailing. In addition, the Fund
will promptly reimburse the Transfer Agent for any other expenses incurred by
the Transfer Agent as to which the Fund and the Transfer Agent mutually agree
that such expenses are not otherwise properly borne by the Transfer Agent as
part of its duties and obligations under the Agreement.
7
<PAGE> 8
Schedule B
DUTIES OF THE AGENT (See Exhibit 1 for Summary of Services)
1. SHAREHOLDER INFORMATION. The Transfer Agent or its agent shall
maintain a record of the number of Shares held by each holder of record which
shall include their addresses and which shall indicate whether such Shares are
held in certificated or uncertificated form.
2. SHAREHOLDER SERVICES. The Transfer Agent or its agent will
investigate all inquiries from shareholders of the Fund relating to Shareholder
accounts and will answer all correspondence from Shareholders and others
relating to its duties hereunder and such other correspondence as may from time
to time be mutually agreed upon between the Transfer Agent and the Fund and
furnish copies of all such inquiries and answers promptly to the Fund.
3. SHARE CERTIFICATES.
(a) At the expense of the Fund, the Transfer Agent or its agent shall
maintain an adequate supply of blank share certificates to meet the Transfer
Agent or its Agent's requirements therefor. Such Share certificates shall be
properly signed by facsimile. The Fund agrees that, notwithstanding the death,
resignation, or removal of any officer of the Fund whose signature appears on
such certificates, the Transfer Agent or its agent may continue to countersign
certificates which bear such signatures until otherwise directed by Written
Instructions.
(b) The Transfer Agent or its agent shall issue replacement Share
certificates in lieu of certificates which have been lost, stolen or destroyed,
upon receipt by the Transfer Agent or its agent of properly executed affidavits
and lost certificate bonds, in form satisfactory to the Transfer Agent or its
agent, with the Fund and the Transfer Agent or its agent as obligees under the
bond.
(c) The Transfer Agent or its agent shall also maintain a record of each
certificate issued, the number of Shares represented thereby and the holder of
record. With respect to Shares held in open accounts or uncertificated form,
i.e., no certificate being issued with respect thereto, the Transfer Agent or
its agent shall maintain comparable records of the record holders thereof,
including their names and addresses. The Transfer Agent or its agent shall
further maintain a stop transfer record on lost and/or replaced certificates.
4. MAILING COMMUNICATIONS TO SHAREHOLDERS; PROXY MATERIALS. At the
expense of the Fund, the Transfer Agent or its agent will address and mail to
Shareholders of the Fund, all reports to Shareholders, dividend and distribution
notices and proxy material for any of the Fund's meetings of Shareholders. In
connection with meetings of Shareholders, the Transfer Agent or its agent, at
the expense of the Fund will prepare Shareholder lists, mail and certify as to
the mailing of proxy materials, process and tabulate returned proxy cards,
report on proxies voted prior to meetings, act as inspector of election at
meetings and certify Shares voted at meetings.
5. DIVIDENDS.
(a) NOTICE TO TRANSFER AGENT AND CUSTODIAN. Upon the declaration of each
dividend and each capital gains distribution by the Board of Trustees of the
Fund with respect to Shares of the Fund, the Transfer Agent shall furnish or
cause to be furnished to the Transfer Agent or its agent a copy of a resolution
of the Fund's Board of Trustees certified by the Secretary of the Fund setting
forth the date of the declaration of such dividend or distribution, the
ex-dividend date, the
8
<PAGE> 9
date of payment thereof, the record date as of which Shareholders entitled to
payment shall be determined, the amount payable per Share to the Shareholders of
record as of that date, the total amount payable to the Transfer Agent or its
agent on the payment date and whether such dividend or distribution is to be
paid in Shares of such class at net asset value.
On or before the payment date specified in such resolution of
the Board of Trustees, the Custodian of the Fund will pay to the Transfer Agent
or its agent sufficient cash to make payment to the Shareholders of record as of
such payment date.
(b) INSUFFICIENT FUNDS FOR PAYMENTS. If the Transfer Agent or its agent
does not receive sufficient cash from the Custodian to make total dividend
and/or distribution payments to all Shareholders of the Fund as of the record
date, the Transfer Agent or its agent will, upon notifying the Fund, withhold
payment to all Shareholders of record as of the record date until such
sufficient cash is provided to the Transfer Agent or its agent.
9
<PAGE> 10
Exhibit 1
to
Schedule B
Summary of Services
The services to be performed by the Transfer Agent or agent shall be as
follows:
A. DAILY RECORDS
-------------
Maintain daily on disc the following information with respect to
each Shareholder account as received:
- Name and Address (Zip Code)
- Class of Shares
- Balance of Shares held by Transfer Agent
- Beneficial owner code: i.e. male, female, joint
tenant, etc.
- Dividend code (reinvestment)
- Complete register information including the number
of Shares held in certificate form, date of issuance
and certificate numbers
B. OTHER DAILY ACTIVITY
--------------------
- Answer written inquiries relating to Shareholder
accounts (matters relating to portfolio management
distribution of Shares and other management policy
questions wil1 be referred to the Fund).
- Examine and process all transfers of Shares, ensuring
that all transfer requirements and legal documents have
been supplied.
- Issue and mail replacement checks. Issue and mail
replacement certificates.
C. REPORTS PROVIDED TO THE FUND
----------------------------
Furnish the following reports to the Fund:
- Daily financial totals
- Monthly report of outstanding
- Shares Monthly analysis of accounts by beneficial
owner code
- Monthly analysis of accounts by Share range
D. DIVIDEND ACTIVITY
-----------------
- Calculate, process, prepare and mail Share dividends,
checks and statements as instructed by the Fund.
- Compute, prepare and mail all necessary reports to
Shareholders or various authorities as requested by the
Fund.
- Prepare and mail 1099 Statements.
10
<PAGE> 11
E. MEETINGS OF SHAREHOLDERS
------------------------
- Cause to be mailed proxy and related material for all
meetings of Shareholders. Tabulate returned proxies
(proxies must be adaptable to mechanical equipment of
the Transfer Agent or its agents) and supply daily
reports when sufficient proxies have been received.
- Prepare and submit to the Fund an Affidavit of
Mailing.
- At the time of the meeting, furnish a certified list
of Shareholders, hard copy, microfilm or microfiche
and, if requested by the Fund, Inspectors of election.
F. PERIODIC ACTIVITIES
-------------------
- Cause to be mailed reports, Fund, and any other
enclosures requested by the Fund (material must be
adaptable to mechanical equipment of Transfer Agent or
its agents).
11
<PAGE> 1
Exhibit (k)(1)(a)
AMENDMENT NO. 1
TO
TRANSFER AGENCY AND REGISTRAR AGREEMENT
The Transfer Agency and Registrar Agreement between Boston Safe Deposit and
Trust Company (the "Transfer Agent") and Colonial Intermediate High Income Fund
(the "Fund") dated July 18, 1988 (the "Transfer Agency Agreement") is hereby
amended by deleting Section 14(b) in its entirety and by replacing it with the
following:
"(b) (1) After a period of five years from the date hereof either of
the parties may terminate this Agreement by giving to the other
party notice in writing specifying the date of such termination,
which shall not be less than 120 days after the date of receipt
of such notice.
(2) This Agreement may be terminated by the Fund prior to the
expiration of the five year period specified in Section 14(b)
(1) upon a finding made in good faith by a majority of the
"disinterested trustees" of the Board of Trustees of the Fund
that (I) the Transfer Agent has failed on a continuing basis to
perform its duties pursuant to the Agreement in a satisfactory
manner consistent with then current industry standards and
practices or (ii) the terms and provisions of the Agreement are
no longer reasonable in light of then current industry standards
and practices. In the event notice to terminate pursuant to
Section 14(b) (1) or 14(b) (2) is given by the Fund to the
Transfer Agent, it shall be accompanied by a resolution of the
Board of Trustees of the Fund, certified by the Secretary of the
Fund, designating a successor transfer agent or transfer agents.
Upon such termination and at the expense of the Fund, the
Transfer Agent will deliver to such successor a certified list
of shareholders of the Fund with names and addresses), an
historical record of the account of each shareholder and the
status thereof, and all other relevant books, records,
correspondence, and other data established or maintained by the
Transfer Agent under this Agreement in the form reasonably
acceptable to the Transfer Agent, and will cooperate in the
transfer of such duties and responsibilities, including
provisions for assistance from the Transfer Agent's personnel in
the establishment of books, records and other data by such
successor or successors."
<PAGE> 2
IN WITNESS WHEREOF, the Fund and the Transfer Agent have executed this Amendment
No. 1 to the Transfer Agency and Registrar Agreement as of the 22nd day of July,
1988.
COLONIAL INTERMEDIATE HIGH INCOME FUND
By: /s/ EVELYN A. MELLEN
--------------------------------------
Evelyn A. Mellen
BOSTON SAFE DEPOSIT AND TRUST COMPANY
By: /s/ JEFFREY P. BEALE
--------------------------------------
Jeffrey P. Beale
<PAGE> 1
Exhibit (k)(1)(b)
CONSENT TO ASSIGNMENT
Reference is made to the Transfer Agency Agreement dated as of July 18,
1988 ("Transfer Agency Agreement") by and between Colonial Intermediate High
Income Fund, Inc. (the "Fund") and Boston Safe Deposit and Trust Company
("Boston Safe") pursuant to which Boston Safe provides certain transfer agent
services to the Fund.
The undersigned, a duly authorized office of the Fund, hereby agrees and
consents on behalf of the Fund, in accordance with the provisions of the
Transfer Agency Agreement, to the assignment of the Transfer Agency Agreement by
Boston Safe to TBC Shareholder Services Inc., a Massachusetts corporation
("SSI"), and the undersigned further agrees and consents on behalf of the Fund
to the acquisition of SSI by a subsidiary of American Express Company and to
such further assignment of the Transfer Agency Agreement as may occur in
connection with said acquisition. Such consents shall be effective at such time
as SSI has received the regulatory approvals necessary to engage in the business
of providing transfer agency services.
COLONIAL INTERMEDIATE HIGH
INCOME FUND, INC.
By: /s/ EVELYN A. MELLEN
---------------------------------
Evelyn A. Mellen
Title: Vice President
Date: April 19, 1989
<PAGE> 1
Exhibit (k)(4)
SUBSCRIPTION AGENT AGREEMENT
Colonial Intermediate High Income Fund
This Subscription Agent Agreement (the "Agreement") is made as of
__________________, 1998 between Colonial Intermediate High Income Fund, a
Massachusetts business trust (the "Fund") and First Data Investor Services
Group, Inc., as subscription agent (the "Fund"). All terms not defined herein
shall have the meaning given in the prospectus (the "Prospectus") included in
the Registration Statement on Form N-2 (File No. 811-05567) filed by the Fund
with the Securities and Exchange Commission on April 15, 1998, as amended by any
amendment filed with respect thereto (the "Registration Statement").
WHEREAS, the Fund proposes to issue certificates or other evidences of
subscription rights, in the form designated by the Fund (the "Subscription
Certificates") to Shareholders of record (the "Shareholders") of its shares of
beneficial interest, no par value ("Shares"), as of a record date specified by
the Fund (the "Record Date"), pursuant to which each Shareholder will have
certain transferrable rights (the "Rights") to subscribe for Shares, as
described in and upon such terms as are set forth in the Prospectus, a final
copy of which has been or, upon availability will promptly be, delivered to the
Agent; and
WHEREAS, the Fund wishes the Agent to perform certain acts on behalf of
the Fund, and the Agent is willing to so act, in connection with the
distribution of the Subscription Certificates and the issuance and exercise of
the Rights to subscribe therein set forth, all upon the terms and conditions set
forth herein.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
agreements set forth herein, the parties agree as follows:
1. APPOINTMENT. The Fund hereby appoints the Agent to act as subscription
agent in connection with the distribution of Subscription Certificates and the
issuance and exercise of the Rights in accordance with the terms set forth in
this Agreement as more fully described in the attached schedule of services and
procedures which is annexed hereto as Schedule A and incorporated herein by
reference and the Agent hereby accepts such appointment.
2. COMPENSATION FOR SERVICES. The Fund agrees to pay to the Agent
compensation for its services as such in accordance with the attached schedule
of fees annexed hereto as Schedule B and incorporated herein. The Fund further
agrees that it will reimburse the Agent for its reasonable out-of-pocket
expenses incurred in the performance of its duties as such. The Fund agrees to
pay all fees and out-of-pocket expenses by Federal Funds Wire within fifteen
(15) business days following the receipt of the respective invoice.
3. INSTRUCTIONS AND INDEMNIFICATION. The Agent undertakes the duties and
obligations imposed by this Agreement upon the following terms and conditions:
(a) The Agent shall be entitled to rely upon any instructions or
directions furnished to it by a President or Vice President of the Fund, whether
in conformity with the provisions of this Agreement or constituting a
modification hereof or a supplement hereto. Without limiting the generality of
the foregoing or any other provision of this Agreement, the Agent, in connection
with its duties hereunder, shall not be under any duty or obligation to inquire
into the validity or invalidity or authority or lack thereof of any instruction
or direction from an officer of the Fund which conforms to the applicable
requirements of this Agreement and which the Agent reasonably believes to be
genuine and shall not be
<PAGE> 2
liable for any delays, errors or loss of data occurring by reason of
circumstances beyond the Agent's control.
(b) The Fund will indemnify the Agent and its nominees against,
and hold it harmless from, all liability and expense which may arise out of or
in connection with the services required by this Agreement or the instructions
or directions furnished to the Agent relating to this Agreement by a President
or Vice President of the Fund, except for any liability or expense which shall
arise out of the negligence, bad faith or willful misconduct of the Agent or
such nominees. In any case in which the Fund may be asked to indemnify or hold
the Agent harmless, the Agent will notify the Fund promptly after identifying
any situation which it believes presents or appears likely to present a claim
for indemnification against the Fund, although the failure to do so shall not
prevent recovery by the Agent, except to the extent the Fund is predjudiced by
such failure to notify, and shall keep the Fund advised with respect to all
developments concerning such situation. The Fund shall have the option to defend
the Agent against any claim which may be the subject of this indemnification
and, in the event that the Fund so elects, such defense shall be conducted by
counsel chosen by the Fund and satisfactory to the Agent, and thereupon the Fund
shall take over complete defense of the claim and the Agent shall sustain no
further legal or other expenses in respect of such claim. The Agent will not
confess any Claim or make any compromise in any case in which the Fund will be
asked to provide indemnification, except with the Fund's prior written consent.
The obligations of the parties hereto under this Section 3(b) shall survive the
termination of this Agreement.
(c) Notwithstanding any provision in this Agreement to the
contrary, except for the gross negligence or willful misconduct of Agent (or its
subcontractors), Agent's cumulative liability (to the Fund) for all losses,
claims, suits, controversies, breaches, or damages for any cause whatsoever
arising out of or related to this Agreement and regardless of the form of action
or legal theory shall not exceed two times the fees received by Agent for the
services provided under this Agreement. In allocating risk under the Agreement,
the parties agree that the damage limitation set forth above shall apply to any
alternative remedy ordered by a court in the event such court determines that
sole and exclusive remedy provided for in the Agreement fails of its essential
purpose.
(d) NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY, IN
NO EVENT SHALL AGENT, ITS AFFILIATES OR ANY OF ITS OR THEIR DIRECTORS, OFFICERS,
EMPLOYEES, AGENTS OR SUBCONTRACTORS BE LIABLE UNDER ANY THEORY OF TORT,
CONTRACT, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY FOR LOST PROFITS,
EXEMPLARY, PUNITIVE, SPECIAL, INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES,
EACH OF WHICH IS HEREBY EXCLUDED BY AGREEMENT OF THE PARTIES REGARDLESS OF
WHETHER SUCH DAMAGES WERE FORESEEABLE OR WHETHER EITHER PARTY OR ANY ENTITY HAS
BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
4. ASSIGNMENT, DELEGATION.
(a) Neither this Agreement nor any rights or obligations hereunder
may be assigned or delegated by either party without the written consent of the
other party. Notwithstanding the foregoing, Agent may without further consent of
the Fund engage the services of a subcontractor to perform certain of the
services set forth herein, provided however, Agent shall be responsible for the
acts and omissions of such subcontractors.
(b) This Agreement shall inure to the benefit of and be binding
upon the parties and their
<PAGE> 3
respective permitted successors and assigns. Nothing in this Agreement is
intended or shall be construed to confer upon any other person any right, remedy
or claim or to impose upon any other person any duty, liability or obligation.
5. GOVERNING LAW. The validity, interpretation and performance of this
Agreement shall be governed by the law of the Commonwealth of Massachusetts,
excluding the conflicts of laws provisions thereof.
6. SEVERABILITY. The parties hereto agree that if any of the provisions
contained in this Agreement shall be determined invalid, unlawful or
unenforceable to any extent, such provisions shall be deemed modified to the
extent necessary to render such provisions enforceable. The parties hereto
further agree that this Agreement shall be deemed severable, and the invalidity,
unlawfulness or unenforceability of any term or provision thereof shall not
affect the validity, legality or enforceability of this Agreement or of any term
or provision hereof.
7. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which
together shall be considered one and the same agreement.
8. CAPTIONS. The captions and descriptive headings herein are for the
convenience of the parties only. They do not in any way modify, amplify, alter
or give full notice of the provisions hereof.
9. FACSIMILE SIGNATURES. Any facsimile signature of any party hereto shall
constitute a legal, valid and binding execution hereof by such party.
10. FURTHER ACTIONS. Each party agrees to perform such further acts and
execute such further documents as are necessary to effect the purposes of this
Agreement.
11. ADDITIONAL PROVISIONS. Except as specifically modified by this
Agreement, the Agent's rights and responsibilities set forth in the Transfer
Agency and Services Agreement in effect between Agent and the Fund are hereby
ratified and confirmed and continue in effect.
12. 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.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers, as of the day and year first above
written.
FIRST DATA INVESTOR SERVICES COLONIAL INTERMEDIATE HIGH
GROUP, INC. INCOME FUND
- ------------------------------- ----------------------------------
Signature Signature
- ------------------------------- ----------------------------------
Title Title
<PAGE> 4
Schedule A
Services and Procedures
1. Form and Execution of Subscription Certificates.
(a) Each Subscription Certificate shall be fully transferable. The
Agent shall, in its capacity as Transfer Agent of the Fund, maintain a register
of Subscription Certificates and the holders of record thereof (each of whom
shall be deemed a "Shareholder" hereunder for purposes of determining the rights
of holders of Subscription Certificates). Each Subscription Certificate shall,
subject to the provisions thereof, entitle the Shareholder in whose name it is
recorded to the following:
(i) The right to acquire during the Subscription Period,
as defined in the Prospectus, at the Subscription Price, as defined in
the Prospectus, a number of Shares equal to one Share for every three
Rights (the "Primary Subscription Right"); PROVIDED, HOWEVER, that the
Record Date Shareholders issued fewer that three Rights are entitled to
purchase one Share; and PROVIDED FURTHER, that no fractional Shares
shall be issued; and
(ii) With respect to Record Date Shareholders only, the
right to subscribe for additional Shares, subject to the availability
of such Shares and to the allotment of such Shares as may be available
among Record Date Shareholders who exercise Over-Subscription Rights on
the basis specified in the Prospectus; provided, however, that such
Record Date Shareholder has exercised all Primary Subscription Rights
issued to him or her (the "Over-Subscription Privilege").
2. Rights and Issuance of Subscription Certificates.
(a) Each Subscription Certificate shall evidence the rights of the
Shareholder therein named to purchase Shares upon the terms and conditions
therein and herein set forth.
(b) Upon the written advice of the Fund, signed by any of its duly
authorized officers, as to the Record Date, the Agent shall, from a list of the
Fund Shareholders as of the Record Date to be prepared by the Agent in its
capacity as Transfer Agent of the Fund, prepare and record Subscription
Certificates in the names of the Shareholders, setting forth the number of
Rights to subscribe for the Shares calculated on the basis of one Right for each
Share recorded on the books in the name of each such Shareholder as of the
Record Date. The number of Rights that are issued to Record Date Shareholders
will be rounded down, by the Agent, to the nearest number of full Rights as
fractional Rights will not be issued. Each Subscription Certificate shall be
dated as of the Record Date and shall be executed manually or by facsimile
signature of a duly authorized officer of the Subscription Agent. Upon the
written advice, signed as aforesaid, as to the effective date of the
Registration Statement, the Agent shall promptly countersign and deliver the
Subscription Certificates, together with a copy of the Prospectus, instruction
letter and any other document as the Fund deems necessary or appropriate, to all
Shareholders with record addresses in the United States (including its
territories and possessions and the District of Columbia). Delivery shall be by
first class mail (without registration or insurance), except for those
Shareholders having a registered address outside the United States (who will
only receive a notice and other documents as the Fund deems necessary or
appropriate, if any), delivery shall be by air mail (without registration or
insurance) and by first class mail (without registration or insurance) to those
Shareholders having APO or FPO addresses. No Subscription Certificate shall be
valid for any purpose unless so executed.
<PAGE> 5
(c) The Agent will mail a copy of the Prospectus, instruction
letter, a special notice and other documents as the Fund deems necessary or
appropriate, if any, but not Subscription Certificates to Record Date
Shareholders whose record addresses are outside the United States (including its
territories and possessions and the District of Columbia ) ("Foreign Record Date
Shareholders"). The Rights to which such Subscription Certificates relate will
be held by the Agent for such Foreign Record Date Shareholders' accounts until
instructions are received to exercise, sell or transfer the Rights.
3. Exercise.
(a) Record Date Shareholders may acquire Shares on Primary
Subscription and pursuant to the Over-Subscription Privilege by delivery to the
Agent as specified in the Prospectus of (i) the Subscription Certificate with
respect thereto, duly executed by such Shareholder in accordance with and as
provided by the terms and conditions of the Subscription Certificate, together
with (ii) the estimated purchase price of as disclosed in the Prospectus for
each Share subscribed for by exercise of such Rights, in U.S. dollars in cash or
by money order or check or bank draft drawn on a bank in the United States, in
each case payable to the order of the Fund.
(b) Rights may be exercised at any time after the date of issuance
of the Subscription Certificates with respect thereto but no later than 5:00
P.M. New York time on such date as the Fund shall designate to the Agent in
writing (the "Expiration Date"). For the purpose of determining the time of the
exercise of any Rights, delivery of any material to the Agent shall be deemed to
occur when such materials are received at the corporate office of the Agent
specified in the Prospectus.
(c) Notwithstanding the provisions of Section 3(a) above regarding
delivery of an executed Subscription Certificate to the Agent prior to 5:00 P.M.
New York time on the Expiration Date, if prior to such time the Agent receives a
Notice of Guaranteed Delivery by facsimile (telecopy) or otherwise from a bank,
a trust Fund or a New York Stock Exchange member guaranteeing delivery of (i)
payment of the full Subscription Price for the Shares subscribed for on Primary
Subscription and any additional Shares of Common Stock subscribed for pursuant
to the Over-Subscription Privilege, and (ii) a properly completed and executed
Subscription Certificate, then such exercise of Primary Subscription Rights and
Over-Subscription Rights shall be regarded as timely, subject, however, to
receipt of the duly executed Subscription Certificate and full payment for the
Shares by the Agent within three Business Days (as defined below) after the
Expiration Date (the "Protect Period"). For the purposes of the Prospectus and
this Agreement, "Business Day" shall mean any day on which trading is conducted
on the New York Stock Exchange.
(d) Within five Business Days following the Expiration Date (the
"Confirm Date") the Agent shall send to each exercising Shareholder (or, if
Shares on the Record Date are held by Cede & Co. or any other depository or
nominee, to Cede & Co. or such other depository or nominee) a confirmation
showing the number of Shares acquired pursuant to the Primary Subscription, and,
if applicable, the Over-Subscription Privilege, the per Share and total purchase
price for such Shares, and any additional amount payable to the Fund by such
Shareholder or any excess to be refunded by the Fund to such Shareholder, along
with a letter explaining the allocation of Shares pursuant to the
Over-Subscription Privilege.
(e) Any additional payment required from a Shareholder must be
received by the Agent within ten Business Days after the Confirmation Date and
any excess payment to be refunded by the Fund to a Shareholder will be mailed by
the Agent within ten Business Days after the Confirmation Date.
<PAGE> 6
If a Shareholder does not make timely payment of any additional amounts due in
accordance with Section 3(d) above, the Agent will consult with the Fund in
accordance with Section 4 as to the appropriate action to be taken. The Agent
will not issue or deliver certificates for Shares subscribed for until payment
in full therefore has been received, including collection of checks and payment
pursuant to notices of guaranteed delivery.
(f) The Rights are transferable until the Expiration Date, and the
Rights and the Shares will be listed for trading on the New York Stock Exchange.
Reference is made to the Prospectus for a complete description of the sale of
the Rights and the issue of the Shares.
4. Validity of Subscriptions. Irregular subscriptions not otherwise
covered by specific instructions herein shall be submitted to an appropriate
officer of the Fund and handled in accordance with his or her instructions. Such
instructions will be documented by the Agent indicating the instructing officer
and the date thereof.
5. Over-Subscription. If, after allocation of Shares to Record Date
Shareholders, there remain unexercised Rights, then the Agent shall allot the
Shares issuable upon exercise of such unexercised Rights (the "Remaining
Shares") to Shareholders who have exercised all the Rights initially issued to
them and who wish to acquire more than the number of Shares for which the Rights
issued to them are exercisable. Shares subscribed for pursuant to the
Over-Subscription Privilege will be allocated in the amounts of such
over-subscriptions. If the number of Shares for which the Over-Subscription
Privilege has been exercised is greater than the Remaining Shares, the Agent
shall allocate the Remaining Shares to Record Date Shareholders exercising
Over-Subscription Privilege pro rata based on the number of Shares owned by them
on the Record Date. Any remaining Shares to be issued shall be allocated to
holders of Rights acquired in the secondary market based on the number of Rights
exercised by such holders of Rights. The percentage of Remaining Shares each
over-subscribing Record Date Shareholder or other Rights holder may acquire will
be rounded down to result in delivery of whole Shares. The Agent shall advise
the Fund immediately upon the completion of the allocation set forth above as to
the total number of Shares subscribed and distributable.
6. Delivery of Certificates. The Agent will deliver (i) certificates
representing those Shares purchased pursuant to exercise of Primary Subscription
Rights as soon as practicable after the corresponding Rights have been validly
exercised and full payment for such Shares has been received and cleared and
(ii) certificates representing those Shares purchased pursuant to the exercise
of the Over-Subscription Privilege as soon as practicable after the Expiration
Date and after all allocations have been effected.
7. Holding Proceeds of Rights Offering in Escrow.
(a) All proceeds received by the Agent from Shareholders in
respect of the exercise of Rights shall be held by the Agent, on behalf of the
Fund, in a segregated, interest-bearing escrow account (the "Escrow Account").
Pending disbursement in the manner described in Section 3(e) above, funds held
in the Escrow Account shall be invested by the Agent at the direction of the
Fund.
(b) The Agent shall deliver all proceeds received in respect of
the exercise of Rights (including interest earned thereon) to the Fund as
promptly as practicable, but in no event later than five business days after the
Expiration Date. Proceeds held in respect of Excess Payments (including interest
earned thereon) shall belong to the Fund.
<PAGE> 7
8. Reports. Daily, during the period commencing on the Record Date, until
termination of the Subscription Period, the Agent will report by telephone or
telecopier (by 2:00 p.m., New York time), confirmed by letter, to an Officer of
the Fund, data regarding Rights exercised, the total number of Shares subscribed
for, and payments received therefor, bringing forward the figures from the
previous day's report in each case so as to show the cumulative totals and any
such other information as may be reasonably requested by the Fund.
9. Loss or Mutilation. If any Subscription Certificate is lost, stolen,
mutilated or destroyed, the Agent may, on such terms which will indemnify and
protect the Fund and the Agent as the Agent may in its discretion impose (which
shall, in the case of a mutilated Subscription Certificate include the surrender
and cancellation thereof), issue a new Subscription Certificate of like
denomination in substitution for the Subscription Certificate so lost, stolen,
mutilated or destroyed.
10. Changes in Subscription Certificate. The Agent may, without the consent
or concurrence of the Shareholders in whose names Subscription Certificates are
registered, by supplemental agreement or otherwise, concur with the Fund in
making any changes or corrections in a Subscription Certificate that it shall
have been advised by counsel (who may be counsel for the Fund) is appropriate to
cure any ambiguity or to correct any defective or inconsistent provision or
clerical omission or mistake or manifest error therein or herein contained, and
which shall not be inconsistent with the provision of the Subscription
Certificate except insofar as any such change may confer additional rights upon
the Shareholders.
<PAGE> 8
Schedule B
Fees
<PAGE> 1
Exhibit (k)(5)
[SHAREHOLDER
COMMUNICATIONS
CORPORATION LOGO]
INFORMATION AGENT AGREEMENT
This document will constitute the agreement between COLONIAL INTERMEDIATE
HIGH INCOME FUND ("CIF"), with its principal executive offices at One Financial
Center, Boston, MA 02111 and SHAREHOLDER COMMUNICATIONS CORPORATION ("SCC"),
with its principal executive offices at 17 State Street, New York, NY 10005,
relating to a Rights Offering (the "OFFER") of Colonial Intermediate High Income
Fund (the "FUND").
The services to be provided by SCC will be as follows:
(1) INDIVIDUAL HOLDERS OF RECORD AND BENEFICIAL OWNERS
TARGET GROUP. SCC estimates that it may call between 1,440 to 2,400 of
the approximately 9,500 outstanding beneficial and registered
shareholders of the FUND. The estimate number is subject to adjustment
and SCC may actually call more or less shareholders depending on the
response to the OFFER or at CIF's direction.
TELEPHONE NUMBER LOOKUPS. SCC will obtain the needed telephone numbers
from various types of telephone directories.
INITIAL TELEPHONE CALLS TO PROVIDE INFORMATION. SCC will begin
telephone calls to the target group as soon as practicable after being
instructed by CIF. Most calls will be made during 10:00 A.M. to 9:00
P.M. on business days and only during 10:00 A.M. to 5:00 P.M. on
Saturdays. NO CALLS WILL BE RECEIVED BY ANY SHAREHOLDER AFTER 9:00
P.M. ON ANY DAY, IN ANY TIME ZONE, UNLESS SPECIFICALLY REQUESTED BY
THE SHAREHOLDER. SCC will maintain "800" lines for shareholders to
call with questions about the OFFER. The "800" lines will be staffed
Monday through Friday between 9:00 a.m. and 9:00 p.m. SCC will provide
CIF with a weekly report reflecting the number of calls received by
SCC reflecting the names and phone number, if available.
REMAILS. SCC will coordinate remails of offering materials to the
shareholders who advise us that they have discarded or misplaced the
originally mailed materials. Use of overnight courier services must
receive prior approval by CIF.
REMINDER/EXTENSION MAILING. SCC will help to coordinate any targeted
or broad-based reminder mailing at the request of CIF. SCC will mail
only materials supplied by CIF or approved by CIF in writing.
SUBSCRIPTION REPORTS. SCC will provide CIF and/or the dealer manager
with subscription indications beginning not less than 7 business days
prior to expiration of the OFFER. These reports are based solely on
verbal indications received from the reorganization departments of
each participating broker dealer.
<PAGE> 2
[SHAREHOLDER
COMMUNICATIONS
CORPORATION LOGO]
(2) BANK/BROKER SERVICING
SCC will contact all banks, dealers and other nominee shareholders
("sponsors") holding stock as shown on appropriate portions of the
shareholder lists to ascertain quantities of offering materials needed
for forwarding to beneficial owners.
SCC will deliver offering materials by messenger to New York City
based intermediaries and by Federal Express or other means to non-New
York City based intermediaries. SCC will also follow-up by telephone
with each intermediary to insure receipt of the offering materials and
to confirm timely remailing of materials to the beneficial owners.
SCC will maintain frequent contact with intermediaries to monitor
shareholder response and to insure that all liaison procedures are
proceeding satisfactorily. In addition, SCC will contact beneficial
holders directly, if possible, and do whatever may be appropriate or
necessary to provide information regarding the OFFER to this group.
SCC will, as frequently as practicable, report to CIF with responses
from intermediaries.
(3) PROJECT FEE
In consideration for acting as Information Agent SCC will receive a
project fee of $10,000.
(4) ESTIMATED EXPENSES
SCC will be reimbursed by CIF for its reasonable out-of-pocket
expenses incurred provided that SCC submits to CIF an expense report,
itemizing such expenses and providing copies of all supporting bills
in respect of such expenses. If the actual expenses incurred are less
than the portion of the estimated high range expenses paid in advance
by CIF, CIF will receive from SCC a check payable in the amount of the
difference at the time that SCC sends its final invoice for the second
half of the project fee.
SCC's expenses are estimated as set forth below and the estimates are
based largely on data provided to SCC by CIF. In the course of the
OFFER the expenses and expense categories may change due to changes in
the OFFER schedule or due to events beyond SCC's control, such as
delays in receiving offering material and related items. In the event
of a change of 10% or more from the total expenses estimated or new
expenses not originally contemplated, SCC will notify CIF by phone
and/or by letter for prior approval of such expenses.
<PAGE> 3
[SHAREHOLDER
COMMUNICATIONS
CORPORATION LOGO]
<TABLE>
<CAPTION>
ESTIMATED EXPENSES Low Range High Range
--------- ----------
<S> <C> <C>
DATA HANDLING AND PREPARATION
Telephone # Lookup - Account Consolidation,
Computer Match and Information Operators (blended rate)
4,800 @ $.35 ............................................. $ 1,680 $ 1,680
INBOUND/OUTBOUND INFORMATION CAMPAIGN
Outbound Telephone Calls
1,440 to 2,400 @ $2.75 (registered & NOBO holders) ........ 3,960 6,600
1,000 to 1,400 @ $2.75 (Reorganization Calls) ............. 2,750 3,850
Inbound "800" Telephone Calls
(Shareholders, Banks, Brokers and Financial Advisors)
475 to 760 @ $2.75 ........................................ 1,306 2,090
MAILING & DISTRIBUTION
Bank/Broker Distribution (freight, messenger and FedEx) ... 950 1,750
Miscellaneous expenses - Fax, FedEx,
postage, search and related items ......................... 250 400
------- -------
TOTAL ESTIMATED EXPENSES ............................. $10,896 $16,370
</TABLE>
(5) PERFORMANCE
SCC will use its best efforts to achieve the goals of CIF but SCC is
not guaranteeing a minimum success rate. SCC's Project Fee as outlined
in Section 3 or Expenses as outlined in Section 4 are not contingent
on success or failure of the OFFER.
SCC's strategies revolve around a telephone information campaign. The
purpose of the telephone information campaign is to raise the overall
awareness amongst shareholders of the OFFER and help shareholders
better understand the transaction. This in turn may result in a higher
overall response.
(6) COMPLIANCE
SCC agrees that all activities by SCC and by others on behalf of SCC
pursuant to this Agreement shall be conducted in compliance with all
applicable (i) federal and state laws and regulations, including, but
not limited to all federal and state securities laws and regulations,
and (ii) requirements of the National Association of Securities
Dealers, Inc. and the New York Stock Exchange.
CIF agrees that all activities by CIF and by others (other than by, or
on behalf of SCC) on behalf of CIF pursuant to this Agreement shall be
conducted in compliance with all applicable (i) federal and state laws
and regulations, including, but not limited to all federal and state
securities laws and regulations, and (ii) requirements of the National
Association of Securities Dealers, Inc.
<PAGE> 4
[SHAREHOLDER
COMMUNICATIONS
CORPORATION LOGO]
In rendering the services contemplated by this Agreement, SCC agrees
not to make any representations, oral or written that are not
contained in the FUND's current Prospectus for the OFFER, unless
previously authorized to do so in writing by CIF.
(7) PAYMENT
Payment for one half the project fee ($5,000) and one half the
estimated high range expenses ($8,185) for a total of $13,185 will be
made at the signing of this contract. The balance, if any, will be
paid by CIF due thirty days after SCC sends its final invoice.
(8) DISSEMINATION OF INFORMATION
In rendering the services contemplated by this Agreement, SCC agrees
that neither SCC, nor any person or entity acting on behalf of SCC
shall (i) mail or otherwise distribute any written materials unless
such materials have been provided by CIF to SCC for distribution, or
such distribution has been approved by CIF in advance in writing, (ii)
make any oral representations or other statements to any person or
entity relating in anyway to the FUND or the OFFER other than as set
forth in (A) written materials provided by CIF to SCC for use by SCC
in oral communications pursuant to this Agreement or (B) the then
current prospectus for the OFFER. In connection with representations
or other statements based on information set forth in such prospectus,
SCC shall take appropriate steps to ensure that information is
presented in a manner that is fair, balanced and not misleading.
(9) TRAINING
SCC shall at its own expense provide training to all persons who are
to be involved in communications with shareholders or intermediaries
so as to ensure that all such persons review carefully and understand
the OFFER and the prospectus for the FUND so as to be in a position to
effectively communicate with shareholders and the intermediaries.
Training materials will be based solely on the information provided in
the prospectus or supplemented by CIF.
(10) MISCELLANEOUS
SCC will hold in confidence and will not use nor disclose to third
parties information we receive from CIF, or information developed by
SCC based upon such information we receive, except for information
which was public at the time of disclosure or becomes part of the
public domain without disclosure by SCC or information which we learn
from a third party which does not have an obligation of
confidentiality to CIF or the FUND.
<PAGE> 5
[SHAREHOLDER
COMMUNICATIONS
CORPORATION LOGO]
In the event the project is cancelled for an indefinite period of time
after the signing of this Agreement and before the expiration of the
OFFER, SCC will be reimbursed by CIF for any expenses incurred and a
pro rata portion of the project fee as calculated based upon the
number of days lapsed from the signing of this Agreement through the
original expiration date.
CIF agrees to indemnify, hold harmless, reimburse and defend SCC, and
its officers, agents and employees, against all claims or threatened
claims, costs, expenses, liabilities, obligations, losses or damages
(including reasonable legal fees and expenses) of any nature, incurred
by or imposed upon SCC, or any of its officers, agents or employees,
which results, arises out of or is based upon services rendered to CIF
in accordance with the provisions of this AGREEMENT, provided that
such services are rendered to CIF without any negligence, willful
misconduct, bad faith or reckless disregard on the part of SCC, or its
officers, agents and employees. SCC agrees to advise the FUND of any
claim or liability promptly after receipt of any notice thereof. The
FUND shall not be liable for any settlement without its written
consent.
This agreement will be governed by and construed in accordance with
the laws of the State of New York. This AGREEMENT sets forth the entire
AGREEMENT between SCC and CIF with respect to the agreement herein and cannot be
modified except in writing by both parties.
IN WITNESS WHEREOF, the parties have signed this AGREEMENT this _____
day of May 1998.
COLONIAL INTERMEDIATE SHAREHOLDER COMMUNICATIONS
HIGH INCOME FUND CORPORATION
By By
---------------------------- ----------------------------
Robert S. Brennan
Vice President
<PAGE> 1
[ROPES & GRAY LETTERHEAD APPEARS HERE]
May 18, 1998
Colonial Intermediate High Income Fund
One Financial Center
Boston, Massachusetts 02111
Ladies and Gentlemen:
We have acted as counsel to Colonial Intermediate High Income Fund (the
"Fund") in connection with the Registration Statement of the Fund on Form N-2
(File Nos. 333-50141 and 811-5567) (the "Registration Statement"), under the
Securities Act of 1933, as amended (the "Act"), and the Investment Company Act
of 1940, as amended, relating to the proposed issuance of transferable rights
(the "Rights") to subscribe for up to an aggregate of 5,010,532 shares
of beneficial interest, no par value, of the Fund (the "Shares"). The Rights and
Shares are to be sold pursuant to a Dealer Manager Agreement to be entered into
by and among the Fund, Colonial Management Associates, Inc. and PaineWebber
Incorporated, as Dealer Manager (the "Dealer Manager Agreement").
We have examined the Fund's Agreement and Declaration of Trust, as amended,
on file in the office of the Secretary of State of The Commonwealth of
Massachusetts and the Clerk of the City of Boston and are familiar with the
actions taken by the Fund's Trustees in connection with the issuance of the
Rights and the sale of the Shares. We have also examined the form of Dealer
Manager Agreement filed as an exhibit to the Registration Statement. We have
also examined such other documents and records as we have deemed necessary for
the purpose of this opinion.
For purposes of this opinion, we have assumed that the Dealer Manager
Agreement in the form filed as an exhibit to the Registration Statement will
have been duly executed and delivered by and on behalf of each of the parties
thereto.
Based on the foregoing, we are of the opinion that:
1. The Fund is a duly organized and validly existing unincorporated
association under the laws of The Commonwealth of Massachusetts.
2. The issuance of the Rights and the sale of the Shares have been duly
authorized; when issued in accordance with the Dealer Manager Agreement, the
Rights will be validly issued by the Fund; and when the Shares are issued and
paid for upon exercise of the Rights in accordance with the Dealer Manager
Agreement, the Shares will be validly issued, fully paid and nonassessable by
the Fund.
<PAGE> 2
-2-
Colonial Intermediate
High Income Fund May 18, 1998
3. The statements regarding United States federal income taxes expressed
under the headings "The Offer--Federal Income Tax Consequences of the Offer" and
"Federal Taxation" in the Prospectus contained in the Registration Statement are
true and correct in all material respects.
The Fund is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Fund.
However, the Agreement and Declaration of Trust disclaims shareholder liability
for acts or obligations of the Fund and requires that notice of such disclaimer
be given in each agreement, obligation or instrument entered into or executed
by the Fund or its Trustees. The Agreement and Declaration of Trust provides
for indemnification out of the property of the Fund for all loss and expense of
any shareholder of the Fund held personally liable solely by reason of his
being or having been a shareholder. Thus, the risk of a shareholder incurring
financial loss on account of being a shareholder is limited to circumstances in
which the Fund itself would be unable to meet its obligations.
We understand that this opinion is to be used in connection with the
registration of the Rights and the Shares for offering and sale pursuant to the
Act. We consent to the filing of this opinion with and as part of the
Registration Statement and to the use of our name in such Registration
Statement and in the related Prospectus under the caption "Legal Opinions." In
giving this consent, we do not hereby admit that we are within the category of
persons whose consent is required under Section 7 of the Act, or the rules and
regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
/s/ Ropes & Gray
---------------------------
Ropes & Gray
-2-
