<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON April 8, 1998
SECURITIES ACT FILE NO. 33-
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. ___________ [ ]
Post-Effective Amendment No.___________ [ ]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. ___7______ [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.
Ropes & Gray
One International Place
Boston, Massachusetts 02110-2624
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
- ---------- ---------- --------- --------- ------------
Shares of
Beneficial
Interest 4,982,394 $7.625 $37,990,754 $11,207
(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.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
<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 Notes
9. Management Prospectus Summary; The Adviser;
Information Regarding Senior
Securities; Description of Shares of
Beneficial Interest;
Description of Term Notes; Custodian,
Transfer Agent, Dividend
Disbursing Agent and Registrar
10. Capital Stock, Long-Term Description of Term Notes; 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; Fund 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
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED APRIL 15, 1998
COLONIAL INTERMEDIATE HIGH INCOME FUND
_________ 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 ________ __, 1998 (the "Record Date"), transferable rights ("Rights")
entitling the holders thereof to subscribe for an aggregate of __________ shares
of beneficial interest, no par value, of the Fund (the "Shares") at the rate of
one Share for every ____ 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 ____ 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 $____.
THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON _______ __, 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--TERMS OF 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 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." 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."
Colonial Management Associates, Inc. (the "Adviser") has served as the Fund's
investment adviser since the Fund's inception in 1988. The Adviser will benefit
from the Offer because its fees are based on the average managed assets of the
Fund. 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.
===============================================================================
Subscription Price Sales Load(1) Proceeds to Fund(2)(3)
- --------------------------------------------------------------------------------
Per Share $_____ $______ $______
- --------------------------------------------------------------------------------
Total Maximum $______ $______ $______
===============================================================================
(footnotes on following page)
The date of this Prospectus is ________ __, 1998
<PAGE> 4
(continued from cover page)
Prior to the Expiration Date, ________________________ (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 ________, 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 36 of
the Prospectus for a table of contents of the SAI.
All questions and inquiries relating to the Offer should be directed to
________ (the "Information Agent"). 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 _________ __, ____ . The net asset value per Share at
the close of business on _________ __, 1998 (the last trading date on which the
Fund publicly reported its net asset value prior to the announcement of the
Offer) and on_________ __, 1998 was $____ and $____, respectively, and the last
reported sales price of a Share on the Exchange on those dates was $______ and
$______, respectively.
---------------------------
(1) In connection with the Offer, the Fund has agreed to pay the Dealer Manager
a fee for its financial advisory, marketing and soliciting services equal
to ____% 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 ____% 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 ____% 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
$_______, which includes up to $_______ 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. The Offer, together
with a contemplated increase in the Fund's bank borrowing, is intended to
achieve these results.
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
acquisition of new portfolio securities while retaining longer-term investments
that the Adviser believes should be held, allow greater diversification of
portfolio securities, afford opportunities for the purchase and sale of
portfolio securities in potentially larger blocks and thus on potentially better
terms, and otherwise enable the Fund to take fuller advantage of investment
opportunities.
The Board of Trustees also considered the impact of the Offer on its
current distributions. 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. 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."
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 possible dilution of their interest in the Fund.
The Fund maintains a leveraged capital structure when it believes such a
capital structure is appropriate for prevailing market conditions. 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 its
ability to incrementally increase its existing 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."
TERMS OF THE OFFER
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") entitling the holders thereof to subscribe
for an aggregate of ________ shares of beneficial interest, no par value, of the
Fund (the "Shares") (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 ____ Rights
held (1-for-__). Fractional shares will not be issued upon the exercise of
Rights. Record Date Shareholders issued fewer than ____ 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 _________ __, 1998 and ends at 5:00
P.M., New York City time, on ________ __, 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,
except as discussed below under "Foreign Restrictions."
-3-
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<PAGE> 6
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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 _____ Rights held is hereinafter
referred to as the "Primary Subscription." 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 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 prior to the payment date. Assuming the Subscription
Period is not extended, it is expected that the first dividend received on
Shares issued after the Expiration Date will be paid on the last Business Day
of________ 1998.
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 dividend record date shares and, thus, such
Shares may have a dilutive effect on the income 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 $______.
METHOD FOR EXERCISING RIGHTS
Rights are evidenced by Subscription Certificates that, except as described
below under "Foreign Restrictions," will be mailed 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, banker 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
-4-
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<PAGE> 7
===============================================================================
(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 _________ __, 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 _________ __, 1998, two
Business Days prior to the Expiration Date, due to normal settlement procedures.
Trading of the Rights on the Exchange may be conducted from _________ __, 1998
until and including _________ __, 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 ____% 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 ____% 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 ____% 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. See
"The Offer--Distribution Arrangements." Other offering expenses incurred by the
Fund are estimated at $_______, which includes up to $_______ 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 receive 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 _________ __, 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 Man ager 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.
-5-
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<PAGE> 8
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USE OF PROCEEDS
Based on the Subscription Price of $____ per Share, the net proceeds of the
Offer, assuming all _______ Shares offered hereby are sold, are estimated to be
approximately $_________, after deducting offering expenses payable by the Fund
estimated at approximately $______. 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:
Shareholders may also contact their brokers or nominees for information
with respect to the Offer.
<TABLE>
<CAPTION>
IMPORTANT DATES TO REMEMBER
EVENT DATE
- --------------------------- ----
<S> <C>
Record Date.............................................. _________ __, 1998
Subscription Period...................................... _________ __, 1998 to
_________ __, 1998(a)
Expiration Date.......................................... _________ __, 1998(a)
Subscription Certificates and Payment for Shares Due(b) _________ __, 1998(a)
Notice of Guaranteed Delivery Due(b)..................... _________ __, 1998(a)
Payment for Guarantees of Delivery Due................... _________ __, 1998(a)
Confirmation to Participants............................. _________ __, 1998(a)
</TABLE>
- ----------
(a) Unless the Offer is extended.
(b) A shareholder exercising Rights must deliver by _________ __, 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 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
-6-
===============================================================================
<PAGE> 9
===============================================================================
foreign securities are 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 repurchased 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."
At the date hereof, the Fund is seeking a commitment from its lender to add
incremental leverage upon completion of the Offer. With respect to any
commitment so obtained, the Fund's lender may not be required to fulfill its
commitment to provide incremental leverage to 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 incur incremental leverage at or
following the completion of the Offer, when such leverage is added, the
percentage of the Fund's assets representing leverage is expected to increase
from approximately 20% to approximately 25% upon 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 under the Investment Company Act of 1940, as amended (the "1940 Act"),
and existing 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 14,506 shares, 14,818 shares and ______ shares,
respectively. As of April 30, 1998, the Fund had _________ shares outstanding
and net assets of approximately $_____ 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 a registered investment adviser since 1931. The Adviser
currently 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 an 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 $____, which
is __% below the Fund's net asset value of $____ per share as of ,_________ __,
1998, the Fund's net asset value per share (after payment
-7-
===============================================================================
<PAGE> 10
===============================================================================
of the Dealer Manager and soliciting fees and estimated offering expenses) would
be reduced by approximately $____ per share. The distribution to shareholders of
transferable Rights which themselves may have a realizable value will afford non
participating 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 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's use of leverage is currently benefiting the holders of shares as the
average cost of funds (pursuant to its Credit Agreement obligations) was
approximately 7.33% as of April 30, 1998 while the "high-yield" market currently
offers interest income at annualized rates of approximately ___%.
At the date hereof, the Fund is seeking a commitment from its lender to add
incremental leverage upon completion of the Offer. If such leverage is added,
the percentage of the Fund's assets representing leverage is expected to
increase from approximately 20% to approximately 25% upon 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 under the 1940 Act and existing 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 indebtedness 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
____% 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).
For a more detailed discussion of the risks and special considerations with
respect to "high yield," high risk securities, see "Risk Factors and Special
Considerations--Lower-Rated Investments."
-8-
===============================================================================
<PAGE> 11
===============================================================================
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 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."
-9-
===============================================================================
<PAGE> 12
FEE TABLE
Shareholder Transaction Expenses
Sales Load (as a percentage of the Subscription Price per Share)(1)...... ____%
Annual Expenses (as a percentage of average weekly net assets
attributable to shares)(2)
Management Fees(3)....................................................... ____%
Interest Expense......................................................... ____%
Other Expenses........................................................... ____%
Total Annual Expenses............................................... ____%
====
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............................. $___ $___ $____ $___
</TABLE>
- ----------
(1) The Fund has agreed to pay the Dealer Manager a fee for its financial
advisory, marketing and soliciting services equal to ____% 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 ____% 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 ____% 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
______. 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 $______ and $______, respectively, for their services
related to the Offer, which includes 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 ____% sales load and an annual
expense ratio of ___%. 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."
-10-
<PAGE> 13
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 in
the Fund's October 31, 1997 Annual Report which is available upon request from
the Fund's registrar and transfer agent, First Data Investors Services Group,
Inc.
<TABLE>
<CAPTION>
July 29, 1988
(Commencement
of
Operations)
---------------------------------------------------------------------------------------------- to
For the Fiscal Years Ended October 31, October 31,
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <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 $ 9.262(b)
-------- -------- -------- -------- -------- -------- -------- ------- -------- --------
Net investment
income................. 0.699(c) 0.699 0.696 0.693 0.709 0.773 0.800 1.072 1.223 0.257
Net realized and
unrealized gain(loss).. 0.383 0.258 0.340 (0.587) 0.497 0.142 1.385 (3.332) (0.983) (0.054)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations........... 1.082 0.957 1.036 0.106 1.206 0.915 2.185 (2.260) (0.240) 0.203
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Distributions:
From net investment
income................. (0.702) (0.687) (0.696) (0.746) (0.716) (0.775) (0.775) (1.106) (1.200) (0.245)
From paid-in-capital... -- -- -- -- -- -- -- (0.014)(d) -- --
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total distributions.. (0.702) (0.687) (0.696) (0.745) (0.716) (0.775) (0.775) (1.120) (1.200) (0.245)
-------- -------- -------- -------- -------- ------- -------- -------- -------- --------
Net asset value --
end of period.......... $ 7.270 $ 6.890 $ 6.620 $ 6.280 $ 6.920 $ 6.430 $ 6.290 $ 4.880 $ 8.260 $ 9.220
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
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 $ 9.500
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
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)% (2.50)%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Net assets, end of
period(f).............. $107,774 $ 99,925 $ 93,984 $ 87,519 $ 95,164 $ 87,149 $ 83,613 $ 64,872 $107,769 $116,613
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
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% 1.04%(g)
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% 3.26%(f)
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% 11.06%(g)
Portfolio turnover rate. 92% 92% 92% 160% 135% 78% 30% 12% 23% 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.
-11-
<PAGE> 14
CAPITALIZATION AT APRIL 30, 1997
<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 value... Unlimited ____________ shares -0- shares
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.
APPROXIMATE
AT TOTAL AMOUNT ASSET COVERAGE MARKET VALUE
OCTOBER 31 OUTSTANDING PER UNIT(2) PER UNIT
---------- ------------ -------------- ------------
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 ______
- ---------------
(1) On July 15, 1996, the Fund repurchased the remaining $27,400,000 principal
amount of its Senior Extendible Notes, which carried an annual interest
rate through __________, 1996 of ____%, for $_________. 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 (not
including senior securities) 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.
-12-
<PAGE> 15
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>
QUARTERLY
TRADING PREMIUM/(DISCOUNT)
MARKET PRICE VOLUME NET ASSET VALUE TO NET ASSET VALUE (%)
QUARTER ENDED ------------- ---------- --------------- ----------------------
HIGH LOW (THOUSANDS HIGH LOW HIGH LOW
----- ----- OF SHARES) ---- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C>
January 31, 1996...... $7.125 $7.000 1,519.0 $6.79 $6.60 8.0% 0.9%
April 30, 1996......... 7.250 7.125 1,662.0 6.89 6.70 7.1% 1.6%
July 31, 1996.......... 7.000 6.875 1,710.2 6.75 6.68 4.3% (1.0%)
October 31, 1996....... 7.250 7.125 1,105.5 6.96 6.74 4.9% 0.5%
January 31, 1997....... 7.375 7.250 1,963.1 7.09 6.90 5.5% 0.5%
April 30, 1997......... 7.500 7.375 1,677.2 7.20 6.85 6.7% 0.5%
July 31, 1997.......... 7.750 7.625 1,618.5 7.30 6.98 7.7% 3.6%
October 31, 1997....... 7.938 7.813 1,501.4 7.44 7.25 6.8% 5.0%
January 31, 1998....... 7.938 7.813 920.7 7.49 7.28 7.1% 4.3%
April 30, 1998......... -- -- -- -- -- -- --
</TABLE>
The net asset value per share of the Fund at the close of business on
____________, 1998 (the last trading date on which the Fund publicly reported
its net asset value prior to the announcement of the Offer) and on __________,
1998 was $____ and $____, respectively, and the last reported sales price of a
share of the Fund on the Exchange on those dates was $______ and $_____,
respectively.
-13-
<PAGE> 16
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) _____________ 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 corporate debt securities rated in
the lower categories (commonly referred to as "high-yield," high risk securities
or "junk bonds") 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. 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 are 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."
- --------
(1) Throughout 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.
-14-
<PAGE> 17
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. The Offer, together with a contemplated increase in the Fund's bank
borrowing, is intended to achieve these results.
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
acquisition of new portfolio securities while retaining longer-term investments
that the Adviser believes should be held, allow greater diversification of
portfolio securities, afford opportunities for the purchase and sale of
portfolio securities in potentially larger blocks and thus on potentially better
terms, and otherwise enable the Fund to take fuller advantage of investment
opportunities.
The Board of Trustees also considered the impact of the Offer on its
current distributions. 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. 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."
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 possible dilution of their interest in the Fund.
The Fund maintains a leveraged capital structure when it believes such a
capital structure is appropriate for prevailing market conditions. 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 its
ability to incrementally increase the Fund's existing leverage. For a discussion
of the anticipated impact on the Offer on the Fund's leverage, please refer to
"Investment Policies and Limitations" and "Risk Factors and Special
Considerations--Risk of Leverage."
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 an aggregate of __________ 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 ____ Rights held (1-for-_). Fractional shares will not be issued upon the
exercise of Rights. Record Date Shareholders issued fewer than ____ 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
_____________, 1998 and ends at 5:00 P.M., New York City time, on ____________,
1998, unless extended by the
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Fund. The Rights are evidenced by Subscription Certificates that will be mailed
to Record Date Shareholders, except as discussed below under "Foreign
Shareholders."
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 the 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. Assuming the Subscription Period is not extended, it is expected that the
first dividend received on Shares issued after the Expiration Date will be paid
on the last Business Day of ___________, 1998.
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 dividend record date shares and, thus, such
Shares may have a dilutive effect on the income 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 $______.
The Fund announced the Offer after the close of trading on the Exchange on
____________, 1998. The net asset value per share at the close of business on
_________, 1998 (the last trading date on which the Fund publicly reported its
net asset value prior to the announcement) and on _____________, 1998 was $____
and $____ respectively, and the last reported sales price of a share of the Fund
on the Exchange on those dates was $_____ and $_______, respectively.
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<PAGE> 19
EXPIRATION OF THE OFFER
The Offer will expire at 5:00 P.M., New York City time, on _________, 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 $______ which includes reimbursement for all
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 ________
at 1-800-___-____ (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.
(1) BY FIRST CLASS MAIL: First Data Investor Services Group, Inc.
c/o BankBoston N.A.
Corporate Reorganization
P.O. Box 9573
Boston, MA 02205-9573
(2) BY OVERNIGHT COURIER: First Data Investor Services Group, Inc.
c/o BankBoston, N.A.
Corporate Reorganization
70 Campanelli Drive
Braintree, MA 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
DELIVERY TO AN ADDRESS OTHER THAN ONE OF THE ADDRESSES LISTED ABOVE WILL NOT
CONSTITUTE VALID DELIVERY.
METHOD FOR EXERCISING RIGHTS
Rights are evidenced by Subscription Certificates that, except as described
below under "Foreign Shareholders," will be mailed 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, banker 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 __________, 1998, the third Business Day
after the Expiration Date. A fee may be charged for this service.
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<PAGE> 20
Fractional shares will not be issued upon the exercise of Rights. Record Date
Shareholders issued fewer than ____ 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:
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 $______ which includes 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 Over-Subscription
Privilege (for Record Date Shareholders) to the Subscription Agent based on
the Subscription Price of $____ 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
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<PAGE> 21
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 $____ 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 __________, 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 FOR 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.
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.
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<PAGE> 22
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. Trading in the Rights on the Exchange may be conducted from ________
__, 1998 until and including _________ __, 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 __________ __, 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 their best efforts to
complete the sale and the Subscription Agent will remit the proceeds of sale,
net of commissions, to the Record Date Shareholders. Any commissions on sales
of Rights will be paid by the selling Record Date Shareholders. 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 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.
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<PAGE> 23
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
________________________, ___________________________, ________, ________,
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 ____% 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 ____%
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 ____% 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.
In addition, the Fund may reimburse the Dealer Manager up to an aggregate
of $_______ for their 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 ___ 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
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.
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<PAGE> 24
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 receive 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 _________, 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 their 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 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 a summary
of the capital gains 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 person 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."
-22-
<PAGE> 25
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.
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 advisors regarding the
consequences of their exercise of Rights under ERISA, the Code, and where
applicable, state law.
IMPORTANT DATES TO REMEMBER
Event Date
- ----- ----
Record Date.............................................. ___________, 1998
Subscription Period...................................... ___________, 1998
to ________, 1998
Expiration Date.......................................... ___________, 1998(a)
Subscription Certificates and Payment for Shares Due(b).. ___________, 1998(a)
Notice of Guaranteed Delivery Due(b)..................... ___________, 1998(a)
Payment for Guarantees of Delivery Due................... ___________, 1998(a)
Confirmation to Participants............................. ___________, 1998(a)
- ----------
(a) Unless the Offer is extended.
(b) A shareholder exercising Rights must deliver by _______ __, 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 $____ per Share, the net proceeds of the
Offer to the Fund assuming all ___________ Shares offered hereby are sold are
estimated to be approximately $_______, after deducting offering expenses
payable by the Fund estimated at approximately $_______. 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
-23-
<PAGE> 26
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 will generally 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 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) 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 interest 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 Stock. 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 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 to pay off their
bonds (lowering the risk of default). Relative to other
-24-
<PAGE> 27
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 as of the
current fiscal year or at any other time in the future.
RATED BY
S&P
--------
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%
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 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 an 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 contracted 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
-25-
<PAGE> 28
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 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."
At the date hereof, the Fund is seeking a commitment from its lender to add
incremental leverage to the Fund at or following the completion of the Offer.
With respect to any commitment so obtained, the Fund's lender may not be
required to fulfill its commitment to provide incremental leverage to 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 incur incremental
leverage at or following the completion of the Offer. If such leverage is added,
the percentage of the Fund's assets representing leverage is expected to
increase from approximately 20% to approximately 25% upon completion of the
Offer. If such leverage is added, the percentage of the Fund's assets
representing leverage is expected to be higher upon 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 under the 1940 Act and existing 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.
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
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<PAGE> 29
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 $____, which is __% below the Fund's net asset value of
$___ per share as of __________, 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 $___ per share. 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 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.
At the date hereof, the Fund is seeking a commitment from its lender to add
incremental leverage at or following the completion of the Offer. With respect
to any commitment so obtained, the Fund's lender may not be required to fulfill
its commitment to provide incremental leverage to 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 incur incremental leverage at or
following the completion of the Offer. If such leverage is added, the percentage
of the Fund's assets representing leverage is expected to increase from
approximately 20% to approximately 25% upon 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 existing agreements between the Fund and third
parties.
The 1940 Act generally imposes 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 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. Furthermore, the 1940 Act generally limits
registered closed-end investment companies, such as the Fund, 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.
-27-
<PAGE> 30
The following table illustrates the effect of leverage (using senior
securities--i.e., $__ million Term Note) on the return of a holder of the
shares, assuming a Fund portfolio of approximately $___ million, the annual
returns set forth in such table and assuming 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
Common Stockholder.................. -_____% -____% -____% ____% ____%
</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, the increasing defaults by issuers of lower rated debt
obligations would likely exacerbate such decline in the Fund's net asset value.
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 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 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
-28-
<PAGE> 31
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 ____% 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, below BBB by S&P or below Baa by Moody's).
In addition, in a period of rising interest rates the increasing defaults by
issuers of such debt obligations would likely 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 have to replace the security, 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 such
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 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 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
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of workers' compensation insurance and a property and casualty insurer in the
U.S. The Adviser has been a registered investment adviser since 1931. The
Adviser currently 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.
Under the Management Agreement with the Fund, the Adviser receives a
monthly advisory fee equal to 0.65% (on an annual basis) of the average weekly
net assets (less accrued liabilities) of the Fund. The Adviser will benefit from
the Offer because the Adviser's fee is based on the average weekly net assets of
the Fund. 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 $____ per Share,
the Adviser would receive additional annual advisory fees of approximately
$_______ as a result of the increase in assets under management over the Fund's
current assets under management.
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.
DETERMINATION OF NET ASSET VALUE
Net asset value of the shares will be determined as of the close of 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 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 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
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<PAGE> 33
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 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 its 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 as compared to 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 each
class 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.
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. (the "Plan Agent"), as agent under the Plan,
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
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<PAGE> 34
shares are held in the name of a broker or nominee should contact the broker or
nominee for details. All distributions to investors who elect not to participate
(or whose broker or nominee elects not to participate) in the Plan, will be paid
by check mailed directly to the record holder by the Plan Agent, as dividend
paying agent.
The Plan Agent will furnish each person who buys shares in the offering
with written information relating to the Plan. Included in such information will
be procedures for electing to receive distributions in cash (or, in the case of
shares held in the name of a broker or nominee who does not participate in the
Plan, procedures for having such shares registered in the name of the
shareholder so that such shareholder may participate in the Plan).
If the Trustees of the Fund declare a dividend 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 the Prospectus and Statement of Additional
Information, but in no event less than 95% of the market price. If the net asset
value of the shares at such time exceeds the market price of shares at such
time, or if the Fund should declare a dividend or capital gains distribution
payable only in cash, the Plan Agent will, as agent for the participants, buy
shares in the open market, 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 on 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 stock or in
cash. However, each participant will pay a pro rata share of brokerage
commissions incurred with respect to the Plan Agent's open market purchases in
connection with the reinvestment of dividends and capital gains distributions.
The automatic reinvestment of dividends and capital gains distributions
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 the members of the Plan at least 30 days before the record
date for such dividend or 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
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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. See "Taxes--
Federal Income Tax Treatment of Holders of Shares" in the Statement of
Additional Information for a summary of the capital gains rates applicable to
capital gains or losses recognized upon the sale of shares. 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. 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, ____________ shares are
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 and will have no preemptive rights or conversion rights. The
Fund's shares are listed on the Exchange under the symbol "CIF."
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 the Fund's 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.
Subject to the foregoing, and any requirements of Massachusetts law, the
Fund's net investment income for any year will be distributed to the holders of
the shares. The term "net investment income" includes interest, dividends,
short-term capital gains and other income received or accrued less interest
payments with respect to the Term Note, the advisory fee, bank custodian and
surety custodian charges, taxes (except capital gains taxes) and other expenses
properly chargeable against income, but does not include net capital gains,
stock dividends, transfer taxes, brokerage or other capital charges or
distributions designated as a return of capital. Any net capital gains (defined
as the excess of net long-term capital gains over net short-term capital losses)
of the Fund will be distributed annually to the holders of the shares subject to
the foregoing and any requirements of Massachusetts law.
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<PAGE> 36
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 30, 1997. The
next annual meeting of shareholders is scheduled for April 29, 1998.
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.
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 will be 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
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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 Act 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 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 Boston Safe Deposit and Trust
Company, whose principal business address is One Boston Place, Boston,
Massachusetts 02108, 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.
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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 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 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 other information regarding registrants that file
electronically with the Commission.
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
PAGE
Definitions 2
Investment Objective and Policies 2
Fundamental Investment Policies 2
Other Investment Policies 3
Fund Charges and Expenses 3
Management of the Fund 8
Custodian 9
Independent Accountants 9
Incorporation of Financial Statements by Reference 9
Determination of Net Asset Value 9
Portfolio Transactions 10
Miscellaneous Investment Practices 11
Taxes 26
Shareholder Liability 30
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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.
-37-
<PAGE> 40
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.
DUFF & PHELPS CORPORATION
LONG-TERM DEBT
AAA -- Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA- -- High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic conditions.
A+, A, A- -- Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB+, BBB, BBB- -- Below average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
-38-
<PAGE> 41
BB+, BB, BB- -- Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may move
up or down frequently within this category.
B+, B, B- -- Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or into
a higher or lower rating grade.
CCC -- Well below investment-grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends. Protection
factors are narrow, and risk can be substantial with unfavorable
economic/industry conditions and/or with unfavorable company developments.
DD -- Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
FITCH INVESTORS SERVICE, INC.
AAA -- Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA -- Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA.
A -- Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be strong
but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB -- Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
BB -- Bonds considered to be speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.
B -- Bonds are considered highly speculative. Bonds in this class are lightly
protected as to the obligor's ability to pay interest over the life of the issue
and repay principal when due.
CCC -- Bonds have certain characteristics which, with passing of time, could
lead to the possibility of default on either principal or interest payments.
CC -- Bonds are minimally protected. Default in payment of interest and/or
principal seems probable.
C -- Bonds are in actual or imminent default in payment of interest or
principal.
DDD -- Bonds are in default and in arrears in interest and/or principal
payments. Such bonds are extremely speculative and should be valued only on the
basis of their value in liquidation or reorganization of the obligor.
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<PAGE> 42
<TABLE>
<S> <C>
================================================================ ================================================================
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 ___________ SHARES OF BENEFICIAL
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN INTEREST ISSUABLE UPON EXERCISE OF
AUTHORIZED BY THE FUND OR THE DEALER MANAGER. NEITHER THE RIGHTS
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, TO SUBSCRIBE FOR
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS SUCH SCHARES
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 COLONIAL INTERMEDIATE
REGISTERED SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES HIGH INCOME FUND
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.
----------------- SHARES OF BENEFICIAL INTEREST
TABLE OF CONTENTS
PROSPECTUS -----------------
PROSPECTUS
PAGE -----------------
Prospectus Summary.................................... 3
Fee Table............................................. 10
Financial Highlights.................................. 11
Capitalization at April 30, 1998...................... 12
Information Regarding Senior Securities............... 12
Trading and Net Asset Value Information............... 13
The Fund.............................................. 14
The Offer............................................. 15
Use of Proceeds....................................... 23
Investment Policies and Limitations................... 24
Risk Factors and Special Considerations............... 26
The Adviser........................................... 29
Determination of Net Asset Value...................... 30
Share Repurchases; Conversion to Open-End
Status........................................... 30
Dividends and Distributions; Dividend
Reinvestment Plan................................ 31
Federal Taxation...................................... 32
Description of Shares of Beneficial Interest.......... 33
Description of Term Note.............................. 34
Custodian, Transfer Agent, Dividend Disbursing
Agent and Registrar.............................. 35
Legal Opinions........................................ 35 -----------------
Reports to Shareholders............................... 35
Experts............................................... 36
Further Information................................... 36
Table of Contents of Statement of Additional ________ __, 1998
Information...................................... 36
Appendix A ........................................... 37
================================================================ ================================================================
</TABLE>
<PAGE> 43
SUBJECT TO COMPLETION, STATEMENT OF ADDITIONAL INFORMATION DATED APRIL 15, 1998
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 _______, 1998. This SAI should be read together with the
Prospectus. Investors may obtain a free copy of the Prospectus dated
___________, 1998 and the Annual Report dated October 31, 1997 from Liberty
Financial Investments, Inc., One Financial Center, Boston, MA 02111-2621
TABLE OF CONTENTS PAGE
Definitions 2
Investment Objective and Policies 2
Fundamental Investment Policies 2
Other Investment Policies 3
Fund Charges and Expenses 3
Management of the Fund 8
Custodian 9
Independent Accountants 9
Incorporation of Financial Statements by Reference 9
Determination of Net Asset Value 9
Portfolio Transactions 10
Miscellaneous Investment Practices 11
Taxes 25
Shareholder Liability 30
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY ANY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE A
PROSPECTUS.
<PAGE> 44
SUBJECT TO COMPLETION, DATED APRIL 15, 1998
COLONIAL INTERMEDIATE HIGH INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
DEFINITIONS
"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
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 can not 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> 45
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 the 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 closing value of the total 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) at the annual rate of 0.65%.
RECENT FEES PAID TO THE ADVISER AND FIRST DATA (dollars in thousands)
Year Ended October 31
-------------------------
1997 1996 1995
---- ---- ----
Management fee $680 $631 $588
Bookkeeping fee 46 43 41
Transfer agent fee 51 53 59
BROKERAGE COMMISSIONS
The Fund did not pay any brokerage commissions for the fiscal years ended
October 31, 1997, 1996 and 1995.
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<PAGE> 46
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, Dechert
313 Bedford Road Price & Rhoads from September, 1988 to
Ridgewood, NJ 07450 December, 1993).
Tom Bleasdale 67 Trustee Retired (formerly Chairman of the Board
102 Clubhouse Drive # 275 and Chief Executive Officer, Shore Bank &
Naples, FL 34105 Trust Company from 1992-1993), is a
Director of The Empire Company since
June, 1995.
Lora S. Collins 62 Trustee Attorney (formerly Attorney, Kramer,
1175 Hill Road Levin, Naftalis & Frankel from September,
Southold, NY 11971 1986 to November, 1996).
James E. Grinnell 68 Trustee Private Investor since November, 1988.
22 Harbor Avenue
Marblehead, MA 01945
Richard W. Lowry 61 Trustee Private Investor since August, 1987.
10701 Charleston Drive
Vero Beach, FL 32963
William E. Mayer* 57 Trustee Partner, Development Capital, LLC (formerly
500 Park Avenue, 5th Floor Dean, College of Business and Management,
New York, NY 10022 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 Board,
16 Running Tide Road Hannaford Bros. Co. from May, 1984 to May,
Cape Elizabeth, ME 04107 1997, and Chief Executive Officer, Hannaford
Bros. Co. from May, 1973 to May, 1992).
John J. Neuhauser 54 Trustee Dean, Boston College School of
140 Commonwealth Avenue Management since 1977.
Chestnut Hill, MA 02167
Robert L. Sullivan 70 Trustee Retired Partner, Peat Marwick Main & Co.
7121 Natelli Woods Lane
Bethesda, MD 20817
</TABLE>
-4-
<PAGE> 47
<TABLE>
<S> <C> <C> <C>
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 Controller and Chief Accounting Officer of
Chief Accounting Colonial Funds since February, 1998, is Vice
Officer President of the Adviser since February, 1998
(formerly Senior Tax Manager, Coopers &
Lybrand, L.L.P. 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).
Timothy J. Jacoby 45 Treasurer and Chief Treasurer and Chief Financial Officer of
Financial Officer Colonial Funds since October, 1996 (formerly
Controller and Chief Accounting Office from
October, 1997 to February, 1998), is 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).
</TABLE>
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<PAGE> 48
<TABLE>
<S> <C> <C> <C>
Davey S. Scoon 51 Vice President Vice President of Colonial Funds since June,
1993, is 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).
</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, MA 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):
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<PAGE> 49
<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) 94,968(f)
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>
(a) The Fund does not currently provide pension or retirement plan benefits to
the Trustees.
(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 will retire 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.
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:
Total Compensation From
Liberty Funds For The Calendar
Trustee Year Ended December 31, 1997(J)
- ------- -------------------------------
Robert J. Birnbaum $26,800
James E. Grinnell 26,800
Richard W. Lowry 26,800
(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).
-7-
<PAGE> 50
OWNERSHIP OF THE FUND
At April 30, 1998, the officers and Trustees of the Fund as a group owned ___%
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 _______ shares representing ____% of
the Fund's outstanding shares.
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, Colonial
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, MA 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,
MA 02210. Liberty Mutual's address is 175 Berkeley Street, Boston, MA 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 Advisor'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 $27,000 per year plus 0.035% on an
annual basis of the Fund's [average net assets] over $50 million.
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
-8-
<PAGE> 51
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
Boston Safe Deposit and Trust Company (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 One Boston Place, Boston, Massachusetts
02108.
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
Statement of Additional Information to the extent a statement contained in the
Prospectus or this Statement of Additional Information 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
Statement of Additional Information. The Fund will furnish, without charge, a
copy of its Annual Report, up request to Colonial Investors Service Center,
Inc., P.O. Box 1722, Boston, MA 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 of the shares will be determined as of the close of 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 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
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business days in New York and on which the Fund's NAV is not calculated. 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 number of securities issues, 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 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 Colonial 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.
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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%.
MISCELLANEOUS INVESTMENT PRACTICES
SHORT-TERM TRADING
In seeking the Fund's objectives(s), 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 mutual funds. 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 in lower-rated securities (commonly known as "high yield,"
high risk securities or "junk bonds") to the extent described in the Prospectus.
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
payment 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
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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 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 may 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 unless
otherwise specified in the Prospectus.
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.
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<PAGE> 55
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 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 are also subject to the risks of
high yield securities.
MONEY MARKET INSTRUMENTS
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. Participation Interests include
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the underlying securities and any related guaranty, letter of credit, or
collateralization arrangement which the Fund would be allowed to invest in
directly.
SECURITIES LOANS
The Fund may make secured loans of its portfolio securities, on either a
short-term or long-term basis, amounting to not more than __% of its total
assets, 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 lent. 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 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 up to the limit specified in the
Prospectus. 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
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<PAGE> 57
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
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
objectives and policies. Call options written by the Fund give the purchaser the
right to buy the underlying securities from the Fund at a stated exercise price;
put options give the purchaser the right to sell the underlying securities to
the Fund at a stated price.
The Fund may write only covered options, which means that, so long as the Fund
is obligated as the writer of a call option, it will own the underlying
securities subject to the option (or comparable securities satisfying the cover
requirements of securities exchanges). In the case of put options, the Fund will
hold cash and/or high-grade short-term debt obligations equal to the price to be
paid if the option is exercised. In addition, the Fund will be considered to
have covered a put or call option if and to the extent that it holds an option
that offsets some or all of the risk of the option it has written. The Fund may
write combinations of covered puts and calls on the same underlying security.
The Fund will receive a premium from writing a put or call option, which
increases the Fund's return on the underlying security in the event the option
expires unexercised or is closed out at a profit. The amount of the premium
reflects, among other things, the relationship between the exercise price and
the current market value of the underlying security, the volatility of the
underlying security, the amount of time remaining until expiration, current
interest rates, and the effect of supply and demand in the options market and in
the market for the underlying security. By writing a call option, the Fund
limits its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the option but continues to bear
the risk of a decline in the value of the underlying security. By writing a put
option, the Fund assumes the risk that it may be required to purchase the
underlying security for an exercise price higher than its then-current market
value, resulting in a potential capital loss unless the security subsequently
appreciates in value.
The Fund may terminate an option that it has written prior to its expiration by
entering into a closing purchase transaction, in which it purchases an
offsetting option. The Fund realizes a profit or loss from a closing transaction
if the cost of the transaction (option premium plus transaction costs) is less
or more than the premium received from writing the option. If the Fund writes a
call option but does not own the underlying security, and when it writes a put
option, the Fund may be required to deposit cash or securities with its broker
as "margin," or collateral, for its obligation to buy or sell the underlying
security. As the value of the underlying security varies, the Fund may have to
deposit additional margin with the broker. Margin 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.
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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 correctly forecast interest rate and market movements. 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.
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
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<PAGE> 59
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
internationally-traded 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.
Over-the-counter ("OTC") options purchased by the Fund and assets held to cover
OTC options written by the Fund may, under certain circumstances, be considered
illiquid securities for purposes of any limitation on the Fund's ability to
invest in illiquid securities.
FUTURES CONTRACTS AND RELATED OPTIONS
Subject to applicable law, and unless otherwise specified in the Prospectus, 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 specific instruments delivered or taken,
respectively, at settlement date are not determined until on or near that date.
The determination is made in accordance with the rules of the exchange on which
the futures contract sale or purchase was made. Futures contracts are traded in
the United States only on commodity exchanges or boards of trade -- known as
"contract markets" -- approved for such trading by the Commodity Futures Trading
Commission (the "CFTC"), and must be executed through a futures commission
merchant or brokerage firm which is a member of the relevant contract market.
Although futures contracts (other than index futures) by their terms call for
actual delivery or acceptance of commodities or securities, in most cases the
contracts are closed out before the settlement date without the making or taking
of delivery. Closing out a futures contract sale is effected by purchasing a
futures contract for the same aggregate amount of the specific type of financial
instrument or commodity with the same delivery date. If the price of the initial
sale of the futures contract exceeds the price of the offsetting purchase, the
seller is paid the difference and realizes a gain. Conversely, if the price of
the offsetting purchase exceeds the price of the initial sale, the seller
realizes a loss. If the Fund is unable to enter into a closing transaction, the
amount of the Fund's potential loss is unlimited. The closing out of a futures
contract purchase is effected by the purchaser's entering into a futures
contract sale. If the offsetting sale price exceeds the purchase price, the
purchaser realizes a gain, and if the purchase price exceeds the offsetting sale
price, the purchaser realizes a loss. In general, 40% of the gain or loss
arising from the closing out of a futures contract traded on an exchange
approved by the CFTC is treated as short-term gain or loss, and 60% is treated
as long-term gain or loss.
Unlike when the Fund purchases or sells a security, no price is paid or received
by the Fund upon the purchase or sale of a futures contract. Upon entering into
a contract, the Fund is required to deposit with its custodian in a segregated
account in the name of the futures broker an amount of liquid assets. This
amount is known as "initial margin." The nature of initial margin in futures
transactions is different from that of margin in security
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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 hedge 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 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.
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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. The successful use of these
strategies further depends on the ability of the Adviser to forecast interest
rates and market movements correctly.
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
will 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 tax-exempt securities held by it by selling Treasury
security futures and the values of Treasury securities subsequently increase
while the values of its tax-exempt securities decrease, the Fund would incur
losses on both the Treasury security futures contracts written by it and the
tax-exempt securities held in its portfolio.
INDEX FUTURES CONTRACTS. An index futures contract is a contract to buy or sell
units of an index at a specified future date at a price agreed upon when the
contract is made. Entering into a contract to buy units of an index is commonly
referred to as buying or purchasing a contract or holding a long position in the
index. Entering into a contract to sell units of an index is commonly referred
to as selling a contract or holding a short position. A unit is the current
value of the index. The Fund may enter into stock index futures contracts, debt
index futures
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<PAGE> 62
contracts, or other index futures contracts appropriate to its objectives. 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 STOCK INDEX FUTURES. Options on index futures are similar to options
on securities except that options on index futures give the purchaser the right,
in return for the premium paid, to assume a position in an index futures
contract (a long position if the option is a call and a short position if the
option is a put) at a specified exercise price at any time during the period of
the option. Upon exercise of the option, the delivery of the futures position by
the writer of the option to the holder of the option will be accompanied by
delivery of the accumulated balance in the writer's futures margin account which
represents the amount by which the market price of the index futures contract,
at exercise, exceeds (in the case of a call) or is less than (in the case of a
put) the exercise price of the option on the index future. If an option is
exercised on the last trading day prior to its expiration date, the settlement
will be made entirely in cash equal to the difference between the exercise price
of the option and the closing level of the index on which the future is based on
the expiration date. Purchasers of options who fail to exercise their options
prior to the exercise date suffer a loss of the premium paid.
OPTIONS ON INDICES
As an alternative to purchasing call and put options on index futures, the Fund
may purchase and sell call and put options on the underlying indices themselves.
Such options would be used in a manner identical to the use of options on index
futures.
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<PAGE> 63
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 foreign countries may limit the
Fund's ability to invest in securities of certain issuers organized under the
laws of those foreign countries.
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<PAGE> 64
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.
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
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<PAGE> 65
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. See "Risk factors in options transactions" above.
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.
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 in question.
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<PAGE> 66
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.
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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 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. The Adviser, under the supervision of
the Board of Trustees, will consider whether securities purchased under Rule
144A are illiquid and thus subject to the Fund's investment restriction on
illiquid securities. A determination of whether a Rule 144A security is liquid
or not is a question of fact. In making this determination, the Adviser will
consider the trading markets for the specific security, taking into account the
unregistered nature of a Rule 144A security. In addition, the Adviser could
consider the (i) frequency of trades and quotes, (ii) number of dealers and
potential purchasers, (iii) dealer undertakings to make a market, and (iv)
nature of the security and of marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers, and the mechanics of
transfer). The liquidity of Rule 144A securities will be monitored and, if as a
result of changed conditions, it is determined by the Adviser that a Rule 144A
security is no longer liquid, the Fund's holdings of illiquid securities would
be reviewed to determine what, if any, steps are required to assure that the
Fund does not invest more than its investment restriction on illiquid securities
allows. Investing in Rule 144A securities could have the effect of increasing
the amount of the Fund's assets invested in illiquid securities if qualified
institutional buyer are unwilling to purchase such securities.
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.
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<PAGE> 68
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 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
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<PAGE> 69
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."
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 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 cash distribution to 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.
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 received by corporate
shareholders will 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.
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<PAGE> 70
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 such a 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, shareholders subject to U.S. tax would
include in income, as long-term capital gains, their proportionate share of such
undistributed amounts, but would 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 would 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 federal adjusted
gross income. 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
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 advisors 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
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<PAGE> 71
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 apply
to distributions of capital gain dividends by regulated investment companies
such as 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 regulated investment
companies such as 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 advisors 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,
1998, 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, 1998. On March 30, 1998, the U.S. Treasury Department and the
Internal Revenue Service announced that the Final Withholding Regulations would
be amended to extend the date of applicability to payments made after
December 31, 1999. Investors should consult their tax advisors 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 advisors 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 "Declaration") disclaims shareholder
liability for acts or obligations of the Fund and requires that a notice of such
disclaimer be given in each agreement, obligation or instrument entered into or
executed by the Fund or the Trustees. The Declaration provides for
indemnification out of Fund property for all loss and expense of any shareholder
held personally liable for the
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<PAGE> 72
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
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<PAGE> 73
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
(a)(2) Amendment No. 1 to Agreement and Declaration of
Trust
(b) By-Laws, as amended
(c) Not applicable
(d)(1) Form of specimen share certificate for Shares of
Beneficial Interest, without par value
(d)(2) Form of Subscription Certificate (1)
(d)(3) Form of Notice of Guaranteed Delivery (1)
(d)(4) Nominee Holder Over-Subscription Form (1)
(d)(5) Beneficial Owner Certificate Form (1)
(e) Dividend Reinvestment Plan
(f) Not applicable
(g) Management Agreement with Colonial Management
Associates, Inc.
(h) Form of Dealer Manager Agreement with
________________________ (1)
(i) Not applicable
(j)(1) Custody Agreement with Boston Safe Deposit and
Trust Company (incorporated herein by reference to
Exhibit 8 to Post-Effective Amendment No. 10 to
the Registration Statement of Colonial Trust VI,
Registration Nos. 33-45117 & 811-6529, filed with
the Commission on September 27, 1996)
(j)(2) Amendment to Custody Agreement with Boston Safe
Deposit and Trust Company
(incorporated herein by reference to Exhibit 8(a)
to Post-Effective Amendment No. 10
to the Registration Statement of Colonial Trust VI,
Registration Nos. 33-45117 &
<PAGE> 74
811-6529, filed with the Commission on September
27, 1996)
(k)(1) Transfer Agency and Registrar Agreement(1)
(k)(2) Pricing and Bookkeeping Agreement with Colonial
Management Associates, Inc.
(k)(3) Credit Line Agreement with Bank of America Illinois
(k)(4) Form of Subscription Rights Agency Agreement with
First Data Investor Services Group, Inc. (1)
(k)(5) Form of Information Agent Agreement (1)
(l) Opinion of counsel (1)
(m) Not applicable
(n) Consent of independent accountants
(o) Not applicable
(p) Not applicable
(q) Not applicable
(r) Financial Data Schedule
- --------------------------------
(1) To be filed by Amendment.
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
New York Stock Exchange listing fee
Printing
Accounting fees and expenses
Legal fees and expenses
Dealer Managers' expense reimbursement
Information Agent fees and expenses
Subscription Agent fees and expenses
Miscellaneous
--------
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 March 31, 1998
-------------- ------------------------
Shares of Beneficial Interest 1,334
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
issue.
The Registrant, Colonial Management Associates, Inc. and their
respective trustees, directors and officers are insured by a
directors and officers/errors and omissions liability policy.
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
business and other connections of each director and officer of
Colonial Management Associates, Inc.
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, 1997, 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, 1996, 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 $17,318.0 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.
<PAGE> 75
The following sets forth the business and other connections of each
director and officer of Colonial Management Associates, Inc.:
(1) (2) (3) (4)
Name and principal
business
addresses* Affiliation
of officers and with Period is through 10/31/97. 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
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 V.P.; Colonial Investors Service
Asst. Center, Inc. Asst. Clerk
Sec.; The Colonial Group, Inc. Asst. Clerk
<PAGE> 76
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.
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
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.
<PAGE> 77
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
Controller
Colonial High Income Treasr.,CFO
Municipal Trust Controller
Colonial InterMarket Income Controller;
Trust I Treasr.,CFO
Colonial Intermediate High Controller;
Income Fund Treasr.,CFO
Colonial Investment Grade Controller;
Municipal Trust Treasr.,CFO
Colonial Municipal Income Controller;
Trust Treasr.,CFO
LFC Utilities Trust Controller;
Treasr.,CFO
Colonial Advisory Services,
Inc. CFO, Treasr.
Johnson, Gordon V.P.
Knudsen, Gail V.P.
Koonce, Michael H. 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
Lasher, Ben V.P.
Lennon, John E. V.P. Colonial Advisory Services,
Inc. V.P.
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.
<PAGE> 78
Ostrander, Laura V.P.
Peters, Helen F. Sr.V.P.; Colonial Advisory Services, Pres.,
IPC Mbr. Inc. CEO
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.
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.
<PAGE> 79
- ------------------------------------------------
*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: Boston Safe Deposit and Trust Company
One Boston Place
Boston, Massachusetts 02108
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> 80
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 9th day of April, 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 April 9, 1998
- ------------------------ executive officer)
Harold W. Cogger
/s/ J. KEVIN CONNAUGHTON Controller and Chief April 9, 1998
- ------------------------ Accounting Officer
J. Kevin Connaughton
/s/ TIMOTHY J. JACOBY Treasurer and Chief April 9, 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> 81
/s/ WILLIAM D. IRELAND, JR. *
- --------------------------- Trustee
William D. Ireland, Jr.
/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
April 9, 1998
/s/ JOHN J. NEUHAUSER*
- --------------------- Trustee
John J. Neuhauser
/s/ GEORGE L. SHINN*
- --------------------- Trustee
George L. Shinn
/s/ ROBERT L. SULLIVAN*
- --------------------- Trustee
Robert L. Sullivan
/s/ SINCLAIR WEEKS, JR. *
- --------------------- Trustee
Sinclair Weeks, Jr.
INDEX OF EXHIBITS
(a)(1) Agreement and Declaration of Trust
(a)(2) Amendment No. 1 to the Agreement and Declaration of Trust
(b) By-Laws, as amended
(d)(1) Form of specimen share certificate for Shares of Beneficial
Interest, without par value
(e) Dividend Reinvestment Plan
(g) Management Agreement with Colonial Management Associates, Inc.
(k)(2) Pricing and Bookkeeping Agreement with Colonial Management
Associates, Inc.
(k)(3) Credit Line Agreement with Bank of America Illinois
(n) Consent of Independent Accountants
(r) Financial Data Schedule
<PAGE> 1
Exhibit (a)(1)
COLONIAL INTERMEDIATE HIGH INCOME FUND
AGREEMENT AND DECLARATION OF TRUST
May 24, 1988
COLONIAL INTERMEDIATE HIGH INCOME FUND
---------------------
AGREEMENT AND DECLARATION OF TRUST
---------------------
AGREEMENT AND DECLARATION OF TRUST made at Boston, Massachusetts, this 24th day
of May, 1988, by the Trustees hereunder, and by the holders of shares of
beneficial interest to be issued hereunder as hereinafter provided.
WITNESSETH that
WHEREAS, this Trust has been formed to carry on the business of an investment
company; and
WHEREAS, the Trustees have agreed to manage all property coming into their hands
as trustees of a Massachusetts business trust in accordance with the provisions
hereinafter set forth.
NOW, THEREFORE, the Trustees hereby declare that they will hold all cash,
securities and other assets, which they may from time to time acquire in any
manner, as Trustees hereunder IN TRUST, to manage and dispose of the same upon
the following terms and conditions for the pro rata benefit of the holders from
time to time of Shares in this Trust as hereinafter set forth.
ARTICLE I
NAME AND DEFINITIONS
Name
- ----
Section 1. This Trust shall be known as "Colonial Intermediate High Income Fund"
and the Trustees shall conduct the business of the Trust under that name or any
other name as they may from time to time determine.
Definitions
- -----------
Section 2. Whenever used herein, unless otherwise required by the context or
specifically provided:
(a) The "Trust" refers to the Massachusetts business trust established by this
Agreement and Declaration of Trust, as amended from time to time;
(b) "Trustees" refers to the Trustees of the Trust named herein or elected in
accordance with Article IV;
(c) "Shares" means the equal proportionate transferable units of interest into
which the beneficial interest in the Trust shall be divided from time to time;
(d) "Shareholder" means a record owner of Shares;
(e) The "1940 Act" refers to the Investment Company Act of 1940 and the Rules
and Regulations thereunder, all as amended from time to time;
(f) The terms "Affiliated Person", "Assignment", "Commission", "Interested
Person", "Principal Underwriter" and "Majority Shareholder Vote" (the 67% or 50%
requirement of the third sentence of Section 2(a) (42) of the 1940 Act,
whichever may be applicable) shall have the meanings given them in the 1940 Act;
(g) "Declaration of Trust" shall mean this Agreement and Declaration of Trust as
<PAGE> 2
amended or restated from time to time; and
(h) "By-Laws" shall mean the By-Laws of the Trust as amended from time to time.
ARTICLE II
PURPOSE
The purpose of the Trust is to provide investors a managed investment primarily
in securities, commodities and debt instruments.
ARTICLE III
SHARES
Division of Beneficial Interest
- -------------------------------
Section 1. The beneficial interest in the Trust shall at all times be divided
into Shares of a single series, without par value, each of which shall represent
an equal proportionate interest in the Trust with each other Share, none having
priority or preference over another. The number of Shares authorized shall be
unlimited, and the Shares so authorized may be represented in part by fractional
shares. The Trustees may from time to time divide or combine the Shares into a
greater or lesser number without thereby changing the proportionate beneficial
interests in the Trust.
Ownership of Shares
- -------------------
Section 2. The ownership of Shares shall be recorded on the books of the Trust
or its transfer or similar agent. No certificates certifying the ownership of
Shares shall be issued except as the Trustees may otherwise determine from time
to time. The Trustees may make such rules as they consider appropriate for the
issuance of Share certificates, the transfer of Shares and similar matters. The
record books of the Trust as kept by the Trust or any transfer or similar agent
of the Trust, as the case may be, shall be conclusive as to who are the
Shareholders and as to the number of Shares held from time to time by each
Shareholder.
Investments in the Trust
- ------------------------
Section 3. The Trustees shall accept investments in the Trust from such persons
and on such terms and, subject to any requirements of law, for such
consideration, which may consist of cash or tangible or intangible property or a
combination thereof, as they from time to time authorize.
No Preemptive Rights
- --------------------
Section 4. Shareholders shall have no preemptive or other right to receive,
purchase or subscribe for any additional Shares or other securities issued by
the Trust.
Status of Shares and Limitation of Personal Liability
- -----------------------------------------------------
Section 5. Shares shall be deemed to be personal property giving only the rights
provided in this instrument. Every Shareholder by virtue of having become a
Shareholder shall be held to have expressly assented and agreed to the terms
hereof and to have become a party hereto. The death of a Shareholder during the
continuance of the Trust shall not operate to terminate the same nor entitle the
representative of any deceased Shareholder to an accounting or to take any
action in court or elsewhere against the Trust or the Trustees, but only to the
rights of said decedent under this Trust. Ownership of Shares shall not entitle
the Shareholder to any title in or to the whole or any part of the Trust
property or right to call for a partition or division of the same or for an
accounting, nor shall the ownership of Shares constitute the Shareholders
partners. Neither the Trust nor the Trustees, nor any officer, employee or agent
of the Trust, shall have any power to bind personally any Shareholder, nor
except as specifically provided herein to call upon any Shareholder for the
payment of any sum of money or assessment whatsoever other than such as the
Shareholder may at any time personally agree to pay.
<PAGE> 3
ARTICLE IV
THE TRUSTEES
Number of Trustees and Term of Office
- -------------------------------------
Section 1. The number of Trustees shall be such number as shall be fixed from
time to time by a written instrument signed by a majority of the Trustees,
provided, however, that the number of Trustees shall in no event be reduced to
less than three (3) nor increased to more than fifteen (15). No reduction in the
number of Trustees shall have the effect of removing any Trustee from office
prior to the expiration of his term unless the Trustee is specifically removed
pursuant to Section 2 of this Article at the time of the decrease. The Board of
Trustees shall be divided into three classes.
Within the limits above specified, the number of Trustees in each class shall be
determined by resolution of the Board of Trustees. The initial Trustees, each of
whom shall serve until the first meeting of Shareholders at which Trustees are
elected and until his or her successor is elected and qualified, or until he or
she sooner dies, resigns or is removed, shall be John A. McNeice, Jr. and such
other persons as the Trustee or Trustees then in office shall, prior to any sale
of Shares pursuant to a public offering, appoint. The term of office of all of
the initial Trustees shall expire on the date of the first annual meeting of
shareholders or special meeting in lieu thereof, which annual or special meeting
shall be called to be held not more than one year after Shares are first sold
pursuant to a public offering. The term of office of the first class shall
expire on the date of the second annual meeting of shareholders or any special
meeting in lieu thereof. The term of office of the second class shall expire on
the date of the third annual meeting of shareholders or any special meeting in
lieu thereof. The term of office of the third class shall expire on the date of
the fourth annual meeting of shareholders or any special meeting in lieu
thereof. Upon expiration of the term of office of each class as set forth above,
the number of Trustees in such class, as determined by the Board of Trustees,
shall be elected for a term expiring on the date of the third annual meeting of
shareholders or any special meeting in lieu thereof following such expiration to
succeed the Trustees whose terms of office expire. The Trustees shall be elected
at an annual meeting of the shareholders or a special meeting in lieu thereof,
except as provided in Section 2 of this Article.
Vacancies; Removal
- ------------------
Section 2. Any vacancies occurring in the Board of Trustees may be filled by the
Trustees if, immediately after filling any such vacancy, at least two-thirds of
the Trustees then holding office shall have been elected to such office by the
Shareholders. In the event that at any time less than a majority of the Trustees
then holding office were elected to such office by the Shareholders, the
Trustees shall call a meeting of Shareholders for the purpose of electing
Trustees. At any meeting called for such purpose, a Trustee may be removed, with
or without cause, by vote of a majority of the outstanding shares. By vote of a
majority of the Trustees then in office, the Trustees may remove a Trustee with
or without cause.
Effect of Death, Resignation, etc. of a Trustee
- -----------------------------------------------
Section 3. The death, declination, resignation, retirement, removal or
incapacity of the Trustees, or any one of them, shall not operate to annul the
Trust or to revoke any existing agency created pursuant to the terms of this
Declaration of Trust.
Powers
- ------
Section 4. Subject to the provisions of this Declaration of Trust, the business
of the Trust shall be managed by the Trustees, and they shall have all powers
necessary or convenient to carry out that responsibility. Without limiting the
foregoing, the Trustees may adopt By-Laws not inconsistent with this Declaration
of Trust providing for the conduct of the business of the Trust and may amend
and repeal them to the extent that such By-Laws do not reserve that right to the
Shareholders; they may fill vacancies in their number, including vacancies
resulting from increases in their number, and may
<PAGE> 4
elect and remove such officers and appoint and terminate such agents as they
consider appropriate; they may appoint from their own number, and terminate, any
one or more committees consisting of two or more Trustees, including an
executive committee which may, when the Trustees are not in session, exercise
some or all of the power and authority of the Trustees as the Trustees may
determine; they may appoint an advisory board, the members of which shall not be
Trustees and need not be Shareholders; they may employ one or more custodians of
the assets of the Trust and may authorize such custodians to employ
subcustodians and to deposit all or any part of such assets in a system or
systems for the central handling of securities, retain a transfer agent or a
Shareholder services agent, or both, provide for the distribution of Shares by
the Trust, through one or more principal underwriters or otherwise, set record
dates for the determination of Shareholders with respect to various matters, and
in general delegate such authority as they consider desirable to any officer of
the Trust, to any committee of the Trustees and to any agent or employee of the
Trust or to any such custodian or underwriter.
Without limiting the foregoing, the Trustees shall have power and authority:
(a) To invest and reinvest cash, and to hold cash uninvested;
(b) To sell, exchange, lend, pledge, mortgage, hypothecate, write options on and
lease any or all of the assets of the Trust;
(c) To vote or give assent, or exercise any rights of ownership, with respect to
stock or other securities or property; and to execute and deliver proxies or
powers of attorney to such person or persons as the Trustees shall deem proper,
granting to such person or persons such power and discretion with relation to
securities or property as the Trustees shall deem proper;
(d) To exercise powers and rights of subscription or otherwise which in any
manner arise out of ownership of securities;
(e) To hold any security or property in a form not indicating any trust, whether
in bearer, unregistered or other negotiable form, or in the name of the Trustees
or of the Trust or in the name of a custodian, subcustodian or other depository
or a nominee or nominees or otherwise;
(f) To consent to or participate in any plan for the reorganization,
consolidation or merger of any corporation or issuer, any security of which is
or was held in the Trust; to consent to any contract, lease, mortgage, purchase
or sale of property by such corporation or issuer, and to pay calls or
subscriptions with respect to any security held in the Trust;
(g) To join with other security holders in acting through a committee,
depositary, voting trustee or otherwise, and in that connection to deposit any
security with, or transfer any security to, any such committee, depositary or
trustee, and to delegate to them such power and authority with relation to any
security (whether or not so deposited or transferred) as the Trustees shall deem
proper, and to agree to pay, and to pay, such portion of the expenses and
compensation of such committee, depositary or trustee as the Trustees shall deem
proper;
(h) To compromise, arbitrate or otherwise adjust claims in favor of or against
the Trust on any matter in controversy, including but not limited to claims for
taxes;
(i) To enter into joint ventures, general or limited partnerships and any other
combinations or associations;
(j) To borrow funds;
(k) To endorse or guarantee the payment of any notes or other obligations of any
person; to make contracts of guaranty or suretyship, or otherwise assume
liability for payment thereof; and to mortgage and pledge the Trust property or
any part thereof to secure any of or all of such obligations;
(l) To purchase and pay for entirely out of Trust property such insurance as
they may deem necessary or appropriate for the conduct of the business,
including, without limitation, insurance policies insuring the assets of the
Trust and payment of distributions and principal on its portfolio investments,
and insurance policies insuring the Shareholders, Trustees, officers, employees,
agents, investment advisers or managers, principal underwriters or independent
contractors of the Trust individually against all claims and liabilities of
every nature arising by reason of holding, being in or having held any such
office or position, or by reason of any action alleged to have been taken or
omitted by any such person as Shareholder, Trustee, officer, employee, agent,
investment adviser or manager, principal underwriter or independent contractor,
including any action taken or omitted that may be determined to constitute
negligence, whether or not the Trust would have the power to indemnify such
person against such liability; and
(m) To pay pensions for faithful service, as deemed appropriate by the Trustees,
and to adopt, establish and carry out pension, profit-sharing, share bonus,
share purchase, savings, thrift and other retirement, incentive and benefit
plans, trusts and provisions, including the purchasing of life insurance and
annuity contracts as a means of providing such retirement and other benefits,
for any or all of the Trustees, officers, employees and agents of the Trust.
<PAGE> 5
The Trustees shall not in any way be bound or limited by any present or future
law or custom in regard to investments by trustees. Except as otherwise provided
herein or from time to time in the By-Laws, any action to be taken by the
Trustees may be taken by a majority of the Trustees present at a meeting of the
Trustees (a quorum being present), within or without Massachusetts, including
any meeting held by means of a conference telephone or other communications
equipment by means of which all persons participating in the meeting can hear
each other at the same time and participation by such means shall constitute
presence in person at a meeting, or by written consents of a majority of the
Trustees then in office.
Payment of Expenses by Trust
- ----------------------------
Section 5. The Trustees are authorized to pay or to cause to be paid out of the
principal or income of the Trust, or partly out of principal and partly out of
income, as they deem fair, all expenses, fees, charges, taxes and liabilities
incurred or arising in connection with the Trust, or in connection with the
management thereof, including, but not limited to, the Trustees' compensation
and such expenses and charges for the services of the Trust's officers,
employees, investment adviser or manager, principal underwriter, auditor,
counsel, custodian, transfer agent, Shareholder servicing agent and such other
agents or independent contractors as the Trustees may deem necessary or proper
to engage, and such other expenses and charges as the Trustees may deem
necessary or proper to incur.
Ownership of Assets of the Trust
- --------------------------------
Section 6. Title to all of the assets of the Trust shall at all times be
considered as vested in the Trustees.
Advisory, Management and Distribution
- -------------------------------------
Section 7. Subject to a favorable Majority Shareholder Vote, the Trustees may,
at any time and from time to time, contract for exclusive or nonexclusive
advisory and/or management services with Colonial Management Associates, Inc., a
Massachusetts corporation, or any other corporation, trust, association or other
organization (the "Adviser"), every such contract to comply with such
requirements and restrictions as may be set forth in the By-Laws; and any such
contract may contain such other terms interpretive of or in addition to said
requirements and restrictions as the Trustees may determine, including, without
limitation, authority to determine from time to time what investments shall be
purchased, held, sold or exchanged and what portion, if any, of the assets of
the Trust shall be held uninvested, and to make changes in the Trust's
investments. The Trustees may also, at any time and from time to time, contract
with the Adviser or any other corporation, trust, association or other
organization, appointing it exclusive or nonexclusive distributor or principal
underwriter for the Shares, every such contract to comply with such requirements
and restrictions as may be set forth in the By-Laws; and any such contract may
contain such other terms interpretive of or in addition to said requirements and
restrictions as the Trustees may determine.
The fact that
(i) any of the Shareholders, Trustees or officers of the Trust is a shareholder,
director, officer, partner, trustee, employee, manager, adviser, principal
underwriter, or distributor or agent of or for any corporation, trust,
association or other organization, or of or for any parent or affiliate of any
organization, with which an advisory or management contract, or principal
underwriter's or distributor's contract, or transfer, shareholder services or
other agency contract may have been or may hereafter be made, or that any
organization, or any parent or affiliate thereof, is a Shareholder or has an
interest in the Trust, or that
(ii) any corporation, trust, association or other organization with which an
advisory or management contract or principal underwriter's or distributor's
contract, or transfer, Shareholder services or other agency contract may have
been or may hereafter be made also has an advisory or management contract, or
principal underwriter's or distributor's contract, or transfer, shareholder
services or other agency contract with one or more other corporations, trusts,
associations or other organizations, or has other business or interests shall
not affect the validity of any such contract or disqualify any Shareholder,
Trustee or officer of the Trust from voting upon or executing the same or create
any liability or accountability to the Trust or its Shareholders.
ARTICLE V
SHAREHOLDERS' VOTING POWERS AND MEETINGS
Voting Powers
- -------------
<PAGE> 6
Section 1. The Shareholders shall have power to vote only (i) for the election
or removal of Trustees as provided in Article IV, Section 1, (ii) with respect
to any Adviser as provided in Article IV, Section 7, (iii) with respect to any
termination of this Trust to the extent and as provided in Article IX, Section
4, (iv) with respect to any amendment of this Declaration of Trust to the extent
and as provided in Article IX, Section 7, (v) to the same extent as the
stockholders of a Massachusetts business corporation as to whether or not a
court action, proceeding or claim should or should not be brought or maintained
derivatively or as a class action on behalf of the Trust or the Shareholders,
(vi) with respect to such additional matters relating to the Trust as may be
required by law, this Declaration of Trust, the By-Laws or any registration of
the Trust with the Securities and Exchange Commission (or any successor agency)
or any state, or as the Trustees may consider necessary or desirable. Each whole
Share shall be entitled to one vote as to any matter on which it is entitled to
vote and each fractional Share shall be entitled to a proportionate fractional
vote. There shall be no cumulative voting in the election of Trustees. Shares
may be voted in person or by proxy. A proxy with respect to Shares held in the
name of two or more persons shall be valid if executed by any one of them unless
at or prior to exercise of the proxy the Trust receives a specific written
notice to the contrary from any one of them. A proxy purporting to be executed
by or on behalf of a Shareholder shall be deemed valid unless challenged at or
prior to its exercise and the burden of proving invalidity shall rest on the
challenger. Until Shares are issued, the Trustees may exercise all rights of
Shareholders and may take any action required by law, this Declaration of Trust
or the By-Laws to be taken by Shareholders.
Voting Power and Meetings
- -------------------------
Section 2. There shall be an annual meeting of the Shareholders on the date
fixed in the By-Laws at the office of the Trust in Boston, Massachusetts, or at
such other place as may be designated in the call thereof, which call shall be
made by the Trustees. In the event that such meeting is not held in any year on
the date fixed in the By-Laws, whether the omission be by oversight or
otherwise, a subsequent special meeting may be called by the Trustees and held
in lieu of the annual meeting with the same effect as though held on such date.
Special meetings may also be called by the Trustees from time to time for the
purpose of taking action upon any matter requiring the vote or authority of the
Shareholders as herein provided or upon any other matter deemed by the Trustees
to be necessary or desirable. Written notice of any meeting of Shareholders
shall be given or caused to be given by the Trustees by mailing such notice at
least seven days before such meeting, postage prepaid, stating the time, place
and purpose of the meeting, to each Shareholder at the Shareholder's address as
it appears on the records of the Trust. If the Trustees shall fail to call or
give notice of any meeting of Shareholders for a period of 30 days after written
application by Shareholders holding at least 10% of the Shares then outstanding
requesting a meeting to be called for a purpose requiring action by the
Shareholders as provided herein or in the By-Laws, then Shareholders holding at
least 10% of the Shares then outstanding may call and give notice of such
meeting, and thereupon the meeting shall be held in the manner provided for
herein in case of call thereof by the Trustees.
Quorum and Required Vote
- ------------------------
Section 3. Thirty per cent (30%) of the Shares entitled to vote shall be a
quorum for the transaction of business at a Shareholders' meeting. Any lesser
number, however, shall be sufficient for adjournments. Any adjourned session or
sessions may be held within a reasonable time after the date set for the
original meeting without the necessity of further notice. Except when a larger
vote is required by any provision of this Declaration of Trust or the By-Laws, a
majority of the Shares voted shall decide any questions and a plurality shall
elect a Trustee.
Conversion
- ----------
Section 4. The Trustees shall, if the conditions set forth in the immediately
following sentence have been satisfied, submit to the Shareholders at the first
annual meeting of Shareholders, or special meeting in lieu thereof, held after
November 1, 1993, a proposal that the Trust, consistent with the 1940 Act as
then in effect, amend this Declaration of Trust to convert the Trust from a
"closed-end company" to an "open-end company" as those terms are defined in
Sections 5(a)(2) and 5(a)(1), respectively, of the 1940 Act, as in effect from
time to time. The Trustees shall be required to submit such proposal at such
annual meeting of Shareholders or special meeting in lieu thereof only if both
(i) Shares have traded on the principal security exchange where listed at an
average discount from net asset value of more than 10%, determined on the basis
of the discount as of the end of the last trading day in each week during the
period of 12 calendar weeks preceding November 1, 1993, and (ii) during such
year the Trust receives at its principal executive office written requests from
the holders of
<PAGE> 7
10% or more of the outstanding Shares that such a proposal be submitted to the
Shareholders.
Notwithstanding any other provision of this Declaration of Trust, the conversion
of the Trust from a "closed-end company" to an "open-end company," as those
terms are defined in Sections 5(a)(2) and 5(a)(1), respectively, of the 1940 Act
as in effect from time to time, shall require the affirmative vote or consent of
the holders of at least 66 2/3% of the Shares entitled to vote. Such affirmative
vote or consent shall be in addition to the vote or consent of the holders of
the Shares otherwise required by law or by any agreement between the Trust and
any national securities exchange.
Action by Written Consent
- -------------------------
Section 5. Any action taken by Shareholders may be taken without a meeting if a
majority of Shareholders entitled to vote on the matter (or such larger
proportion thereof as shall be required by any express provision of this
Declaration of Trust or the By-Laws) consent to the action in writing and such
written consents are filed with the records of the meetings of Shareholders.
Such consent shall be treated for all purposes as a vote taken at a meeting of
Shareholders.
Additional Provisions
- ---------------------
Section 6. The By-Laws may include further provisions for Shareholders' votes
and meetings and related matters.
ARTICLE VI
DISTRIBUTIONS AND DETERMINATION OF NET ASSET VALUE
Distributions
- -------------
Section 1. The Trustees may, but need not, each year distribute to the
Shareholders such income and gains, accrued or realized, as the Trustees may
determine, after providing for actual and accrued expenses and liabilities
(including such reserves as the Trustees may establish) determined in accordance
with good accounting practices. The Trustees shall have full discretion to
determine which items shall be treated as income and which items as capital and
their determination shall be binding upon the Shareholders. Distributions of
each year's income, if any be made, may be made in one or more payments, which
shall be in Shares, in cash or otherwise and on a date or dates and as of a
record date or dates determined by the Trustees. At any time and from time to
time in their discretion, the Trustees may distribute to the Shareholders as of
a record date or dates determined by the Trustees, in Shares, in cash or
otherwise, all or part of any gains realized on the sale or disposition of
property or otherwise, or all or part of any other principal of the Trust. Each
distribution pursuant to this Section 1 shall be made ratably according to the
number of Shares held by the several Shareholders on the applicable record date
thereof, provided that no distribution need be made on Shares purchased pursuant
to orders received, or for which payment is made, after such time or times as
the Trustees may determine.
Any such distribution paid in Shares will be paid at the net asset value thereof
as determined in accordance with Section 2 of this Article VII, or at such other
value as may be specified by the By-Laws or as the Trustees may from time to
time determine, subject to applicable laws and regulations then in effect.
Determination of Net Asset Value
- --------------------------------
Section 2. The term "net asset value" of the Shares shall mean: (i) the value of
all the assets of the Trust; (ii) less total liabilities of the Trust; (iii)
divided by the number of Shares outstanding, in each case at the time of each
determination. Any fractions involved in the computation of net asset value per
share shall be adjusted to the nearer cent unless the Trustees shall determine
to adjust such fractions to a fraction of a cent.
The Trustees, or any officer or officers or agent of this Trust designated for
the purpose by the Trustees, shall determine the net asset value of the Shares,
and the Trustees shall fix the times as of which the net asset value of the
Shares shall be determined and shall fix the periods during which any such net
asset value shall be effective as to sales and other transactions in the Shares,
except as such times and periods for any such transaction may be fixed by other
provisions of this Declaration of Trust or by the By-Laws.
In valuing the portfolio investments for determination of net asset value per
share, securities for which market quotations are readily available shall be
valued at prices which, in the opinion of the Trustees, or any officer or
officers or agent of the Trust designated for the
<PAGE> 8
purpose by the Trustees, most nearly represent the market value of such
securities, which may, but need not, be the most recent bid price obtained from
one or more of the market makers for such securities; other securities and
assets shall be valued at fair value as determined by or pursuant to the
direction of the Trustees. Notwithstanding the foregoing, short-term debt
obligations, commercial paper, and repurchase agreements may be, but need not
be, valued on the basis of quoted yields for securities of comparable maturity,
quality and type, or on the basis of amortized cost. In determination of net
asset value, dividends receivable and accounts receivable for investments sold
and for Shares sold shall be stated at the amounts to be received therefor; and
income receivable accrued daily on bonds and notes owned shall be stated at the
amount to be received. Any other assets shall be stated at fair value as
determined by the Trustees or such officer, officers or agent pursuant to the
Trustees' authority, except that no value shall be assigned to good will,
furniture, lists, reports, statistics or other noncurrent assets other than real
estate. Liabilities for accounts payable for investments purchased shall be
stated at the amounts payable therefor. In determining net asset value of the
Trust, the person or persons making such determination on behalf of the Trust
may include in liabilities such reserves, estimated accrued expenses and
contingencies as such person or persons may in its, his or their best judgment
deem fair and reasonable under the circumstances. Any income dividends and gains
distributions payable by the Trust shall be deducted as of such time or times on
the record date therefor as the Trustees shall determine.
The manner of determining the net assets of the Trust or of determining the net
asset value of the Shares may from time to time be altered as necessary or
desirable in the judgment of the Trustees to conform to any other method
prescribed or permitted by any applicable law or regulation.
Determinations under this Section 2 made in good faith and in accordance with
the provisions of the 1940 Act shall be binding on all parties concerned.
ARTICLE VII
COMPENSATION AND LIMITATION OF LIABILITY OF TRUSTEES
Compensation
- ------------
Section 1. The Trustees as such shall be entitled to reasonable compensation
from the Trust; they may fix the amount of their compensation. Nothing herein
shall in any way prevent the employment of any Trustee for advisory, management,
legal, accounting, investment banking or other services and payment for the same
by the Trust.
Limitation of Liability
- -----------------------
Section 2. The Trustees shall not be responsible or liable in any event for any
neglect or wrongdoing of any officer, agent, employee, adviser or principal
underwriter of the Trust, nor shall any Trustee be responsible for the act or
omission of any other Trustee, but nothing herein contained shall protect any
Trustee against any liability to which he or she would otherwise be subject by
reason of wilful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office.
Every note, bond, contract, instrument, certificate, Share or undertaking and
every other act or thing whatsoever executed or done by or on behalf of the
Trust or the Trustees or any of them in connection with the Trust shall be
conclusively deemed to have been executed or done only in or with respect to
their or his or her capacity as Trustees or Trustee, and such Trustees or
Trustee shall not be personally liable thereon.
ARTICLE VIII
INDEMNIFICATION
Trustees, Officers, etc.
- ------------------------
Section 1. The Trust shall indemnify each of its Trustees and officers
(including persons who serve at the Trust's request as directors, officers or
trustees of another organization in which the Trust has any interest as a
shareholder, creditor or otherwise) (hereinafter referred to as a "Covered
Person") against all liabilities and expenses, including but not limited to
amounts paid in satisfaction of judgments, in compromise or as fines and
penalties, and counsel fees reasonably incurred by any Covered Person in
connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, before any court or administrative or
legislative body, in which such Covered Person may be or may have been involved
as a party or otherwise or with which such person may be or may have been
threatened, while in office or thereafter, by reason of being or having been
such a Trustee
<PAGE> 9
or officer, except that no Covered Person shall be indemnified against any
liability to the Trust or its Shareholders to which such Covered Person would
otherwise be subject by reason of wilful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of such
Covered Person's office. Expenses, including counsel fees so incurred by any
such Covered Person (but excluding amounts paid in satisfaction of judgments, in
compromise or as fines or penalties), may be paid from time to time by the Trust
in advance of the final disposition of any such action, suit or proceeding upon
receipt of an undertaking by or on behalf of such Covered Person to repay
amounts so paid to the Trust if it is ultimately determined that indemnification
of such expenses is not authorized under this Article, provided that (a) such
Covered Person shall provide security for his undertaking, (b) the Trust shall
be insured against losses arising by reason of such Covered Person's failure to
fulfill his undertaking, or (c) a majority of the Trustees who are disinterested
persons and who are not Interested Persons (provided that a majority of such
Trustees then in office act on the matter), or independent legal counsel in a
written opinion, shall determine, based on a review of readily available facts
(but not a full trial-type inquiry), that there is reason to believe such
Covered Person ultimately will be entitled to indemnification.
Compromise Payment
- ------------------
Section 2. As to any matter disposed of (whether by a compromise payment,
pursuant to a consent decree or otherwise) without an adjudication in a decision
on the merits by a court, or by any other body before which the proceeding was
brought, that such Covered Person is liable to the Trust or its Shareholders by
reason of wilful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of such Covered Person's office,
indemnification shall be provided if (a) approved as in the best interest of the
Trust, after notice that it involves such indemnification, by at least a
majority of the Trustees who are disinterested persons and are not Interested
Persons (provided that a majority of such Trustees then in office act on the
matter), upon a determination, based upon a review of readily available facts
(but not a full trial-type inquiry) that such Covered Person is not liable to
the Trust or its Shareholders by reason of wilful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of such
Covered Person's office, or (b) there has been obtained an opinion in writing of
independent legal counsel, based upon a review of readily available facts (but
not a full-trial type inquiry) to the effect that such indemnification would not
protect such Covered Person against any liability to the Trust to which such
Covered Person would otherwise be subject by reason of wilful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office. Any approval pursuant to this Section shall not prevent
the recovery from any Covered Person of any amount paid to such Covered Person
in accordance with this Section as indemnification if such Covered Person is
subsequently adjudicated by a court of competent jurisidiction to have been
liable to the Trust or its Shareholders by reason of wilful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of such Covered Person's office.
Indemnification Not Exclusive
- -----------------------------
Section 3. The right of indemnification hereby provided shall not be exclusive
of or affect any other rights to which any such Covered Person may be entitled.
As used in this Article VIII, the term "Covered Person" shall include such
person's heirs, executors and administrators, and a "disinterested person" is a
person against whom none of the actions, suits or other proceedings in question
or another action, suit or other proceeding on the same or similar grounds is
then or has been pending. Nothing contained in this article shall affect any
rights to indemnification to which personnel of the Trust, other than Trustees
and officers, and other persons may be entitled by contract or otherwise under
law, nor the power of the Trust to purchase and maintain liability insurance on
behalf of such person.
Shareholders
- ------------
Section 4. In case any Shareholder or former Shareholder shall be held to be
personally liable solely by reason of his or her being or having been a
Shareholder and not because of his or her acts or omissions or for some other
reason, the Shareholder or former Shareholder (or his or her heirs, executors,
administrators or other legal representatives or in the case of a corporation or
other entity, its corporate or other general successor) shall be entitled to be
held harmless from and indemnified against all loss and expense arising from
such liability.
ARTICLE IX
MISCELLANEOUS
<PAGE> 10
Trustees, Shareholders, etc. Not Personally Liable: Notice
- ----------------------------------------------------------
Section 1. All persons extending credit to, contracting with or having any claim
against the Trust shall look only to the assets of the Trust for payment under
such credit, contract or claim; and neither the Shareholders nor the Trustees,
nor any of the Trust's officers, employees or agents, whether past, present or
future, shall be personally liable therefor. Nothing in this Declaration of
Trust shall protect any Trustee against any liability to which such Trustee
would otherwise be subject by reason of wilful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of the
office of Trustee.
Every note, bond, contract, instrument, certificate or undertaking made or
issued by the Trustees or by any officers or officer shall give notice that this
Declaration of Trust is on file with the Secretary of State of The Commonwealth
of Massachusetts and shall recite that the same was executed or made by or on
behalf of the Trust or by them as Trustees or Trustee or as officers or officer
and not individually and that the obligations of such instrument are not binding
upon any of them or the Shareholders individually but are binding only upon the
assets and property of the Trust, and may contain such further recital as he or
she or they may deem appropriate, but the omission thereof shall not operate to
bind any Trustees or officers or officer or Shareholders or Shareholder
individually.
Trustee's Good Faith Action, Expert Advice, No Bond or Surety
- -------------------------------------------------------------
Section 2. The exercise by the Trustees of their powers and discretions
hereunder shall be binding upon everyone interested. A Trustee shall be liable
for his or her own wilful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of the office of Trustee, and
for nothing else, and shall not be liable for errors of judgment or mistakes of
fact or law. The Trustees may take advice of counsel or other experts with
respect to the meaning and operation of this Declaration of Trust, and shall be
under no liability for any act or omission in accordance with such advice or for
failing to follow such advice. The Trustees shall not be required to give any
bond as such, nor any surety if a bond is required.
Liability of Third Persons Dealing with Trustees
- ------------------------------------------------
Section 3. No person dealing with the Trustees shall be bound to make any
inquiry concerning the validity of any transaction made or to be made by the
Trustees or to see to the application of any payments made or property
transferred to the Trust or upon its order.
Duration and Termination of Trust
- ---------------------------------
Section 4. Unless terminated as provided herein, the Trust shall continue
without limitation of time. The Trust may be terminated at any time by vote of
Shareholders holding at least 66 2/3% of the Shares entitled to vote or by the
Trustees by written notice to the Shareholders.
Upon termination of the Trust, after paying or otherwise providing for all
charges, taxes, expenses and liabilities, whether due or accrued or anticipated
as may be determined by the Trustees, the Trust shall in accordance with such
procedures as the Trustees consider appropriate reduce the remaining assets to
distributable form in cash or shares or other securities, or any combination
thereof, and distribute the proceeds to the Shareholders, ratably according to
the number of Shares held by the several Shareholders on the date of
termination.
Filing of Copies, References, Headings
- ---------------------------------------
Section 5. The original or a copy of this instrument and of each amendment
hereto shall be kept at the office of the Trust where it may be inspected by any
Shareholder. A copy of this instrument and of each amendment hereto shall be
filed by the Trust with the Secretary of State of The Commonwealth of
Massachusetts and with the Clerk of the City of Boston, as well as any other
governmental office where such filing may from time to time be required. Anyone
dealing with the Trust may rely on a certificate by an officer of the Trust as
to whether or not any such amendments have been made and as to any matters in
connection with the Trust hereunder; and, with the same effect as if it were the
original, may rely on a copy certified by an officer of the Trust to be a copy
of this instrument or of any such amendments. In this instrument and in any such
amendment, references to this instrument, and all expressions like "herein",
"hereof" and "hereunder", shall be deemed to refer to this instrument as amended
or affected by any such amendments. Headings are placed herein for
<PAGE> 11
convenience of reference only and shall not be taken as a part hereof or control
or affect the meaning, construction or effect of this instrument. This
instrument may be executed in any number of counterparts, each of which shall be
deemed an original.
Applicable Law
- --------------
Section 6. This Declaration of Trust is made in The Commonwealth of
Massachusetts, and it is created under and is to be governed by and construed
and administered according to the laws of said Commonwealth. The Trust shall be
of the type commonly called a Massachusetts business trust, and without limiting
the provisions hereof, the Trust may exercise all powers which are ordinarily
exercised by such a trust.
Amendments
- ----------
Section 7. (a) Except as provided in paragraph (b) of this Section 7, this
Declaration of Trust may be amended at any time by an instrument in writing
signed by a majority of the then Trustees when authorized so to do by a vote of
Shareholders holding a majority of the Shares entitled to vote.
Amendments having the purpose of changing the name of the Trust or of supplying
any omission, curing any ambiguity or curing, correcting or supplementing any
defective or inconsistent provision contained herein shall not require
authorization by Shareholder vote.
(b) No amendment may be made under this Section 7 which shall amend, alter,
change or repeal any of the provisions of Article IV, Section 1, Article V,
Section 4 or this paragraph (b) unless the amendment effecting such amendment,
alteration, change or repeal shall receive the affirmative vote or consent of at
least 66 2/3% of the Shares entitled to vote. Such affirmative vote or consent
shall be in addition to the vote or consent of the holders of Shares otherwise
required by law or by the terms of any agreement between the Trust and any
national securities exchange.
IN WITNESS WHEREOF, all of the Trustees as aforesaid do hereto set their hands
this 24th day of May, 1988.
JOHN A. MCNEICE, JR.
- --------------------
John A. McNeice, Jr.
COMMONWEALTH OF MASSACHUSETS)
)
COUNTY OF SUFFOLK ) ss.
Then personally appeared before me John A. McNeice, Jr., who acknowledged the
foregoing instrument to be his free act and deed.
EVELYN A. MELLEN
- ----------------
Evelyn A. Mellen
Notary Public
My commission expires on: 12/9/94
May 24, 1988
<PAGE> 1
Exhibit (a)(2)
AMENDMENT NO. 1 TO THE
AGREEMENT AND DECLARATION OF
COLONIAL INTERMEDIATE HIGH INCOME FUND
WHEREAS, Section 7 (b) of Article IX of the Agreement and Declaration
of Trust of Colonial Intermediate High Income Fund, a copy of which is on file
in the office of the Secretary of the Commonwealth of Massachusetts, provides
that said Agreement and Declaration of Trust may be amended at any time by an
instrument in writing signed by a majority of the then Trustees when authorized
so to do by a vote of a majority of the shareholders;
WHEREAS, Section 1 of Article V of said Agreement and Declaration of
Trust provides that until shares are issued the Trustees may exercise all rights
of shareholders and may take any action required by law, the Agreement and
Declaration of Trust or the by-laws to be taken by shareholders; and
WHEREAS, no shares have been issued by Colonial Intermediate High
Income Fund;
WE, THE UNDERSIGNED, being at least a majority of the Trustees of
Colonial Intermediate High Income Fund, do hereby certify that the undersigned
have authorized the following amendment to said Agreement and Declaration of
Trust as follows:
Section 3 of Article V is hereby amended by deleting the words "Thirty
per cent (30%)" from the first line thereof so that said section shall read in
its entirety as follows:
"Section 3. A majority of the Shares entitled to vote shall be a quorum
for the transaction of business at a Shareholders' meeting. Any lesser
number, however, shall be sufficient for adjournments. Any adjourned
session or sessions may be held within a reasonable time after the date
set for the original meeting without the necessity of further notice.
Except when a larger vote is required by any provision of this
Declaration of Trust or the By-Laws, a majority of the Shares voted
shall decide any questions and a plurality shall elect a Trustee."
The foregoing amendment shall become effective as of the time this
instrument is filed with the Secretary of the Commonwealth of Massachusetts.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands in
the City of Boston, Massachusetts for themselves and their assigns, on this 15th
day of July, 1988.
<PAGE> 2
/s/ Tom Bleasdale /s/ Frederic W. Watriss
- --------------------------------- --------------------------------
Tom Bleasdale Frederic W. Watriss
/s/ Lora S. Collins /s/ George L. Shinn
- --------------------------------- ---------------------------------
Lora S. Collins George L. Shinn
/s/ James L. Moody, Jr. /s/ John A. McNeice, Jr.
- --------------------------------- --------------------------------
James L. Moody, Jr. John A. McNeice, Jr.
THE COMMONWEALTH OF MASSACHUSETTS
Suffolk, ss. July 15, 1988
Then personally appeared the above-named Trustee(s) and acknowledged
the foregoing instrument to be his or their free act and deed, before me.
-------------------
Notary Public
My Commission expires:
(Notary's Seal)
<PAGE> 1
Exhibit (b)
Retyped - 10/12/90
Amended 10/12/90 - Sec. 2.5
Amended 12/13/91 - Sec. 8
Amended 10/9/92 - Sec. 11
Amended 2/16/96: - Section 3.1, paragraph 2
Amended 4/5/96: - Section 2.1, paragraph 1
BY-LAWS
OF
COLONIAL INTERMEDIATE HIGH INCOME FUND
Section 1. Agreement and Declaration of Trust and Principal Office
1.1 Agreement and Declaration of Trust. These By-Laws shall be subject to
the Agreement and Declaration of Trust, as from time to time in effect
(the "Declaration of Trust"), of Colonial Intermediate High Income Fund,
a Massachusetts business Trust established by the Declaration of Trust
(the "Trust").
1.2 Principal Office of the Trust. The principal office of the Trust shall
be located in Boston, Massachusetts.
Section 2. Shareholders
2.1 Shareholder Meetings. The annual meeting of the shareholders of the
Trust shall be held between April 1 and April 30 in each year, on a date
and at a time within that period set by the Trustees; provided, however,
that the 1996 annual meeting of shareholders be held between April
1,1996 and June 30, 1996 on a date and time within that period as set by
the President, Secretary or any Vice President of the Trust. A special
meeting of the shareholders of the Trust may be called at any time by
the Trustees, by the president or, if the trustees and the president
shall fail to call any meeting of shareholders for a period of 30 days
after written application of one or more shareholders who hold at least
10% of all outstanding shares of the Trust, then such shareholders may
call such meeting. Each call of a meeting shall state the place, date,
hour and purposes of the meeting.
2.2 Place of Meetings. All meetings of the shareholders shall be held at the
principal office of the Trust, or, to the extent permitted by the
Declaration of Trust, at such other place within the United States as
shall be designated by the Trustees or the president of the Trust.
2.3 Notice of Meetings. A written notice of each meeting of shareholders,
stating the place, date and hour and the purposes of the meeting, shall
be given at least seven days before the meeting to each shareholder
entitled to vote thereat by leaving such notice with him or at his
residence or usual place of business or by mailing it, postage prepaid,
and addressed to such shareholder at his address as it appears in the
records of the Trust. Such notice shall be given by the secretary or an
assistant secretary or by an officer designated by the Trustees. No
notice of any meeting of shareholders need be given to a shareholder if
a written waiver of notice, executed before or after the meeting by such
shareholder or his attorney thereunto duly authorized, is filed with the
records of the meeting.
<PAGE> 2
2.4 Ballots. No ballot shall be required for any election unless requested
by a shareholder present or represented at the meeting and entitled to
vote in the election.
2.5 Proxies. Shareholders entitled to vote may vote either in person or by
proxy in writing dated not more than six months before the meeting named
therein, which proxies shall be filed with the secretary or other person
responsible to record the proceedings of the meeting before being voted.
Unless otherwise specifically limited by their terms, such proxies shall
entitle the holders thereof to vote at any adjournment of such meeting
but shall not be valid after the final adjournment of such meeting. The
placing of a shareholder's name on a proxy pursuant to telephonic or
electronically transmitted instructions obtained pursuant to procedures
reasonably designed to verify that such instruction have been authorized
by such shareholder shall constitute execution of such proxy by or on
behalf of such shareholder.
Section 3. Trustees
3.1 Committees and Advisory Board. The Trustees may appoint from their
number an executive committee and other committees. Except as the
Trustees may otherwise determine, any such committee may make rules for
conduct of its business. The Trustees may appoint an advisory board to
consist of not less than two nor more than five members. The members of
the advisory board shall be compensated in such manner as the Trustees
may determine and shall confer with and advise the Trustees regarding
the investments and other affairs of the Trust. Each member of the
advisory board shall hold office until the first meeting of the Trustees
following the next meeting of the shareholders and until his successor
is elected and qualified, or until he sooner dies, resigns, is removed,
or becomes disqualified, or until the advisory board is sooner abolished
by the Trustees.
In addition, the Trustees may appoint a Dividend Committee of not less
than three persons, who may (but need not) be Trustees.
3.2 Regular Meetings. Regular meetings of the Trustees may be held without
call or notice at such places and at such times as the Trustees may from
time to time determine, provided that notice of the first regular
meeting following any such determination shall be given to absent
Trustees.
3.3 Special Meetings. Special meetings of the Trustees may be held at any
time and at any place designated in the call of the meeting, when called
by the president or the treasurer or by two or more Trustees, sufficient
notice thereof being given to each Trustee by the secretary or an
assistant secretary or by the officer or one of the Trustees calling the
meeting.
3.4 Notice. It shall be sufficient notice to a Trustee to send notice by
mail at least forty-eight hours or by telegram at least twenty-four
hours before the meeting addressed to the Trustee at his or her usual or
last known business or residence address or to give notice to him or her
in person or by telephone at least twenty-four hours before the meeting.
Notice of a meeting need not be given to any Trustee if a written waiver
of notice, executed by him or her before or after the meeting, is filed
with the records of the meeting, or to any Trustee who attends the
meeting without protesting prior thereto or at its commencement the lack
of notice to him or her. Neither notice of a meeting nor a waiver of a
notice need specify the purposes of the meeting.
3.5 Quorum. At any meeting of the Trustees one-third of the Trustees then in
office shall constitute a quorum; provided, however, a quorum shall not
be less than two. Any meeting may be adjourned from time to time by a
majority of the votes cast upon the question, whether or not a quorum is
present, and the meeting may be held as adjourned without further
notice.
Section 4. Officers and Agents
<PAGE> 3
4.1 Enumeration; Qualification. The officers of the Trust shall be a
president, a treasurer, a secretary and such other officers, if any, as
the Trustees from time to time may in their discretion elect or appoint.
The Trust may also have such agents, if any, as the Trustees from time
to time may in their discretion appoint. Any officer may be but none
need be a Trustee or shareholder. Any two or more offices may be held by
the same person.
4.2 Powers. Subject to the other provisions of these By-Laws, each officer
shall have, in addition to the duties and powers herein and in the
Declaration of Trust set forth, such duties and powers as are commonly
incident to his or her office as if the Trust were organized as a
Massachusetts business corporation and such other duties and powers as
the Trustees may from time to time designate, including without
limitation the power to make purchases and sales of portfolio securities
of the Trust pursuant to recommendations of the Trust's investment
adviser in accordance with the policies and objectives of the Trust set
forth in its prospectus and with such general or specific instructions
as the Trustees may from time to time have issued.
4.3 Election. The president, the treasurer and the secretary shall be
elected annually by the Trustees. Other elected officers, if any, may be
elected or appointed by the Trustees at said meeting or at any other
time.
4.4 Tenure. The president, the treasurer and the secretary shall hold office
until their respective successors are chosen and qualified, or in each
case until he or she sooner dies, resigns, is removed or becomes
disqualified. Each other officer shall hold office at the pleasure of
the Trustees. Each agent shall retain his or her authority at the
pleasure of the Trustees.
4.5 President and Vice Presidents. The president shall be the chief
executive officer of the Trust. The president shall preside at all
meetings of the shareholders and of the Trustees at which he or she is
present, except as otherwise voted by the Trustees. Any vice president
shall have such duties and powers as shall be designated from time to
time by the Trustees.
4.6 Treasurer and Controller. The treasurer shall be the chief financial
officer of the Trust and subject to any arrangement made by the Trustees
with a bank or trust company or other organization as custodian or
transfer or shareholder services agent, shall be in charge of its
valuable papers and shall have such duties and powers as shall be
designated from time to time by the Trustees or by the president. Any
assistant treasurer shall have such duties and powers as shall be
designated from time to time by the Trustees.
The Controller shall be the chief accounting officer of the Trust and
shall be in charge of its books of account and accounting records. The
Controller shall be responsible for preparation of financial statements
of the Trust and shall have such other duties and powers as may be
designated from time to time by the Trustees or the President.
4.7 Secretary and Assistant Secretaries. The secretary shall record all
proceedings of the shareholders and the Trustees in books to be kept
therefor, which books shall be kept at the principal office of the
Trust. In the absence of the secretary from any meeting of shareholders
or Trustees, an assistant secretary, or if there be none or he or she is
absent, a temporary clerk chosen at the meeting shall record the
proceedings thereof in the aforesaid books.
Section 5. Resignations and Removals
Any Trustee, officer or advisory board member may resign at any time by
delivering his or her resignation in writing to the president, the treasurer or
the secretary or to a meeting of the Trustees. The Trustees may remove any
officer elected by them with or without cause by the vote of a majority of the
Trustees then in office. Except to the extent expressly provided in a written
agreement with the Trust, no Trustee, officer, or advisory board member
resigning, and no officer or advisory board member removed shall have
<PAGE> 4
any right to any compensation for any period following his or her resignation or
removal, or any right to damages on account of such removal.
Section 6. Vacancies
A vacancy in any office may be filled at any time. Each successor shall hold
office for the unexpired term, and in the case of the president, the treasurer
and the secretary, until his or her successor is chosen and qualified, or in
each case until he or she sooner dies, resigns, is removed or becomes
disqualified.
Section 7. Shares of Beneficial Interest
7.1 Share Certificates. Each shareholder shall be entitled to a certificate
stating the number of shares owned by him or her, in such form as shall
be prescribed from time to time by the Trustees. Such certificate shall
be signed by the president or a vice president and by the treasurer or
an assistant treasurer. Such signatures may be facsimiles if the
certificate is signed by a transfer agent or by a registrar, other than
a Trustee, officer or employee of the Trust. In case any officer who has
signed or whose facsimile signature has been placed on such certificate
shall have ceased to be such officer before such certificate is issued,
it may be issued by the Trust with the same effect as if he or she were
such officer at the time of its issue.
In lieu of issuing certificates for shares, the Trustees or the transfer
agent may either issue receipts therefor or may keep accounts upon the
books of the Trust for the record holders of such shares, who shall in
either case be deemed, for all purposes hereunder, to be the holders of
certificates for such shares as if they had accepted such certificates
and shall be held to have expressly assented and agreed to the terms
hereof.
7.2 Loss of Certificates. In the case of the alleged loss or destruction or
the mutilation of a share certificate, a duplicate certificate may be
issued in place thereof, upon such terms as the Trustees may prescribe.
7.3 Discontinuance of Issuance of Certificates. The Trustees may at any time
discontinue the issuance of share certificates and may, by written
notice to each shareholder, require the surrender of share certificates
to the Trust for cancellation. Such surrender and cancellation shall not
affect the ownership of shares in the Trust.
Section 8. Record Date and Closing Transfer Books
The Trustees may fix in advance a time, which shall not be more than 90 days
before the date of any meeting of shareholders or the date for the payment of
any dividend or making of any other distribution to shareholders, as the record
date for determining the shareholders having the right to notice and to vote at
such meeting and any adjournment thereof or the right to receive such dividend
or distribution, and in such case only shareholders of record on such record
date shall have such right, notwithstanding any transfer of shares on the books
of the Trust after the record date; or without fixing such record date the
Trustees may for any of such purposes close the transfer books for all or any
part of such period.
Section 9. Seal
The seal of the Trust shall, subject to alteration by the Trustees, consist of a
flat-faced circular die with the word "Massachusetts" together with the name of
the Trust and the year of its organization, cut or engraved thereon; but, unless
otherwise required by the Trustees, the seal shall not be necessary to be placed
on, and its absence shall not impair the validity of, any document, instrument
or other paper executed and delivered by or on behalf of the Trust.
Section 10. Execution of Papers
<PAGE> 5
Except as the Trustees may generally or in particular cases authorize the
execution thereof in some other manner, all deeds, leases, transfers, contracts,
bonds, notes, checks, drafts and other obligations made, accepted or endorsed by
the Trust shall be signed, and all transfers of securities standing in the name
of the Trust shall be executed, by the president or by one of the vice
presidents or by the treasurer or by whomsoever else shall be designated for
that purpose by the vote of the Trustees and need not bear the seal of the
Trust.
Section 11. Fiscal Year
Except as from time to time otherwise provided by the Trustees, President,
Secretary, Controller or Treasurer the fiscal year of the Trust shall end on
October 31.
Section 12. Amendments
These By-Laws may be amended or repealed, in whole or in part, by a majority of
the Trustees then in office at any meeting of the Trustees, or by one or more
writings signed by such a majority.
<PAGE> 1
Exhibit (d)(1)
LOT 1 7-12624-160 -89
SHARE(S) OF BENEFICIAL INTEREST SHARE(S) OF BENEFICIAL INTEREST
Number
C NO PAR VALUE NO PAR VALUE
THIS CERTIFICATE IS TRANSFERABLE
IN BOSTON, MASSACHUSETTS AND CUSIP 195763 10 7
NEW YORK, NEW YORK SEE REVERSE FOR
CERTAIN DEFINITIONS
COLONIAL INTERMEDIATE HIGH INCOME FUND
SHARE CERTIFICATE
- ------------------- -------------------- -------------- -----------------------
CERTIFICATE NUMBER REFERENCE DATE SHARES
- ------------------- -------------------- -------------- -----------------------
S P E C I M E N
THIS
CERTIFIES
THAT
IS THE
OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF BENEFICIAL INTEREST OF
Colonial Intermediate High Income Fund, the said shares being issued, received
and held under and subject to the terms and provisions of the Agreement and
Declaration of Trust dated as of May 24, 1988, establishing Colonial
Intermediate High Income Fund, and all amendments, thereto, copies of which are
on file with the Secretary of the Commonwealth of Massachusetts. The said owner
by accepting this certificate agrees to and is bound by all of the said terms
and provisions. The shares represented hereby are transferable in writing by the
owner thereof in person or by attorney upon surrender of this certificate to the
Trustees properly endorsed for transfer. This certificate is executed on behalf
of the Trustees of the Trust as Trustees and not individually and the
obligations hereof are not binding upon any of the Trustees, officers or
shareholders of the Trust individually but are binding only upon the assets and
property of the Trust. This certificate is not valid until countersigned and
registered by the Transfer Agent and Registrar or its designated Agent.
Witness the facsimile seal of the Trust and the
facsimile signatures of its duly authorized officers.
Dated:
Countersigned and Registered:
Shareholder Services Group, Inc.
(Boston, Massachusetts) Transfer Agent
and Registrar
Authorized Signature. TREASURER PRESIDENT
<PAGE> 2
EXPLANATION OF ABBREVIATIONS
The following abbreviations when used in the form of ownership on the
face of this certificate shall be construed as though they were written out in
full according to applicable laws or regulations.
Abbreviations in addition to those appearing below, may be used.
Abbreviation Equivalent Abbreviation Equivalent
- ------------ ---------- ------------ ----------
JT TEN As joint tenants, TEN IN COM As tenants in common
with right of TEN BY ENT As tenants by the
survivorship and entireties
not as tenants UNIF TRANSFERS Uniform Transfers to
in common MIN ACT Minors
Abbreviation Equivalent Abbreviation Equivalent
- ------------ ----------- ------------ -----------
ADM Administrator(s) FDN Foundation
Administratrix PL Public Law
AGMT Agreement TR (As) trustees(s),
for, of
CUST Custodian for UA Under Agreement
EST Estate, Of estate of UW Under will of, Of
will of,
FBO For the benefit of Under last will &
Testament
Additional abbreviations may also be used though not in the above list.
- ----------------------------------------------------------------------------
TRANSFER FORM
FOR VALUE RECEIVED, _________________________________ hereby sell,
assign and transfer unto (I/We)
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- -----------------------------------------
- -----------------------------------------
- ----------------------------------------------------------------
Please print or typewrite name and address (including postal zip
code of assignee)
___________________________________________________________________Shares
represented by this Certificate and do hereby irrevocably constitute and appoint
_____________________________________________________________________Attorney,
to transfer said shares on the books of the Trust with full
power of substitution in the premises.
Dated:
SIGNATURE GUARANTEED BY Signature(s)_________________________________
(The signature to this assignment must
correspond with the name as
written upon the face of this
Certificate in every
particular, without alteration or
enlargement or any change
whatsoever. If more than one owner,
all must sign.)
- --------------------------------------------------------------------
(Signature must be guaranteed by a commercial bank or trust company or
member firm of any national stock exchange.)
IMPORTANT NOTICE:
When you sign your name to the Transfer Form without filling in the
name of your "Assignee" this certificate becomes fully negotiable, similar to a
check endorsed in blank. Therefore, to safeguard a signed certificate, it is
recommended that you fill in the name of the new owner in the "Assignee" space.
Alternatively, instead of using this Transfer Form, you may sign a
separate "stock power" form and then mail the unsigned certificate and the
signed "stock power" in separate envelopes. For added protection, use registered
mail for a certificate.
<PAGE> 1
Exhibit (e)
DIVIDEND REINVESTMENT PLAN
Terms and Conditions of the Dividend Reinvestment Plan
1. I will automatically be a participant ("Participant") in the Dividend
Reinvestment Plan ("Plan") if my shares are held in my name, unless I
specifically elect to receive all dividend and capital gain distributions in
cash. You, Ameritrust Company, N.A., will act as Plan Agent for me, and will
open an account for me under the Plan in the same name as my present shares are
registered.
If my shares are registered in the name of a brokerage firm or other
nominee ("Nominee"), I will automatically be a Participant in the Plan, unless
(a) such service is not provided by the Nominee or (b) the Nominee or I elect to
receive all dividend and capital gain distributions in cash.
2. Whenever Colonial Intermediate High Income Fund (the "Trust") declares a
dividend or capital gain distribution payable in shares or cash, I shall
automatically receive such shares, including fractions, for my account, except
in the circumstances described in paragraph 3 below. If the market price of
shares on the payment date for the distribution equals or exceeds their net
asset value, the Trust will issue shares at the higher of net asset value or 95%
of the market price. The 5% discount may constitute additional income to you for
the federal income tax purposes.
3. Should the net asset value per share of the Trust's shares of beneficial
interest exceed the market price per share on the payment date for an optional
stock or cash income distribution and capital gain distribution, or should the
Trust declare an income and capital gain distribution payable only in cash, you
shall apply the amount of such income distribution and capital gain distribution
on my shares (less my pro rata share of brokerage commissions incurred with
respect to your open-market purchases in connection with the reinvestment of
such distribution) to the purchase on the open market of the Trust's shares of
beneficial interest for my account. Such purchases will be made as soon as
practical after the payment date for such distribution, and in no event more
than 30 days after such date, except where necessary to comply with applicable
provisions of federal securities law.
4. For all purposes of the Plan: (a) the market price of the Trust's shares of
beneficial interest on a particular date shall be the last sales price on the
New York Stock Exchange on that date, or if there is no sale on such Exchange on
that date, then the mean between the closing bid and asked quotations for such
shares on such Exchange on such date and (b) net asset value per share of the
Trust's shares of beneficial interest on a particular date shall be as
determined by or on behalf of the Trust.
5. Any open-market purchases provided for above may be made on any securities
exchange where the Trust's share of beneficial interest are traded, in the
over-the-counter market or in negotiated transactions and may be on such terms
as to price, delivery and otherwise as you shall determine. My funds held by you
uninvested will not bear interest, and it is understood that, in any event, you
shall have no liability in connection with an inability to purchase shares
within 30 days after the initial date of such purchase as herein provided, or
with the timing of any purchases effected. You shall have no responsibility as
to the value of the Trust's shares of beneficial interest acquired for my
account. For the purposes of cash investments you may commingle my funds with
those of other shareholders of the Trust for whom you similarly act as Plan
Agent, and the average price (including brokerage commissions) of all shares
purchased by you as Plan Agent shall be the price per share allocable to me in
connection therewith.
6. You may hold my shares under the Plan, together with the shares of other
shareholders of the Trust, in non-certificated form in your name or that of your
Nominee. If my shares are registered in my name, you will forward to me any
proxy solicitation material and will vote any shares so held for me only in
accordance with the proxy returned by me to the Trust.
Upon my written request, you will deliver to me, without charge, a
certificate for the full shares. If my shares are held in Nominee name, my
Nominee will forward any proxy solicitation material to me.
7. You will confirm to me each acquisition made for my account as soon as
practicable but not later than 60 days after the date thereof. Although I may
from time to time have an undivided fractional interest (computed to three
decimal places) in a share of the Trust, no certificates for a fractional share
will be issued. However, distributions on fractional shares will be credited to
my account. In the event of termination of my account under the Plan, you will
adjust for any such undivided fractional interest in cash at the market value of
the Trust's shares at the time of termination less the pro rata expense of any
sale required to make such an adjustment.
8. Any stock dividends or split shares distributed by the Trust on shares held
by you for me will be credited to my account.
<PAGE> 2
9. Your service fee for handling distributions will be paid by the Trust. I will
be charged a pro rata share of brokerage commissions on all open market
purchases.
10. I may terminate my account under the Plan by notifying you in writing. Such
termination will be effective immediately if my notice is received by you not
less than ten days prior to any distribution record date; otherwise such
termination will be effective shortly after the investment of such distributions
with respect to any subsequent distribution. The Plan may be terminated by you
(with prior consent of the Trust) or the Trust upon notice in writing mailed to
me at least 90 days prior to any date for the payment of any distribution by the
Trust. Upon any termination you will cause a certificate or certificates for the
full shares held for me under the Plan and cash adjustment for any fraction to
be delivered to me without charge. If I elect by notice to you in writing in
advance of such termination to have you sell part of all of my shares and remit
the proceeds to me, you are authorized to deduct a $5.00 fee plus brokerage
commission for this transaction from the proceeds.
11. These Terms and Conditions may be amended or supplemented by you (with prior
consent of the Trust) or the Trust only by mailing to me appropriate written
notice at least 90 days prior to the effective date thereof, except when
necessary or appropriate to comply with applicable law or the rules or policies
of the Securities and Exchange Commission or any other regulatory authority. The
amendment or supplement shall be deemed to be accepted by me unless, prior to
the effective date thereof, you receive written notice of the termination of my
account under the Plan. Any such amendment may include an appointment by you in
your place and stead of a successor Plan Agent under these Terms and Conditions,
with full power and authority to perform all and any of the acts to be performed
by the Plan Agent under these Terms and Conditions. Upon any such appointment of
any Agent for the purpose of receiving distributions, the Trust will be
authorized to pay to such successor Plan Agent, for my account, all
distributions payable on shares of beneficial interest of the Trust held in my
name or under the Plan for retention or application by such successor Plan Agent
as provided in these Terms and Conditions.
12. You shall at all times act in good faith and agree to use your best efforts
to insure the accuracy of all services performed under these Terms and
Conditions and to comply with applicable law, but assume no responsibility and
shall not be liable for loss or damage due to errors unless such error is caused
by your negligence, bad faith, or willful misconduct or that of your employees.
13. These Terms and Conditions shall be governed by the laws of the State of
Ohio.
<PAGE> 3
AUTHORIZATION FOR CASH DISTRIBUTIONS
Please change my dividend and capital gain distributions election to cash.
To be effective, this authorization must be received by Ameritrust Company, N.A.
at least 10 business days before the record date for a distribution.
DO NOT MAIL THIS FORM IF YOU WISH TO RECEIVE BOTH YOUR DIVIDEND AND CAPITAL GAIN
DISTRIBUTIONS IN ADDITIONAL SHARES.
Taxpayer identification Number________________________________
Signature(s)__________________________________________________
Please sign exactly as your shares are registered. All
persons whose names appear on the share certificates must sign.
Date_________________________
AMERITRUST COMPANY NATIONAL ASSOCIATION
CORPORATE TRUST DIVISION
P.O. BOX 6477
CLEVELAND, OHIO 44101
<PAGE> 1
Exhibit (g)
MANAGEMENT AGREEMENT
AGREEMENT dated as of March 27, 1995, between COLONIAL INTERMEDIATE HIGH INCOME
FUND, a Massachusetts business trust (Fund), and COLONIAL MANAGEMENT ASSOCIATES,
INC., a Massachusetts corporation (Adviser).
In consideration of the promises and covenants herein, the parties agree as
follows:
1. The Adviser will manage the investment of the assets of the Fund in
accordance with its investment policies and will perform the other
services herein set forth, subject to the supervision of the Board of
Trustees of the Fund.
2. In carrying out its investment management obligations, the Adviser
shall:
(a) evaluate such economic, statistical and financial information and
undertake such investment research as it shall believe advisable; (b)
purchase and sell securities and other investments for the Fund in
accordance with the procedures approved by the Board of Trustees; and
(c) report results to the Board of Trustees.
3. The Adviser shall furnish at its expense the following:
(a) office space, supplies, facilities and equipment; (b) executive and
other personnel for managing the affairs of the Fund (including
preparing financial information of the Fund and reports and tax returns
required to be filed with public authorities, but exclusive of those
related to custodial, transfer, dividend and plan agency services,
determination of net asset value and maintenance of records required by
Section 31(a) of the Investment Company Act of 1940, as amended, and the
rules thereunder (1940 Act)); and (c) compensation of Trustees who are
directors, officers, partners or employees of the Adviser or its
affiliated persons (other than a registered investment company).
4. The Adviser shall be free to render similar services to others so long
as its services hereunder are not impaired thereby.
5. The Fund shall pay the Adviser monthly a fee at the annual rate of 0.65%
of the average weekly net assets of the Fund.
6. If the operating expenses of the Fund for any fiscal year exceed the
most restrictive applicable expense limitation for any state in which
shares are sold, the Adviser's fee shall be reduced by the excess but
not to less than zero.
Operating expenses shall not include brokerage, interest, taxes,
deferred organization expenses and extraordinary expenses, if any. The
Adviser may waive its compensation (and, bear expenses of the Fund) to
the extent that expenses of the Fund exceed any expense limitation the
Adviser declares to be effective.
7. This Agreement shall become effective as of the date of its execution,
and
<PAGE> 2
(a) unless otherwise terminated, shall continue until two years from its
date of execution and from year to year thereafter so long as approved
annually in accordance with the 1940 Act; (b) may be terminated without
penalty on sixty days' written notice to the Adviser either by vote of
the Board of Trustees of the Fund or by vote of a majority of the
outstanding voting securities of the Fund; (c) shall automatically
terminate in the event of its assignment; and (d) may be terminated
without penalty by the Adviser on sixty days' written notice to the
Fund.
8. This Agreement may be amended in accordance with the 1940 Act.
9. For the purpose of the Agreement, the terms "vote of a majority of the
outstanding voting securities", "affiliated person" and "assignment"
shall have their respective meanings defined in the 1940 Act and
exemptions and interpretations issued by the Securities and Exchange
Commission under the 1940 Act.
10. In the absence of willful misfeasance, bad faith or gross negligence on
the part of the Adviser, or reckless disregard of its obligations and
duties hereunder, the Adviser shall not be subject to any liability to
the Fund, to any shareholder of the Fund or to any other person, firm or
organization, for any act or omission in the course of, or connected
with, rendering services hereunder.
COLONIAL INTERMEDIATE HIGH INCOME FUND
By: /s/ Peter L. Lydecker
-----------------------------
Peter L. Lydecker
Title: Controller
COLONIAL MANAGEMENT ASSOCIATES, INC.
By: /s/ Arthur O. Stern
-----------------------------
Arthur O. Stern
Title: Executive Vice President
A copy of the document establishing the Fund is filed with the Secretary of The
Commonwealth of Massachusetts. This Agreement is executed by officers not as
individuals and is not binding upon any of the Trustees, officers or
shareholders of the Fund individually but only upon the assets of the Fund.
<PAGE> 1
Exhibit (K)(2)
PRICING AND BOOKKEEPING AGREEMENT
AGREEMENT dated as of November 1, 1991, between Colonial Intermediate
High Income Fund (Fund) and Colonial Management Associates, Inc. (Colonial ), a
Massachusetts corporation. The Fund and Colonial agree as follows:
1. Appointment. The Fund appoints Colonial as agent to perform the
services described below, such appointment to take effect November 1, 1991.
2. Services. Colonial shall (i) determine and timely communicate to
persons designated by the Fund the Fund's net asset value per share; and (ii)
maintain and preserve in a secure manner the accounting records of the Fund. All
records shall be the property of the Fund. Colonial will provide disaster
planning to minimize possible service interruption.
3. Audit, Use and Inspection. Colonial shall make available on its
premises during regular business hours all records of a Fund for reasonable
audit, use and inspection by the Fund, its agents and any regulatory agency
having authority over the Fund.
4. Compensation. The Fund will pay Colonial a monthly fee of $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 weekly net assets of the Fund for such month.
5. Compliance. Colonial shall comply with applicable provisions in the
Fund's prospectuses relating to pricing and bookkeeping and the Senior
Extendible Notes and applicable laws and rules in the provision of services
under this Agreement.
6. Limitation of Liability. In the absence of willful misfeasance, bad
faith or gross negligence on the part of Colonial, or reckless disregard of its
obligations and duties hereunder, Colonial shall not be subject to any liability
to the Fund, to any shareholder of the Fund or to any other person, firm or
organization, for any act or omission in the course of, or connected with,
rendering services hereunder.
7. Amendments. The Fund shall submit to Colonial a reasonable time in
advance of filing with the Securities and Exchange Commission copies of any
changes in its Registration Statements. If a change in documents or procedures
materially increases the cost to Colonial of performing its obligations,
Colonial shall be entitled to receive reasonable additional compensation.
8. Duration and Termination, etc. This Agreement may be changed only by
writing executed by each party. This Agreement: (a) shall continue in effect
from year to year so long as approved annually by vote of a majority of the
Trustees who are not affiliated with Colonial; (b) may be terminated at any time
without penalty by sixty days' written notice to either party; and (c) may be
terminated at any time
<PAGE> 2
for cause by either party if such cause remains unremedied for a reasonable
period not to exceed ninety days after receipt of written specification of such
cause. Paragraph 6 of this Agreement shall survive termination. If the Fund
designates a successor to any of Colonial's obligations, Colonial shall, at the
expense and direction of the Fund, transfer to the successor all Fund records
maintained by Colonial.
9. Miscellaneous. This Agreement shall be governed by the laws of The
Commonwealth of Massachusetts.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the day and year first above.
COLONIAL INTERMEDIATE HIGH INCOME FUND
By: RICHARD A. SILVER, CONTROLLER
-----------------------------
Richard A. Silver, Controller
COLONIAL MANAGEMENT ASSOCIATES, INC.
By: MICHAEL H. KOONCE, SENIOR VICE PRESIDENT
----------------------------------------
Michael H. Koonce, Senior Vice President
A copy of the document establishing the Fund is filed with the Secretary of The
Commonwealth of Massachusetts. This Agreement is executed by officers not as
individuals and is not binding upon any of the Trustees, officers or
shareholders of the Fund individually but only upon the assets of the Fund.
<PAGE> 1
Exhibit (K)(3)
CREDIT AGREEMENT
Dated as of June 12, 1996
between
COLONIAL INTERMEDIATE HIGH INCOME FUND
and
BANK OF AMERICA ILLINOIS
<PAGE> 2
Page
TABLE OF CONTENTS
I DEFINITIONS AND INTERPRETATION ............................... 1
1.1. Defined Terms .................................. 1
1.2. Interpretation ................................. 1
1.3. Accounting Terms ............................... 2
1.4. Authority of Adviser; Adviser Disclaimer ....... 2
II THE CREDITS .................................................. 3
2.1. Amounts and Terms of Commitments ............... 3
2.2. Note ........................................... 3
2.3. Transfer of Proceeds. .......................... 3
2.4. Prepayments .................................... 3
2.5. Repayment ...................................... 4
2.6. Interest ....................................... 4
2.7. Computation of Fees and Interest ............... 5
2.8. Payments ....................................... 5
2.9. Source of Repayment ............................ 5
III TAXES, YIELD PROTECTION AND ILLEGALITY ....................... 6
3.1. Taxes .......................................... 6
3.3. Increased Costs and Reduction of Return ........ 7
3.4. Prepayment Fee ................................. 8
3.4. Certificates of Bank ........................... 9
3.5. Survival ....................................... 9
IV CONDITIONS TO LOAN ........................................... 9
4.1. Conditions of Loan ............................. 9
V REPRESENTATIONS AND WARRANTIES ............................... 11
5.1. Existence ...................................... 11
5.2. Authorization .................................. 12
5.3. No Conflicts ................................... 12
5.4. Validity and Binding Effect .................... 12
5.5. No Default ..................................... 12
5.6. Financial Statements ........................... 12
5.7. Litigation ..................................... 13
5.8. Liens .......................................... 13
5.9. Partnerships ................................... 13
5.10. Purpose ........................................ 13
5.11. Compliance and Government Approvals ............ 14
5.12. Pension and Welfare Plans ...................... 14
5.13. Taxes .......................................... 14
5.14. Subsidiaries; Investments ...................... 14
5.15. Full Disclosure ................................ 14
5.16. Investment Policies ............................ 14
5.17. Tax Status ..................................... 14
5.18. Status of Loans ................................ 15
VI COVENANTS .................................................... 15
6.1. Financial Statements and Other Reports ......... 15
6.2. Notices ........................................ 16
6.3. Existence ...................................... 17
6.4. Nature of Business ............................. 17
6.5. Books, Records and Access ...................... 17
6.6. Insurance ...................................... 18
6.7. Investment Policies and Restrictions ........... 18
6.8. Taxes .......................................... 18
6.9. Compliance ..................................... 19
6.10. Pension Plans .................................. 19
6.11. Merger, Purchase and Sale ...................... 19
6.12. Asset Coverage Ratio ........................... 19
6.13. Liens .......................................... 19
6.14. Guaranties ..................................... 20
6.15. Other Agreements ............................... 20
6.16. Transactions with Related Parties .............. 20
6.17. Other Indebtedness ............................. 20
6.18. Changes to Organization Documents, etc ......... 20
6.19. Violation of Investment Restrictions, etc ...... 21
6.20. Proceeds of Loan ............................... 21
6.21. Adviser ........................................ 21
6.22. Service Providers to Fund ...................... 21
VII EVENTS OF DEFAULT ............................................ 21
7.1. Events of Default .............................. 21
7.2. Remedies ....................................... 24
VIII MISCELLANEOUS PROVISIONS ..................................... 24
8.1. Amendments and Waivers ......................... 24
8.2. Notices ........................................ 24
8.3. No Waiver; Cumulative Remedies ................. 25
8.4. Costs and Expenses ............................. 25
8.5. Fund Indemnification ........................... 26
8.6. Payments Set Aside ............................. 27
8.7. Successors and Assigns ......................... 27
8.8. Confidentiality ................................ 28
8.9. Set-off ........................................ 29
8.10. Counterparts ................................... 29
8.11. Survival ....................................... 29
8.12. Disclaimer ..................................... 29
8.13. Severability ................................... 29
8.14. No Third Parties Benefited ..................... 30
8.15. Governing Law and Jurisdiction ................. 30
8.16. Waiver of Jury Trial ........................... 30
8.17. Entire Agreement ............................... 30
ii
<PAGE> 3
CREDIT AGREEMENT
THIS CREDIT AGREEMENT, dated as of June 12, 1996, is made by and
between COLONIAL INTERMEDIATE HIGH INCOME FUND (the "Fund"), and BANK OF AMERICA
ILLINOIS (the "Bank"),
W I T N E S S E T H:
WHEREAS, the Fund is a closed-end management investment company
registered under the Act;
WHEREAS, the Fund desires to obtain a term loan in the amount of
$27,400,000; and
WHEREAS, the Bank is willing, on the terms and subject to the
conditions hereinafter set forth, to make such term loan to the Fund,
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS AND INTERPRETATION
1.1 Defined Terms. Unless a clear contrary intention appears, terms
defined in Schedule I have the same respective meanings when used in this
Agreement.
1.2 Interpretation. In this Agreement, unless a clear contrary
intention appears:
(a) the singular number includes the plural number
and vice versa;
(b) reference to any Person includes such Person's
successors and assigns but, if applicable, only if such successors and
assigns are permitted by this Agreement, and reference to a Person in a
particular capacity excludes such Person in any other capacity or
individually;
(c) reference to any gender includes each other gender;
(d) reference to any agreement (including this Agreement),
document or instrument means such agreement, document or instrument as
amended or modified and in effect from time to time in accordance with
the terms thereof and, if applicable, the terms hereof and the other
Credit Documents and reference to any promissory note includes any
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promissory note which is an extension or renewal thereof or a
substitute or replacement therefor;
(e) reference to any applicable law means such applicable
law as amended, modified, codified, replaced or reenacted, in whole or
in part, and in effect from time to time, including rules and
regulations promulgated thereunder, and reference to any section or
other provision of any applicable law means that provision of such
applicable law from time to time in effect and constituting the
substantive amendment, modification, codification, replacement or
reenactment of such section or other provision;
(f) reference to any Article, Section, Annex, Schedule or
Exhibit means such Article or Section hereof or Annex, Schedule or Exhibit
hereto;
(g) "hereunder", "hereof", "hereto" and words of similar
import shall be deemed references to this Agreement as a whole and not to any
particular Article, Section or other provision hereof;
(h) "including" (and with the correlative meaning
"include") means including without limiting the generality of any description
preceding such term;
(i) "or" is not exclusive; and
(j) relative to the determination of any period of time,
"from" means "from and including" and "to" and "through" mean "to but
excluding".
1.3. Accounting Terms. In this Agreement, unless expressly otherwise
provided, accounting terms shall be construed and interpreted, and accounting
determinations and computations shall be made, in accordance with GAAP.
1.4. Authority of Adviser; Adviser Disclaimer. The Fund hereby confirms
that the Adviser has been duly authorized to act on its behalf for purposes of
this Agreement and the Note and to take all actions which the Fund is entitled
or required to take hereunder or thereunder, including, without limitation,
requesting the making of the Loan pursuant to Section 2, and executing and
delivering Borrowing Base Certificates and any and all other certificates,
reports, financial information and notices required to be delivered to the Bank
hereunder. Notwithstanding the foregoing or anything to the contrary contained
in this Agreement, the parties hereto acknowledge and agree that (a) in taking
any such action hereunder or under a Note, the Adviser is acting solely in its
capacity as investment
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adviser for the Fund and not in its individual capacity, (b) neither the Adviser
nor any of its officers, employees or agents (with the Adviser, collectively,
"Adviser Persons") shall have any liability whatsoever for any action taken or
omitted to be taken by any of them in connection with this Agreement or the Note
nor shall any of them be bound by or liable for any indebtedness, liability or
obligation hereunder or under the Note and (c) no Adviser Person shall be
responsible in any manner to the Bank for the truth, completeness or accuracy of
any statement, representation, warranty or certification contained in this
Agreement or in any information, report, certificate or other document furnished
by the Adviser on behalf of the Fund in connection with this Agreement,
including, without limitation, any Borrowing Base Certificate, and any
certificate or notice furnished pursuant to Section 6.1 or 6.2 hereof; provided
that, in the case of clauses (b) and (c) above, the conduct of the Adviser
Persons or any of them did not constitute gross negligence or willful
misconduct.
ARTICLE II
THE CREDITS
2.1. Amounts and Terms of Commitments. The Bank agrees, on the terms and
conditions set forth herein, to make a Loan to the Fund on June 14, 1996 in the
amount of $27,400,000, provided that the principal amount of the Loan shall not
exceed the Borrowing Base. Only one Loan shall be made hereunder and if all or
any portion thereof is repaid, it cannot be reborrowed.
2.2. Note. The Loan shall be evidenced by a Note in the form of Exhibit
2.2. The Bank shall endorse on the schedules annexed to the Note the date and
amount of the Loan and the amount of each payment of principal made by the Fund
with respect thereto. The Bank is irrevocably authorized by the Fund to endorse
the Note, and the Bank's record shall be conclusive absent manifest error;
provided that the failure of the Bank to make, or an error in making, a notation
thereon with respect to the Loan shall not limit or otherwise affect the
obligations of the Fund hereunder or under the Note to the Bank.
2.3 Transfer of Proceeds. The proceeds of the Loan will be made available
to the Fund by the Bank in accordance with written instructions provided to the
Bank by the Fund.
2.4. Prepayments. (a) If at any time the outstanding principal balance of
the Obligations shall exceed the Borrowing Base, the Fund shall immediately
prepay the outstanding principal amount of the Loan in an amount equal to such
excess, together
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with interest accrued thereon and amounts required under Section 3.4.
(b) Subject to Section 3.4, the Fund may, at any time or
from time to time, upon not less than three Business Days' irrevocable notice to
the Bank, prepay the Loan, in whole or in part, in minimum amounts of $1,000,000
or any multiple of $1,000,000 in excess thereof. Such notice of prepayment shall
specify the date and amount of such prepayment. If such notice is given by the
Fund, the Fund shall make such prepayment to the Bank, and the payment amount
specified in such notice shall be due and payable on the date specified therein,
together with accrued interest to each such date on the amount prepaid and any
amounts required pursuant to Section 3.4.
(c) Each prepayment of the Loan pursuant to this Section
shall be without premium or penalty, except as may be required by Section 3.4.
2.5. Repayment. The Fund shall repay to the Bank on the Termination Date
the aggregate principal amount of the Loan outstanding on such date.
2.6. Interest. (a) The Loan shall bear interest on the outstanding
principal amount thereof from the date of the Loan at a rate per annum equal
to 7.33%.
(b) Interest on the Loan shall be paid in arrears on each
Interest Payment Date. Interest shall also be paid on the date of any prepayment
of the Loan under Section 2.4 for the portion of the Loan so prepaid and upon
payment (including prepayment) in full thereof, and during the existence of any
Event of Default, interest shall be paid on demand of the Bank.
Notwithstanding subsection (a) of this Section, if any
amount of principal of or interest on any Loan, or any other amount payable
hereunder or under any other Credit Document, is not paid in full when due
(whether at stated maturity or by acceleration, demand or otherwise), the Fund
agrees to pay interest on such unpaid principal or other amount from the date
such amount becomes due until the date such amount is paid in full, and after
as well as before any entry of judgment thereon to the extent permitted by law,
payable on demand at a fluctuating rate per annum equal to the greater of
(i) 9.33% or (ii) the Base Rate plus 2%.
(c) Anything herein to the contrary notwithstanding, the
obligations of the Fund to the Bank hereunder shall be subject to the limitation
that payments of interest shall not be required for any period for which
interest is computed hereunder, to the extent (but only to the extent) that
contracting for or
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receiving such payment by the Bank would be contrary to the provisions of any
law applicable to the Bank limiting the highest rate of interest that may be
lawfully contracted for, charged or received by the Bank, and in such event the
Fund shall pay the Bank interest at the highest rate permitted by applicable
law.
2.7. Computation of Fees and Interest. (a) All computations of interest
shall be made on the basis of a 360-day year and actual days elapsed (which
results in more interest being paid than if computed on the basis of a 365- or
366-day year). Interest and fees shall accrue during each period during which
interest or such fees are computed from the first day thereof to the last day
thereof.
(b) Each determination of an interest rate by the Bank
shall be conclusive and binding on the Fund in the absence of manifest error.
The Bank will, at the request of the Fund, deliver to the Fund a statement
showing the quotations used by the Bank in determining any interest rate and the
resulting interest rate.
2.8. Payments. (a) All payments to be made by the Fund shall be made
without set-off, recoupment or counterclaim. Except as otherwise expressly
provided herein, all such payments shall be made to the Bank at the Bank's
Payment Office and shall be made in Dollars and in immediately available funds
no later than 11:00 a.m. (San Francisco time) on the date specified herein. Any
payment received by the Bank later than 11:00 a.m. (San Francisco time) shall be
deemed to have been received on the following Business Day, and any applicable
interest shall continue to accrue.
(b) Whenever any payment is due on a day other than a
Business Day, such payment shall be made on the following Business Day (unless
such Business Day shall be in the next calendar month in which case such payment
shall be made on the prior Business Day), and such extension or reduction of
time shall in such case be included in the computation of interest.
2.9. Source of Repayment. The parties hereto acknowledge that the Trust
Agreement for the Fund is on file with the Secretary of State of The
Commonwealth of Massachusetts and the Clerk of the City of Boston. The parties
hereby agree that this Agreement is not executed on behalf of the trustees of
the Fund as individuals; and that the obligations of the Fund under this
Agreement, the Note and any claims, obligations or liabilities arising hereunder
are not binding on any of the trustees, officers or shareholders of the Fund
individually but are binding upon only the assets and property of the Fund.
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(c) Nothing in this Section 2.9 shall affect the Bank's
rights against Adviser Persons as provided in Section 1.4.
ARTICLE III
TAXES, YIELD PROTECTION AND ILLEGALITY
3.1. Taxes. (a) Any and all payments by the Fund to the Bank under this
Agreement and any other Credit Document shall be made free and clear of, and
without deduction or withholding for, any Taxes. In addition, the Fund shall pay
all Other Taxes.
(b) The Fund agrees to indemnify and hold harmless the Bank
for the full amount of Taxes or Other Taxes in connection with a payment by it
(including any Taxes or Other Taxes imposed by any jurisdiction on amounts
payable by it under this Section) paid by the Bank and any liability (including
penalties, interest, additions to tax and expenses) arising therefrom or with
respect thereto, whether or not such Taxes or Other Taxes were correctly or
legally asserted. Payment under this indemnification shall be made within 30
days after the date the Bank makes written demand therefor.
(c) If the Fund shall be required by law to deduct or
withhold any Taxes or Other Taxes from or in respect of any sum payable
hereunder to the Bank, then:
(i) the sum payable shall be increased as necessary
so that after making all required deductions and withholdings
(including deductions and withholdings applicable to additional sums
payable under this Section), the Bank receives an amount equal to the
sum it would have received had no such deductions or withholdings been
made;
(ii) the Fund shall make such deductions and
withholdings;
(iii) the Fund shall pay the full amount deducted
or withheld to the relevant taxing authority or other authority
in accordance with applicable law; and
(iv) the Fund shall also pay to the Bank, at
the time interest is paid, all additional amounts which the Bank
specifies as necessary to preserve the after-tax yield the Bank would
have received if such Taxes or Other Taxes had not been imposed.
(d) Within 30 days after the date of any payment by the Fund
of Taxes or Other Taxes, the Fund shall furnish the Bank
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<PAGE> 9
the original or a certified copy of a receipt evidencing payment thereof or
other evidence of payment satisfactory to the Bank.
(e) If the Fund is required to pay additional amounts to
the Bank pursuant to subsection (c) of this Section, then the Bank shall use
reasonable efforts (consistent with legal and regulatory restrictions) to change
the jurisdiction of its Lending Office so as to eliminate any such additional
payment by the Fund which may thereafter accrue, if such change in the judgment
of the Bank is not otherwise disadvantageous to the Bank.
3.2. Illegality. If the Bank reasonably determines that it is unlawful to
maintain the Loan if funded by deposits in the interbank eurodollar market, the
Bank shall so notify the Fund. The Bank and the Fund shall negotiate to
determine an appropriate interest rate to be applicable to the Loan while the
maintenance of the Loan funded in the interbank eurodollar market is unlawful.
If the Bank and the Fund shall fail to so agree on a rate, the Fund shall, upon
demand from the Bank, immediately prepay in full the Loan, together with
interest accrued thereon and amounts required under Section 3.4.
3.3. Increased Costs and Reduction of Return. (a) If the Bank reasonably
determines that, due to the introduction of or any change in or in the
interpretation of any law or regulation or the compliance by the Bank with any
guideline or request from any central bank or other Governmental Authority
(whether or not having the force of law), there shall be any increase in the
cost to the Bank of agreeing to make or making, funding or maintaining the Loan,
then the Fund shall be liable for, and shall from time to time upon demand pay
to the Bank, additional amounts as are sufficient to compensate the Bank for the
increased costs.
(b) If the Bank shall have determined that (i) the
introduction of any Capital Adequacy Regulation, (ii) any change in any Capital
Adequacy Regulation, (iii) any change in the interpretation or administration of
any Capital Adequacy Regulation by any central bank or other Governmental
Authority charged with the interpretation or administration thereof or (iv)
compliance by the Bank (or its Lending Office) or any corporation controlling
the Bank with any Capital Adequacy Regulation affects or would affect the amount
of capital required or expected to be maintained by the Bank or any corporation
controlling the Bank and (taking into consideration the Bank's or such
corporation's policies with respect to capital adequacy and the Bank's desired
return on capital) determines that the amount of such capital is increased as a
consequence of the Loan or other obligations under this Agreement, then, upon
demand of the Bank to the Fund, the Fund shall pay to the Bank, from time to
time as specified by the
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Bank, additional amounts sufficient to compensate the Bank for such increase.
3.4. Prepayment Fee. Upon the prepayment or repayment of the Loan on any
date other than the Termination Date or upon the failure of the Fund to borrow
the full amount of the Loan on June 14, 1996, the Fund shall pay a Prepayment
Fee. The Prepayment Fee shall be the sum of fees calculated as follows:
(a) Determine the amount of interest which would have
accrued each semi-annual period for the Prepaid Amount had it remained
outstanding until the Termination Date, using the Initial IBOR Rate;
(b) Subtract from each semi-annual interest amount
determined in (a), above, the amount of interest which would accrue for the
Prepaid Amount if it were reinvested from the date of prepayment through the
Termination Date, using the Subsequent IBOR Rate;
(c) If the difference determined pursuant to (b) for the
Prepaid Amount is greater than zero, discount the semi-annual difference to the
date of prepayment by the Subsequent IBOR Rate. The sum of the discounted
semi-annual differences is the Prepayment Fee for that Prepaid Amount.
For purposes of this section,
(a) "Initial IBOR Rate" means the fixed interest rate per
annum which the Bank reasonably estimates as the rate of interest at which
dollar deposits in the approximate amount of the Loan for the period from June
14, 1996 to the Termination Date would be offered by the Grand Cayman Branch of
Bank of America National Trust and Savings Association, Grand Cayman, B.W.I. (or
such other office as may be designated for such purpose by the Bank), to major
banks in the offshore dollar interbank market upon request of such banks at
approximately 11:00 a.m. (New York City time) two Business Days prior to the
commencement of such period.
(b) "Prepaid Amount" means the principal amount of the
Loan being prepaid or not being borrowed.
(c) "Subsequent IBOR Rate" means the fixed interest rate
per annum which the Bank reasonably estimates as the rate of interest at which
dollar deposits in the approximate amount of the Prepaid Amount for the period
from the date of prepayment to the Termination Date would be offered by the
Grand Cayman Branch of Bank of America National Trust and Savings Association,
Grand Cayman, B.W.I. (or such other office as may be designated for such purpose
by the Bank), to major banks in the offshore dollar
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interbank market upon request of such banks at approximately 11:00 a.m. (New
York City time) two Business Days prior to the commence of such period.
3.5 Certificates of Bank. The Bank shall deliver to the Fund a certificate
setting forth in reasonable detail the amount payable to the Bank hereunder, and
such certificate shall be conclusive and binding on the Fund in the absence of
manifest error.
3.6. Survival. The agreements and obligations of the Fund in this Article
III shall survive the payment of all other Obligations.
ARTICLE IV
CONDITIONS TO LOAN
4.1. Conditions of Loan. The obligation of the Bank to make the Loan shall
b subject to the following conditions precedent.
(a) The Bank shall have received from the Fund a certificate of its
Secretary or Assistant Secretary as to
(i) resolutions of its board of trustees then in full force and
effect authorizing the execution, delivery and performance of this
Agreement, the Note and each other Credit Document to be executed by it;
(ii) the incumbency and signatures of those of its officers or
agents authorized to act with respect to this Agreement, the Note and each
other Credit Document executed by it;
(iii) the Fund's valid existence as evidenced by a certificate
issued by the Secretary of State of The Commonwealth of Massachusetts and
appended to the relevant certificate of its Secretary or Assistant
Secretary; and
(iv) the fact that the agreements delivered by the Fund pursuant to
Section 4.1(e) constitute all such agreements between the Fund and the
Adviser;
upon which certificates the Bank may conclusively rely until they shall have
received a further certificate from the Fund cancelling or amending such prior
certificate.
(b) The Bank shall have received a Note duly executed and delivered
by the Fund and made payable to the order of the Bank.
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(c) The Bank shall have received an opinion addressed to the Bank,
from Ropes & Gray, counsel to the Fund, substantially in the form of Exhibit
4.1(c), which the Fund hereby expressly authorizes and instructs such counsel to
prepare and deliver.
(d) The Bank shall have received evidence of payment of all accrued
and unpaid fees, costs and expenses to the extent then due and payable on the
Closing Date, together with Attorney Costs of the Bank to the extent invoiced
prior to or on the Closing Date, plus such additional amounts of Attorney Costs
as shall constitute the Bank's reasonable estimate of Attorney Costs incurred or
to be incurred by it through the closing proceedings (provided that such
estimate shall not thereafter preclude final settling of accounts between the
Fund and the Bank), including any such costs, fees and expenses then due and
payable pursuant to Section 8.4.
(e)The Bank shall have received copies of the investment advisory
agreement between the Fund and the Adviser, together with all sub-advisory
agreements, if any.
(f) The Bank shall have received an initial Borrowing Base
Certificate.
(g) The Bank shall have received copies of the most recent
prospectus for the Fund.
(h) No Default shall have occurred and be continuing.
(i) The representations and warranties contained in Article V
(except to the extent such representations and warranties relate solely to an
earlier date, in which case they shall be true and correct as of such earlier
date) shall be true and correct in all material respects on and as of the date
of the Loan, both immediately before and after giving effect to the Loan.
(j) The acceptance by the Fund of the proceeds of the Loan shall
constitute a representation and warranty by the Fund that on the date of the
Loan (both immediately before and after giving effect to the Loan and the
application of the proceeds thereof) or continuation or conversion, as the case
may be, the statements made in Sections 4.1(h), (i) and (l), and in the document
referred to in Section 4.1(k) are true and correct.
(k) The Bank shall have received a duly executed FRB Form F U-1 as
required pursuant to FRB Regulation U (12 C.F.R. ss. 221.1 et seq.), in form and
substance satisfactory to the Bank and its counsel, together with all
information requested by the
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Bank in connection therewith, including updates of information, if any, required
by such Regulation U.
(l) Both before and after giving effect to the Loan, the Asset
Coverage Ratio shall be at least 3 to 1.
Any instrument, agreement or other document to be received by the
Bank pursuant to this Article IV, and any other condition precedent required to
be met or satisfied under this Article IV, shall be in form and substance
reasonably satisfactory to the Bank.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
In order to induce the Bank to enter into this Agreement and to make
the Loan hereunder, the Fund represents and warrants to the Bank.
5.1. Existence. The Fund is a closed-end management investment
company within the meaning of the Act and is duly organized, validly existing
and in good standing under the laws of the state of its organization. The Fund
is in good standing and is duly qualified to do business in The Commonwealth of
Massachusetts. The Fund's shares have been and will be duly authorized, validly
issued, fully paid and non-assessable.
5.2. Authorization. The Fund is duly authorized to execute and
deliver this Agreement and the Note and, so long as this Agreement shall remain
in effect with respect to it, the Fund will continue to be duly authorized to
borrow monies hereunder on its own behalf and to perform its obligations under
this Agreement and the Note. The execution, delivery and performance by the Fund
of this Agreement and the Note and the borrowing of the Loan do not and will not
require any consent or approval of or registration with any governmental agency
or authority.
5.3. No Conflicts. The execution, delivery and performance by the
Fund of this Agreement and the Note do not and, so long as this Agreement shall
remain in effect with respect to them, will not (i) conflict with any provision
of law, (ii) conflict with the Trust Agreement of the Fund, (iii) conflict with
any agreement binding upon them, (iv) conflict with the Fund's most recent
prospectus, (v) conflict with any court or administrative order or decree
applicable to them or (vi) require or result in the creation or imposition of
any Lien on any of the Fund's assets.
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5.4. Validity and Binding Effect. This Agreement is, and the Note
when duly executed and delivered will be, the legal, valid and binding
obligation of the Fund, enforceable against it in accordance with their terms,
except as enforceability may be limited by bankruptcy, insolvency,
reorganization, receivership, fraudulent conveyance, fraudulent transfer,
moratorium or other similar laws of general application affecting the
enforcement of creditors' rights or by general principles of equity limiting the
availability of equitable remedies.
5.5. No Default. The Fund is not in default under any agreement or
instrument to which it is a party or by which any of its properties or assets is
bound or affected, other than minor defaults that could not reasonably be
expected to result in a Material Adverse Change. To the best of its knowledge,
no Default with respect to it has occurred and is continuing.
5.6. Financial Statements. The most recent audited Statement of
Assets and Liabilities of the Fund and the most recent semi-annual asset
statement, copies of which have been or will be furnished to the Bank, have been
prepared in conformity with GAAP applied on a basis consistent with that of the
preceding Fiscal Year or period and present fairly its financial condition as at
such dates and the results of its operations for the periods then ended, subject
(in the case of the interim financial statement) to year-end audit adjustments.
Since the date of its most recent Statement of Assets and Liabilities and such
semi-annual asset statement, there has been no Material Adverse Change.
5.7. Litigation. No claims, litigation, arbitration proceedings or
governmental proceedings that could reasonably be expected to result in a
Material Adverse Change are pending against the Fund or, to the best of its
knowledge, threatened against or are affecting it, except those referred to in
Exhibit 5.7-1. Other than any liability incident to such claims, litigation or
proceedings or provided for or disclosed in the financial statements referred to
in Section 5.6 or listed on Exhibit 5.7-2, to the best of its knowledge, it has
no contingent liabilities which are material to it other than those incurred in
the ordinary course of business.
5.8. Liens. None of the property, revenues or assets of the Fund is
subject to any Lien, except (i) Liens in favor of the Banks, if any, (ii) Liens
for current Taxes not delinquent or Taxes being contested in good faith and by
appropriate proceedings and as to which such reserves or other appropriate
provisions as may be required by GAAP are being maintained, (iii) Liens as are
necessary in connection with a secured letter of credit opened by or for it in
connection with the trustees' and officers' errors and omissions liability
insurance policy of the
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Fund, (iv) Liens in connection with the payment of initial and variation margin
in connection with authorized futures and options transactions and collateral
arrangements with respect to options, futures contracts, options on futures
contracts, when-issued or delayed delivery securities or other authorized
investments, (v) Liens arising under any custodian agreement to which it or the
Fund is a party, (vi) Liens in connection with reverse repurchase transactions,
and (vii) Liens on Deposit Securities deposited with the trustee under the
Indenture.
5.9. Partnerships. The Fund is not a general partner or joint
venturer in any partnership or joint venture.
5.10. Purpose. The proceeds of the Loan will be used to purchase
Deposit Securities, which will be deposited in an account with the trustee under
the Indenture. The proceeds of such Deposit Securities will be used to fund the
redemption of the Fund's Senior Extendable Notes. Neither the making of the Loan
nor the use of the proceeds thereof will violate or be inconsistent with the
provisions of Federal Reserve Board Regulations G, T, U or X. Neither the Trust
nor the Fund is engaged in the business of extending credit for the purpose of
purchasing or carrying margin stock. It acknowledges that the Loan may be deemed
by the Federal Reserve Board to be a "purpose loan" under Regulation U because
of the status of the Trust as an investment company (or the functional
equivalent thereof).
5.11. Compliance and Government Approvals. The Fund is in compliance
with all statutes and governmental rules and regulations applicable to it,
including, without limitation, the Act other than immaterial incidents of
non-compliance that could not reasonably be expected to result in a Material
Adverse Change. No authorization or approval or other action by, and no notice
to or filing with, any governmental authority or regulatory body or other person
is required for the due execution, delivery or performance by the Fund of this
Agreement, the Note or any of the other Credit Documents.
5.12. Pension and Welfare Plans. The Fund has not established or
maintained, nor is it liable under, any Plan.
5.13. Taxes. The Fund has filed all tax returns that are required to
have been filed and have paid, or made adequate provisions for the payment of,
all Taxes that are due and payable, except such Taxes, if any, as are being
contested in good faith and by appropriate proceedings and as to which such
reserves or other appropriate provisions as may be required by GAAP have been
maintained. The Fund is not aware of any proposed assessment against it for
additional Taxes (or any basis for any such assessment) which might be material
in amount to it. The Fund has substantially complied with all requirements of
the Code
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applicable to regulated investment companies so as to be relieved of federal
income tax on net investment income and net capital gains distributed to its
shareholders.
5.14. Subsidiaries; Investments. The Fund does not have Subsidiaries
or equity investments or any interest in any other Person other than portfolio
securities (including investment company securities) which may have been
acquired in the ordinary course of business.
5.15. Full Disclosure. No representation or warranty contained in
this Agreement or in any other document or instrument furnished by the Fund to
the Bank in connection herewith contains any untrue statement of any material
fact as of the date when made or omits to state any material fact necessary to
make the statements herein or therein not misleading as of the date when made in
light of the circumstances in which the same were made.
5.16. Investment Policies. The Fund's assets are being invested
substantially in accordance with the investment policies and restrictions set
forth in each of its most recent prospectus and its most recent statement of
additional information.
5.17. Tax Status. The Fund has taken all steps reasonably necessary
to maintain its status as a regulated investment company under the Code with
respect to net investment income and net capital gains.
5.18. Status of Loans. The Fund's obligation in connection with the
repayment of any Loans made to it hereunder shall at all times constitute its
unconditional Indebtedness and will rank at least pari passu in priority of
payment with all of its other present and future unsecured and unsubordinated
Indebtedness.
ARTICLE VI
COVENANTS
From the date of this Agreement and thereafter until all Obligations
have been paid or performed in full, the Fund shall perform the obligations made
applicable to it in this Article VI.
6.1. Financial Statements and Other Reports. The Fund shall deliver
to the Bank:
(a) As soon as available and in any event within 60 days
after each of its Fiscal Years, a copy of its annual audited Statement
of Assets and Liabilities, including a statement of investments,
prepared in conformity with GAAP
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and certified by an independent certified public accountant who, in
the commercially reasonable judgment of the Bank, shall be
satisfactory to the Bank, together with a certificate from such
accountant (i) acknowledging to the Bank such accountant's
understanding that the Bank is relying on such Statement of Assets and
Liabilities, (ii) containing a computation of, and showing compliance
with, the financial ratios contained in Sections 6.12, 6.23 and 6.24
and (iii) to the effect that, in making the examination necessary for
the signing of such Statement of Assets and Liabilities, such
accountant has not become aware of any Default that has occurred and
is continuing, or if such accountant has become aware of any such
event, describing it and the steps, if any, being taken to cure it;
(b) Within 60 days after the end of the first six months of
its Fiscal Year, a copy of its published semi-annual asset statement,
prepared in conformity with GAAP;
(c) Within 15 days after the end of each calendar month, (i)
a certificate substantially in the form of Exhibit 6.1 (a "Borrowing
Base Certificate") setting forth (A) borrowing base (as calculated in
the manner contemplated by the form of Borrowing Base Certificate, the
"Borrowing Base") and (B) Asset Coverage Ratio as of the last day of
such calendar month and (ii) a certificate signed by an Authorized
Officer certifying that, to the best of such Person's knowledge, no
Default has occurred and is continuing or, if an Event of Default has
occurred and is continuing, the steps being taken to remedy the same;
(d) within 15 days after each month, a list of all assets of
the Fund and their most recent valuations;
(e) Within 15 days following the filing thereof, any
preliminary proxy materials filed with the Securities and Exchange
Commission;
(f) Promptly from time to time such other reports or
information as the Bank may reasonably request.
6.2. Notices. The Fund shall notify the Bank in writing of any of
the following immediately upon learning of the occurrence thereof, describing
the same and, if applicable, stating the steps being taken by the Person(s)
affected with respect thereto:
(a) the occurrence of a Default;
(b) the institution of any litigation, arbitration
proceeding or governmental proceeding which is likely to result in a
Material Adverse Change;
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(c) the entry of any judgment or decree against it if the
aggregate amount of all judgments and decrees then outstanding against
it exceeds the lesser of 3% of its Net Asset Value or $3,000,000 after
deducting (i) the amount with respect to which it is insured and with
respect to which the insurer has assumed responsibility in writing and
(ii) the amount for which it is otherwise indemnified if the terms of
such indemnification and the Person providing such indemnification are
satisfactory to the Bank;
(d) the occurrence of a change of its name (whether of its
legal name or a "d/b/a" designation). The Fund shall promptly execute
and deliver to each Bank a new Note for the Fund executed in its new
name, together with such other documents in connection therewith as
the Bank shall reasonably request;
(e) the scheduling of consideration by the board of
trustees of the Fund of a change in the Fund's Adviser, administrator,
custodian (unless such custodian is the Bank) or independent
accountant, or the appointment of any sub-adviser or any Person acting
in a similar capacity to an Adviser; provided that a mailing to
shareholders with respect to any of the foregoing shall not be deemed
to be sufficient notice hereunder;
(f) within 15 days following any change in investment
policy, a copy of such change; and
(g) the occurrence of such other events as the Bank may from
time to time reasonably specify.
Notwithstanding anything to the contrary in the foregoing, in the case
of the matters described in subparagraph (e), the notice contemplated by this
Section 6.2 shall be given not later than 30 days prior to the time (i) the
board of trustees of the Fund is to consider approval of such change or
appointment or otherwise determines to recommend such change or appointment (if
necessary) to the Fund's shareholders for their approval and (ii) of any change
of the Fund's custodian; provided, however, if in the case of the matters
contemplated by subparagraph (e) the Fund could not in good faith have provided
the specified advance notice, such notice shall be given by the Fund immediately
following the earliest feasible time the notice could have been provided.
6.3. Existence. The Fund, except as specified in Section 6.11(a), shall
maintain and preserve its existence as a registered investment company within
the meaning of the Act, and maintain and preserve all rights, privileges,
licenses, copyrights, trademarks, trade names, franchises and other
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authority to the extent material and necessary for the conduct of its business
in the ordinary course.
6.4. Nature of Business. The Fund shall continue in, and limit its
operations to, the business of a closed-end management investment company,
within the meaning of the Act, and maintain in full force and effect at all
times all governmental licenses, registrations, permits and approvals necessary
for the continued conduct of its business, including, without limitation, its
registration with the Securities and Exchange Commission under the Act as a
closed-end investment company.
6.5. Books, Records and Access. The Fund shall maintain complete and
accurate books and records in which full and correct entries in conformity with
GAAP shall be made of all transactions in relation to its business and
activities; upon reasonable notice, the Fund shall permit access by the Bank to
its books and records during normal business hours and permit the Bank to make
copies of such books and records.
6.6. Insurance. The Fund shall maintain in full force and effect insurance
to such extent and against such liabilities as is commonly maintained by
companies similarly situated, including, but not limited to (i) such fidelity
bond coverage as shall be required by Rule 17g-1 promulgated under the Act or
any similar or successor provision and (ii) errors and omissions, director and
officer liability and other insurance against such risks and in such amounts
(and with such co-insurance and deductibles) as is usually carried by other
companies of established reputation engaged in the same or similar businesses
and similarly situated and will, upon request of the Bank, furnish to the Bank a
certificate of an Authorized Officer setting forth the nature and extent of all
insurance maintained by the Fund in accordance with this Section.
6.7. Investment Policies and Restrictions. (a) The Fund, without prior
written notice to the Bank of at least 30 days, shall not rescind, amend or
modify any investment policy described as "fundamental" in any prospectus or any
registration statement(s) that may be on file with the Securities and Exchange
Commission with respect thereto (collectively herein, a "proposed change"). If,
in the reasonable judgment of the Bank, such proposed change will result in a
change in the Bank's analysis of the creditworthiness of the Fund, the Bank
shall notify the Fund of such decision; thereafter, if such proposed change is
implemented with respect to the Fund, the Loan shall become immediately due and
payable.
(b) The Fund's investment in any of its assets shall be made in
accordance with its investment policies and restrictions set forth in its most
recent prospectus.
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6.8. Taxes. The Fund shall pay when due all of its Taxes, unless and only
to the extent that such Taxes are being contested in good faith and by
appropriate proceedings and it shall have set aside on its books such reserves
or other appropriate provisions therefor as may be required by GAAP. The Fund
shall at all times comply with all requirements of the Code applicable to
regulated investment companies, to such effect as not to be subject to federal
income taxes on net investment income and net capital gains distributed to its
shareholders.
6.9. Compliance. The Fund shall comply in all material respects with all
statutes and governmental rules and regulations applicable to it, including,
without limitation, the Act.
6.10. Pension Plans. The Fund will not enter into, or incur any liability
relating to, any Plan.
6.11. Merger, Purchase and Sale. The Fund shall not:
(a) be a party to any merger or consolidation.
(b) except for sales or other dispositions of portfolio securities in
the ordinary course of its business or to meet shareholder redemption requests,
sell, transfer, convey, lease or otherwise dispose of all or any substantial
part of its assets; or
(c) purchase or otherwise acquire all or substantially all the assets
of any Person without the review and consent thereto of the Bank, which consent
shall not be unreasonably withheld.
For purposes of this Section 6.11 only, a sale, transfer, conveyance,
lease or other disposition of assets shall be deemed to be a "substantial part"
of the assets of the Fund only if the value of such assets, when added to the
value of all other assets sold, transferred, conveyed, leased or otherwise
disposed of by the Fund (other than in the normal course of business or in a
manner otherwise consistent with the Fund's investment policies) during the same
Fiscal Year, exceeds 15% of the Fund's Total Assets determined as of the end of
the immediately preceding Fiscal Year.
6.12. Asset Coverage Ratio. The Fund shall not at any time permit its
Asset Coverage Ratio to be less than 3 to 1 or such other more restrictive ratio
as may be set forth in any prospectus with respect to the Fund.
6.13. Liens. The Fund shall not create or permit to exist any Lien with
respect to any property, revenues or assets now owned or hereafter acquired by
it, except (i) Liens in favor of
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<PAGE> 21
the Bank, if any, (ii) Liens for current Taxes not delinquent or Taxes being
contested in good faith and by appropriate proceedings and as to which such
reserves or other appropriate provisions as may be required by GAAP are being
maintained, (iii) Liens as are necessary in connection with a secured letter of
credit opened by or on behalf of the Fund in connection with the Fund's
trustees' errors and omissions liability insurance policy, (iv) Liens incurred
in the ordinary course of business in connection with authorized futures and
options transactions and collateral arrangements with respect to options,
futures contracts, options on futures contracts, when-issued or delayed delivery
securities or other authorized investments, (v) Liens arising under any
custodian agreement to which the Fund is a party, (vi) Liens in connection with
reverse repurchase agreements and (vii) Liens on Deposit Securities deposited
with the trustee under the Indenture; provided, however, the value of any of its
assets subject to a Lien shall be excluded from calculation of the Borrowing
Base.
6.14. Guaranties. The Fund shall not become or be a guarantor or surety
of, or otherwise become or be responsible in any manner (whether by agreement to
purchase any obligations, stock, assets, goods or services, or to supply or
advance any funds, assets, goods or services, or otherwise) with respect to, any
undertaking of any other Person, except for the endorsement, in the ordinary
course of collection, of instruments payable to it or its order.
6.15. Other Agreements. The Fund shall not enter into any agreement
containing any provision that would be violated or breached by performance of
its obligations hereunder or under any instrument or document delivered or to be
delivered by it hereunder or in connection herewith.
6.16. Transactions with Related Parties. The Fund shall not enter into or
be a party to any transaction or arrangement, including, without limitation, the
purchase, sale, loan, lease or exchange of property or the rendering of any
service, with any Related Party, except in the ordinary course of and pursuant
to the reasonable requirements of its business and upon fair and reasonable
terms no less favorable to it than would be obtainable in a comparable
arm's-length transaction with a Person not a Related Party, provided that any
such transaction must be made in substantial compliance with Section 17 of the
Act or an exemption therefrom.
6.17. Other Indebtedness. The Fund shall not incur or permit to exist any
Indebtedness or issue any preferred stock, other than (i) the Loan; (ii)
unsecured Indebtedness owing to its custodian with respect to Indebtedness
arising from failed trades that will not exceed the greater of $4,000,000 and 3%
of its
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then-current Net Asset Value; and (iii) reverse repurchase transactions in an
amount not exceeding that permitted by the Fund's investment policies and
restrictions.
6.18. Changes to Organization Documents, etc. The Fund shall not make or
permit to be made any material changes to its Organization Documents without the
prior written consent of the Bank.
6.19. Violation of Investment Restrictions, etc. The Fund shall not
violate or take any action which would result in a violation of any of the
investment restrictions or fundamental investment policies of the Fund as from
time to time in effect.
6.20. Proceeds of Loan. None of the proceeds of the Loan shall be used
directly for the purpose, whether immediate, incidental or ultimate, of
acquiring any "margin stock" within the meaning of Regulation U.
6.21. Adviser. The Fund shall maintain Colonial Management Associates,
Inc. or one of its Affiliates as Adviser to it.
6.22. Service Providers to Fund. The Fund not shall change its custodian,
accountant or administrator unless the Bank provides its prior written consent
to such change, which consent shall not be withheld by the Bank unless, based
upon its reasonable judgment, the Bank in good faith concludes that such change
will result in a change in the creditworthiness of the Fund.
6.23. Single Issuer. The Fund shall not permit its largest investment
other than investments in securities issued or guaranteed by the government of
the United States or agencies or instrumentalities thereof (including as one
investment multiple investments in one Person or one Person and its Subsidiaries
and Affiliates) to exceed 5% of the Total Assets of the Fund.
6.24. Liquidity. The Fund shall not permit at any time its Cash Equivalent
Investments to be an amount less than the sum of (i) the amount of dividends
payable by the Fund to its shareholders in the month following the date of
determination, plus (ii) the amount of interest payable hereunder on the next
interest payment date following the date of determination.
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ARTICLE VII
EVENTS OF DEFAULT
7.1. Events of Default. Each of the following shall constitute an Event of
Default:
(a) Default in payment by the Fund (i) when and as required
to be paid herein of any amount of principal of any Loan or (ii)
within five days after the same becomes due of any interest, fee or
any other amount payable hereunder or under any other Credit Document.
(b) Default by the Fund in the payment when due, whether by
acceleration or otherwise (subject to any applicable grace period), of
any Indebtedness of, or guaranteed by, the Fund in excess of 3% of the
Fund's then-current Net Asset Value.
(c) Any event or condition shall occur that results in the
acceleration of the maturity of any Indebtedness of, or guaranteed by,
the Fund or enables the holder or holders of such other Indebtedness
or any trustee or agent for such holders (any required notice of
default having been given and any applicable grace period having
expired) to accelerate the maturity of such other Indebtedness in
excess of 3% of the Fund's then-current total Net Asset Value.
(d) Default by the Fund in the payment when due, whether by
acceleration or otherwise, or in the performance or observance
(subject to applicable grace periods, if any, having expired) of (i)
any obligation or agreement of the Fund to or with the Bank (other
than any obligation or agreement of the Fund hereunder or under the
Note) or (ii) any material obligation or agreement of the Fund to or
with any other Person, except only to the extent that the existence of
any such default is being contested by the Fund in good faith and by
appropriate proceedings and the Fund shall have set aside on its books
such reserves or other appropriate provisions therefor as may be
required by GAAP, provided that the amount of such obligation arising
from any default is in excess of 3% of the Fund's then-current total
Net Asset Value.
(e) The Fund (i) ceases or fails to be solvent, or generally
fails to pay, or admits in writing its inability to pay, its debts as
they become due, subject to applicable grace periods, if any, whether
at stated maturity or otherwise; (ii) voluntarily ceases to conduct
its business in the ordinary course; (iii) commences any
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Insolvency Proceeding with respect to itself; or (iv) takes any action
to effectuate or authorize any of the foregoing.
(f) (i) Any involuntary Insolvency Proceeding is commenced
or filed against the Fund, or any writ, judgment, warrant of
attachment, execution or similar process is issued or levied against a
substantial part of its assets, and any such proceeding or petition
shall not be dismissed, or such writ, judgment, warrant of attachment,
execution or similar process shall not be released, vacated or fully
bonded within 60 days after commencement, filing or levy; (ii) the
Fund admits the material allegations of a petition against it in any
Insolvency Proceeding, or an order for relief (or similar order under
non-U.S. law) is ordered in any Insolvency Proceeding; or (iii) it
acquiesces in the appointment of a receiver, trustee, custodian,
conservator, liquidator, mortgagee in possession (or agent therefor)
or other similar Person for itself or a substantial portion of its
property or business.
(g)The Fund shall default in the performance of its
agreement under Section 6.4, 6.7, 6.11, 6.12 or 6.24.
(h) The Fund shall default in the performance of its other
agreements herein set forth (and not constituting an Event of Default
under any of the other subsections of this Section 7.1), and such
default shall continue for 30 days or three Business Days in the case
of the agreement contained in the last sentence of the definition of
"Total Assets" after notice thereof to the Fund from the Bank.
(i) Any representation or warranty made by the Fund herein,
or in any schedule, statement, report, notice, certificate or other
writing furnished by it on or as of the date as of which the facts set
forth therein are stated or certified, is untrue or misleading in any
material respect when made or deemed made or any certification made or
deemed made by it to the Bank is untrue or misleading in any material
respect on or as of the date made or deemed made.
(j) There shall be entered against the Fund one or more
judgments or decrees which, when taken together, will exceed the
lesser of (x) 3% of the Fund's then-current total Net Asset Value and
(y) $3,000,000, excluding those judgments or decrees (i) that shall
have been stayed or discharged less than 30 calendar days from the
entry thereof and (ii) those judgments and decrees for and to the
extent which the Fund is insured and with respect to which the insurer
has assumed responsibility in writing or for and to the extent which
the Fund is otherwise indemnified if the
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terms of such indemnification and the Person providing such
indemnification are satisfactory to the Bank.
(k) The Bank shall have reasonably determined in good faith
that a Material Adverse Change as to the Fund has occurred.
(l) The Fund shall no longer be in compliance with all
material provisions of the Act after giving effect to all notice, cure
and contest periods thereunder.
(m) Colonial Management Associates, Inc. or one of its
Affiliates shall cease to be the Adviser or administrator of the Fund,
or the Fund is otherwise in breach of the covenant set forth in
Section 6.22.
(n) The Fund shall violate or take any action that would
result in a violation of any of its investment restrictions or
fundamental investment policies as from time to time in effect, except
for violations or the taking of such actions that could not reasonably
be expected to result in a Material Adverse Change.
(o) There occurs a Change in Control of the Adviser.
7.2. Remedies. If any Event of Default described in Section 7.1 shall have
occurred and be continuing, the Bank may declare the Obligations under the Note
to be due and payable, whereupon the Obligations shall become immediately due
and payable, all without advance notice of any kind (except that if an event
described in Section 7.1(e) or Section 7.1(f) occurs, the Obligations shall
become immediately due and payable without declaration or advance notice of any
kind). The Bank shall promptly advise the Fund of any such declaration, but
failure to do so shall not impair the effect of such declaration. If an Event of
Default shall have occurred, the Bank may exercise all rights and remedies
available to it against the Fund under the Credit Documents or applicable law.
ARTICLE VIII
MISCELLANEOUS PROVISIONS
8.1. Amendments and Waivers. No amendment or waiver of any provision of
this Agreement or any other Credit Document, and no consent with respect to any
departure by the Fund therefrom, shall be effective unless the same shall be in
writing and signed by the Bank and the Fund, and then any such waiver or consent
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<PAGE> 26
shall be effective only in the specific instance and for the specific purpose
for which given.
8.2. Notices. All notices, requests and other communications shall be in
writing (including, unless the context expressly otherwise provides, by
facsimile transmission, provided that any matter transmitted by the Fund by
facsimile (i) shall be immediately confirmed by a telephone call to the
recipient at the number specified on Schedule II and (ii) shall be followed
promptly by delivery of a hard copy original thereof) and mailed, faxed or
delivered to the address or facsimile number specified for notices on Schedule
II, or, as directed to the Fund or the Bank, to such other address as shall be
designated by such party in a written notice to the other party, and as directed
to the other party, at such other address as shall be designated by such party
in a written notice to the Fund or the Bank.
(b) All such notices, requests and communications shall, when
transmitted by overnight delivery or faxed, be effective when delivered for
overnight (next-day) delivery or transmitted in legible form by facsimile
machine, respectively, or if mailed, upon the third Business Day after the date
deposited into the U.S. mail, or if delivered, upon delivery; provided that
notices pursuant to Article II shall not be effective until actually received by
the Bank.
(c) Any agreement of the Bank herein to receive certain notices by
telephone or facsimile is solely for the convenience and at the request of the
Fund. The Bank shall be entitled to rely on the authority of any Person
purporting to be a Person authorized by the Fund to give such notice, and the
Bank shall not have any liability to the Fund or other Person on account of any
action taken or not taken by the Bank in reliance upon such telephonic or
facsimile notice. The obligation of the Fund to repay the Loan shall not be
affected in any way or to any extent by any failure by the Bank to receive
written confirmation of any telephonic or facsimile notice or the receipt by the
Bank of a confirmation which is at variance with the terms understood by the
Bank to be contained in the telephonic or facsimile notice.
8.3. No Waiver; Cumulative Remedies. No failure to exercise and no delay
in exercising, on the part of the Bank, any right, remedy, power or privilege
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, remedy, power or privilege hereunder preclude any other
or further exercise thereof or the exercise of any other right, remedy, power or
privilege.
8.4. Costs and Expenses. The Fund shall:
24
<PAGE> 27
(a) whether or not the transactions contemplated hereby are
consummated, pay or reimburse the Bank within five Business Days after demand
for all reasonable costs and expenses incurred by the Bank in connection with
the development, preparation, delivery, administration and execution of, and any
amendment, supplement, waiver or modification to (in each case, whether or not
consummated), this Agreement, any Credit Document and any other documents
prepared in connection herewith or therewith, and the consummation of the
transactions contemplated hereby and thereby, including reasonable Attorney
Costs incurred by the Bank with respect thereto; provided notwithstanding
anything to the contrary in the foregoing, the responsibility of the Fund to
reimburse the Bank for Attorney Costs in connection with the development,
preparation, delivery and execution of this Agreement and such other documents
and the consummation of such transactions shall be limited to the reasonable
fees and disbursements of outside counsel to the Bank; and
(b) pay or reimburse the Bank within five Business Days after demand
for all costs and expenses (including Attorney Costs) incurred by them in
connection with the enforcement, attempted enforcement, or preservation of any
rights or remedies under this Agreement or any other Credit Document during the
existence of an Event of Default or after acceleration of the Loan (including in
connection with any "workout" or restructuring regarding the Loan and including
in any Insolvency Proceeding or appellate proceeding).
8.5. Fund Indemnification. (a) Whether or not the transactions
contemplated hereby are consummated, the Fund shall indemnify and hold the Bank
and its officers, directors, employees, counsel, agents and attorneys-in-fact
(each, an "Indemnified Person"), harmless from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, charges, expenses and disbursements (including Attorney Costs) of any
kind or nature whatsoever which may at any time (including at any time following
repayment of the Loan or replacement of the Bank) be imposed on, incurred by or
asserted against any such Person in any way relating to or arising out of this
Agreement or any document contemplated by or referred to herein, or the
transactions contemplated hereby, or any action taken or omitted by any such
Person under or in connection with any of the foregoing, including with respect
to any investigation, litigation or proceeding (including any Insolvency
Proceeding or appellate proceeding) related to or arising out of this Agreement
or the Loan or the use of the proceeds thereof, whether or not any Indemnified
Person is a party thereto (all the foregoing, collectively, the "Indemnified
Liabilities"); provided that no Fund shall have an obligation hereunder to any
Indemnified Person with respect to Indemnified Liabilities resulting solely from
the gross negligence or willful
25
<PAGE> 28
misconduct of such Indemnified Person. The agreements in this Section shall
survive payment of all other Obligations.
(b) Promptly after receipt by an Indemnified Person under subsection
(a) above of notice of the commencement of any action, such Indemnified Person
shall, if a claim in respect thereof is to be made against the Fund under such
subsection, notify the Fund in writing of the commencement thereof, but the
omission so to notify the Fund shall not relieve it from any liability which it
may have to any Indemnified Person otherwise than under such subsection. In case
any such action shall be brought against any Indemnified Person and it shall
notify the Fund of the commencement thereof, the Fund shall be entitled to
participate therein and, to the extent that it shall wish to assume the defense
thereof, with counsel reasonably satisfactory to such Indemnified Person (who
shall not, except with the consent of the Indemnified Person, be counsel to the
Fund), and after notice from the Fund to such Indemnified Person of its election
so to assume the defense thereof; provided that in no event shall any settlement
or compromise of any such claims, actions or demands be made without the consent
of the Indemnified Person, the consent of which shall not be unreasonably
withheld.
(c) The agreements in this Section 8.5 shall survive payment of all
other Obligations.
8.6. Payment Set Aside. To the extent that the Fund makes a payment to the
Bank, or the Bank exercises its right of set-off, and such payment or the
proceeds of such set-off or any part thereof are subsequently invalidated,
declared to be fraudulent or preferential, set aside or required (including
pursuant to any settlement entered into by the Bank in its discretion) to be
repaid to a trustee, receiver or any other party, in connection with any
Insolvency Proceeding or otherwise, then to the extent of such recovery, the
obligation or part thereof originally intended to be satisfied shall be revived
and continued in full force and effect as if such payment had not been made or
such set-off had not occurred.
8.7. Successors and Assigns(a) The provisions of this Agreement shall be
binding upon and shall inure to the benefit of the Fund and the Bank and their
respective successors and assigns, except that the Fund may not assign or
otherwise transfer any of its rights under this Agreement without the prior
written consent of the Bank. The Bank may at any time assign, subject to the
Fund's consent, which consent shall not be unreasonably withheld, to a bank (as
defined in Section 2(a)(5) of the Act) not an affiliate (as defined in the Act)
of the Fund or the Adviser (the "Assignee") all of its rights under this
Agreement and the Note.
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(b) The Bank may at any time grant to one or more banks (as defined
in Section 2(a)(5) of the Act) not an affiliate (as defined in the Act) of the
Fund or Colonial Management Associates, Inc. (each a "Participant")
participating interests in the Loan. In the event of any such grant by the Bank
of a participating interest to a Participant, whether or not upon notice to the
Fund, the Bank shall remain responsible for the performance of its obligations
hereunder, and the Fund shall continue to deal solely and directly with the Bank
in connection with the Bank's rights and obligations under this Agreement. Any
agreement pursuant to which the Bank may grant such a participating interest
shall provide that the Bank shall retain the sole right and responsibility to
enforce the obligations of the Fund hereunder, including, without limitation,
the right to approve any amendment, modification or waiver of any provision of
this Agreement; provided that such participation agreement may provide that the
Bank will not agree to any modification, amendment or waiver of this Agreement
which (i) reduces the principal of or rate of interest on the Loan or (ii)
postpones the date fixed for any payment of principal of or interest on the Loan
without the consent of the Participant. The Fund agrees that each Participant
shall, to the extent provided in its participation agreement, be entitled to the
benefits of Article III with respect to its participating interest.
(c) The Bank may at any time assign all or any portion of its rights
under this Agreement and the Notes to a Federal Reserve Bank. No such assignment
shall release the Bank from its obligations hereunder.
(d) No Participant or other transferee of the Bank's rights shall be
entitled to receive any greater payment under Section 3.1 or Section 3.3 than
the Bank would have been entitled to receive with respect to the rights
transferred, unless such transfer is made with the Fund's prior written consent
or at a time when the circumstances giving rise to such greater payment did not
exist.
8.8. Confidentiality. The Bank agrees to take and to cause its Affiliates
to take normal and reasonable precautions and exercise due care to maintain the
confidentiality of all written information identified as "confidential" or
"secret" by the Fund and provided to it by or on behalf of the Fund, under this
Agreement or any other Credit Document, and neither it nor any of its Affiliates
shall use any such information other than in connection with or in enforcement
of this Agreement and the other Credit Documents, except to the extent such
information (i) was or becomes generally available to the public other than as a
result of disclosure by the Bank or (ii) was or becomes available on a
non-confidential basis from a source other than the Fund, provided that such
source is not bound by a confidentiality
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<PAGE> 30
agreement with the Fund known to the Bank; provided that the Bank may disclose
such information (A) at the request or pursuant to any requirement of any
Governmental Authority to which the Bank is subject or in connection with an
examination of the Bank by any such authority; (B) pursuant to subpoena or other
court process; (C) when required to do so in accordance with the provisions of
any applicable Requirement of Law; (D) to the extent reasonably required in
connection with any litigation or proceeding to which the Bank or its Affiliates
may be party; (E) to the extent reasonably required in connection with the
exercise of any remedy hereunder or under any other Credit Document; (F) to the
Bank's independent auditors and other professional advisors; (G) to any
Participant or Assignee, actual or potential, provided that such Person agrees
in writing to keep such information confidential to the same extent as required
by the Banks hereunder; (H) as to the Bank or its Affiliate, as expressly
permitted under the terms of any other document or agreement regarding
confidentiality to which the Fund is party or is deemed party with the Bank or
such Affiliate; and (I) to its Affiliates.
8.9. Set-Off. In addition to any rights and remedies of the Bank provided
by law, if an Event of Default exists and is continuing or the Loan has been
accelerated pursuant to the terms of the Credit Documents, the Bank is
authorized at any time and from time to time, without prior notice to the Fund
(any such notice being waived by the Fund to the fullest extent permitted by
law), to set off and apply any and all deposits (general or special, time or
demand, provisional or final) at any time held by, and other indebtedness at any
time owing by, the Bank to or for the credit or the account of the Fund against
any and all Obligations owing to the Bank, now or hereafter existing,
irrespective of whether or not the Bank shall have made demand under this
Agreement or any Credit Document and although such Obligations may be contingent
or unmatured. The Bank agrees promptly to notify the Fund after any such set-off
and application made by the Bank; provided that the failure to give such notice
shall not affect the validity of such set-off and application.
8.10. Counterparts. This Agreement may be executed in any number of
separate counterparts, each of which, when so executed, shall be deemed an
original, and all of said counterparts taken together shall be deemed to
constitute but one and the same instrument.
8.11. Survival. The obligations of the Fund under Sections 8.4 and 8.5
shall in each case survive any termination of this Agreement, the payment in
full of all Obligations. The representations and warranties made by the Fund in
this Agreement
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<PAGE> 31
and in each other Credit Document shall survive the execution and delivery of
this Agreement and each such other Credit Document.
8.12. Disclaimer. None of the shareholders, trustees, officers, employee
and other agents of the Fund shall be personally bound by or liable for any
indebtedness, liability or obligation hereunder or under the Note, nor shall
resort be had to their private property for the satisfaction of any obligation
or claim hereunder. Nothing in this Section 8.12 shall affect the Bank's rights
against Adviser Persons as provided in Section 1.4.
8.13. Severability. The illegality or unenforceability of any provision of
this Agreement or any instrument or agreement required hereunder shall not in
any way affect or impair the legality or enforceability of the remaining
provisions of this Agreement or any instrument or agreement required hereunder.
8.14. No Third Parties Benefited. This Agreement is made and entered into
for the sole protection and legal benefit of the Fund and the Bank and their
permitted successors and assigns, and no other Person shall be a direct or
indirect legal beneficiary of, or have any direct or indirect cause of action or
claim in connection with, this Agreement or any of the other Credit Documents.
8.15. Governing Law and Jurisdiction. THIS AGREEMENT AND THE NOTE SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF ILLINOIS;
PROVIDED THAT THE BANK SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW.
(b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR
ANY OTHER CREDIT DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF ILLINOIS
OR OF THE UNITED STATES FOR THE NORTHERN DISTRICT OF ILLINOIS, AND BY EXECUTION
AND DELIVERY OF THIS AGREEMENT, THE FUND AND THE BANK CONSENT, FOR THEMSELVES
AND IN RESPECT OF THEIR PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF THOSE
COURTS. THE FUND AND THE BANK IRREVOCABLY WAIVE ANY OBJECTION, INCLUDING ANY
OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON
CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR
PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS AGREEMENT OR ANY DOCUMENT
RELATED HERETO. THE FUND AND THE BANK EACH WAIVE PERSONAL SERVICE OF ANY
SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS
PERMITTED BY ILLINOIS LAW.
8.16. Waiver of Jury Trial. THE FUND AND THE BANK EACH WAIVE THEIR
RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON
OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER CREDIT DOCUMENTS, OR
THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR
29
<PAGE> 32
OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER
PARTY OR ANY PARTICIPANT OR ASSIGNEE, WHETHER WITH RESPECT TO CONTRACT CLAIMS,
TORT CLAIMS OR OTHERWISE. THE FUND AND THE BANK EACH AGREE THAT ANY SUCH CLAIM
OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT
LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO
A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION,
COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE
THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER CREDIT DOCUMENTS
OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT
AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE
OTHER CREDIT DOCUMENTS.
8.17. Entire Agreement. This Agreement, together with the other Credit
Documents, embodies the entire agreement and understanding between the Fund and
the Bank and supersedes all prior or contemporaneous agreements and
understandings of such Persons, verbal or written, relating to the subject
matter hereof and thereof.
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<PAGE> 33
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the day
and year first above written.
COLONIAL INTERMEDIATE HIGH INCOME FUND
By: /s/ Andrea A. Feingold
----------------------
Andrea A. Feingold
Title: Vice President
Address: One Financial Center
Boston, MA 02111-2621
Facsimile No.: (617) 772-3148
Attention: Fund Accounting
with a copy to:
Address: One Financial Center
Boston, MA 02111-2621
Facsimile No.: (617) 345-0919
Attention: Legal
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<PAGE> 34
BANK OF AMERICA ILLINOIS
By: /s/ Ronald J. Deg
-----------------
Ronald J. Deg
Title: Vice President
Address for Payments:
231 South LaSalle Street
Chicago, Illinois 60697
Account No: 47-03421
ABA No: 071-000-039
Reference: Colonial Intermediate
High Income Fund
Attention: Ms. Denise Stewart
Account Administrator
Telephone: (312) 828-6552
Facsimile: (312) 974-9626
S-2
<PAGE> 35
SCHEDULE I
Definitions
"Act" means the Investment Company Act of 1940.
"Adviser" means Colonial Management Associates, Inc. or one of
its Affiliates, as investment adviser, sub-adviser or
administrator to the Fund, together with any successor thereto permitted
hereunder.
"Adviser Persons" is defined in Section 1.4.
"Affiliate" means, as to any Person, any other Person which, directly
or indirectly, is in control of, is controlled by, or is under common control
with, such Person. A Person shall be deemed to control another Person if the
controlling Person possesses, directly or indirectly, the power to direct or
cause the direction of the management and policies of the other Person, whether
through the ownership of voting securities, membership interests, by contract,
or otherwise.
"Agreement" means this Credit Agreement.
"Asset Coverage Ratio" means, at any time, the "asset coverage" (as
defined in Section 18(h) of the Act) of the Loan; provided that, in calculating
total assets for the purpose of determining asset coverage, both (x) any asset
with respect to which any payment is due but unpaid for at least thirty days or
which is classified as in default by the Adviser and (y) any asset that is not
then-rated at least B-by Standard & Poor's Ratings Group or B-3 by Moody's
Investors Service shall be excluded from total assets; provided, however,
notwithstanding clause (y) of the foregoing proviso, assets (at all times less
than 5% of its total assets) rated at least CCC by Standard & Poor's Ratings
Group or at least Caa by Moody's Investors Service (but not at least B- by
Standard & Poor's Ratings Group or B-3 by Moody's Investors Service) may be
included in total assets for the purpose of the Asset Coverage Ratio, so long as
said assets are publicly issued as a part of an issue of at least $100,000,000
and said assets were underwritten by at least two major dealers; provided,
further, that all assets subject to a Lien shall be excluded; and; provided,
further, that the Bank may exclude any assets on notice to the Fund, which it
reasonably determines not to be liquid assets.
"Assignee" is defined in Section 8.7(a).
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<PAGE> 36
"Attorney Costs" means and includes any and all fees and disbursements
of any law firm or other external counsel, the allocated cost of internal legal
services and all disbursements of internal counsel.
"Authorized Officer" means, relative to the Fund, those of its officers
or agents whose signatures and incumbency shall have been certified to the Bank
pursuant to Section 4.1(a).
"Bank" is defined in the preamble.
"Bankruptcy Code" means the Bankruptcy Reform Act of 1978.
"Base Rate" means, for any day, the rate of interest in effect for such
day as publicly announced from time to time by the Bank of America National
Trust and Savings Association ("BofA") in San Francisco, California, as its
"reference rate." The "reference rate" is a rate set by BofA based upon various
factors, including BofA's costs and desired return, general economic conditions
and other factors and is used as a reference point for pricing some loans, which
may be priced at, above or below such announced rate. Any change in the
reference rate announced by BofA shall take effect at the opening of business on
the day specified in the public announcement of such change.
"Borrowing Base" has the meaning set forth in Section 6.1(c).
"Borrowing Base Certificate" means a Borrowing Base Certificate as
defined in Section 6.1(c) and substantially in the form of Exhibit 6.1 attached
hereto.
"Business Day" means any day other than a Saturday, Sunday or other day
on which commercial banks in New York City or San Francisco are authorized or
required by law to close.
"Capital Adequacy Regulation" means any guideline, request or directive
of any central bank or other Governmental Authority, or any other law, rule or
regulation, whether or not having the force of law, in each case, regarding
capital adequacy of any bank or of any corporation controlling a bank.
"Cash Equivalents" means:
(a) any evidence of Indebtedness, maturing not more than one
year after such time, issued or guaranteed by the United States
Government or any agency thereof;
(b) any commercial paper, maturing not more than nine months
from the date of issue, which is issued by
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(i) a corporation (other than an Affiliate of the
Fund) organized under the laws of any state of the United
States or of the District of Columbia and rated A-1 by
Standard & Poor's Ratings Group or P-1 by Moody's Investors
Service, Inc., or
(ii) the Bank (or its holding company);
(c) any certificate of deposit or bankers' acceptance,
maturing not more than one year after such time, which is issued by
either
(i) a commercial banking institution that is a
member of the Federal Reserve System and has a combined
capital and surplus and undivided profits of not less than
$500,000,000, or
(ii) the Bank; or
(d) any repurchase agreement entered into with the Bank (or
other commercial banking institution of the stature referred to in
clause (c)(i)) which
(i) is secured by a fully perfected security
interest in any obligation of the type described in any of
clauses (a) through (c), and
(ii) has a market value at the time such
repurchase agreement is entered into of not less than 100%
of the repurchase obligation of the Bank (or other
commercial banking institution) thereunder.
"Change in Control" means any transaction or series of transactions
where (i) any "person" (as such term is used in Section 13(d) and 14(d) of the
Securities Exchange Act of 1934 (the "Exchange Act") as in effect on the date
hereof) becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act, as in effect on the date hereof), directly or indirectly, of
securities of another Person (the "Target") representing 20% or more of the
combined voting power of the Target's then-outstanding securities; (ii) at any
time less than a majority of the members of the Target's board of directors
shall be persons who were either nominated for election or were elected by such
board of directors; (iii) the Target's stockholders approve a merger or
consolidation of the Target with any other Person, other than a merger or
consolidation that would result in the voting securities of the Target
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting
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securities of the surviving entity) at least 75% of the combined voting power of
the voting securities of the Target or such surviving entity outstanding
immediately after such merger or consolidation; or (iv) the Target's
stockholders approve a plan of complete liquidation of the Target or an
agreement for the sale or disposition of all or substantially all of the
Target's assets.
"Closing Date" means the date on which all conditions precedent set
forth in Section 4.1 are satisfied or waived by all the Banks (or, in the case
of Section 4.1(d), waived by the Person entitled to receive such payment).
"Code" means the Internal Revenue Code of 1986.
"Contingent Obligation" means, as to any Person, any direct or indirect
liability of that Person, whether or not contingent, with or without recourse,
(a) with respect to any Indebtedness, lease, dividend, letter of credit or other
obligation (the "primary obligations") of another Person (the "primary
obligor"), including any obligation of that Person (i) to purchase, repurchase
or otherwise acquire such primary obligations or any security therefor, (ii) to
advance or provide funds for the payment or discharge of any such primary
obligation, or to maintain working capital or equity capital of the primary
obligor, or otherwise to maintain the net worth or solvency or any balance sheet
item, level of income or financial condition of the primary obligor, (iii) to
purchase property, securities or services primarily for the purpose of assuring
the owner of any such primary obligation of the ability of the primary obligor
to make payment of such primary obligation, or (iv) otherwise to assure or hold
harmless the holder of any such primary obligation against loss in respect
thereof (each, a "Guaranty Obligation"); (b) with respect to any Surety
Instrument issued for the account of that Person or as to which that Person is
otherwise liable for reimbursement of drawings or payments; (c) to purchase any
materials, supplies or other property from, or to obtain the services of,
another Person if the relevant contract or other related document or obligation
requires that payment for such materials, supplies or other property, or for
such services, shall be made regardless of whether delivery of such materials,
supplies or other property is ever made or tendered, or such services are ever
performed or tendered; or (d) in respect of any Swap Contract. The amount of any
Contingent Obligation shall, in the case of Guaranty Obligations, be deemed
equal to the stated or determinable amount of the primary obligation in respect
of which such Guaranty Obligation is made or, if not stated or if
indeterminable, the maximum reasonably anticipated liability in respect thereof,
and in the case of other Contingent
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Obligations, shall be equal to the maximum reasonably anticipated liability in
respect thereof.
"Credit Documents" means this Agreement, the Note and all other
documents delivered to the Bank in connection herewith.
"Default" means any Event of Default or any condition, occurrence or
event which, with notice or lapse of time or both, would, unless cured or
waived, constitute an Event of Default.
"Deposit Securities" is defined in the Indenture.
"Dollar" and the symbol "$" mean the lawful money of the United States.
"ERISA" means the Employee Retirement Income Security Act of 1974.
"Event of Default" means any of the events described in Section 7.1.
"Exchange Act" has the meaning specified in the definition of "Change
in Control".
"Federal Funds Rate" means, for any day, the rate as quoted by the
Federal Reserve Bank of New York and confirmed in the weekly statistical release
designated as H.15(519), or any successor publication, published by the Federal
Reserve Bank of New York (including any such successor, "H.15(519)") on the
preceding Business Day opposite the caption "Federal Funds (Effective)"; or, if
for any relevant day such rate is not so published on any such preceding
Business Day, the rate for such day will be the arithmetic mean as determined by
the Agent of the rates for the last transaction in overnight Federal funds
arranged prior to 9:00 a.m. (New York City time) on that day by each of three
leading brokers of Federal funds transactions in New York City selected by the
Agent.
"Fiscal Quarter" means any quarter of a Fiscal Year.
"Fiscal Year" means any period of twelve consecutive calendar months
ending on the last day of such twelve-month period; references to a Fiscal Year
with a number corresponding to any calendar year (e.g., the "1995 Fiscal Year")
refer to the Fiscal Year ending on or before December 31 during such calendar
year.
"FRB" means the Board of Governors of the Federal Reserve System and any
Governmental Authority succeeding to any of its principal functions.
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<PAGE> 40
"Fund" is defined in the preamble.
"GAAP" means United States generally accepted accounting principles.
"Governmental Authority" means any nation or government, any state or
other political subdivision thereof, any central bank (or similar monetary or
regulatory authority) thereof, any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government,
and any corporation or other entity owned or controlled, through stock or
capital ownership or otherwise, by any of the foregoing.
"Guaranty Obligation" has the meaning specified in the definition of
"Contingent Obligation."
"Indebtedness" of any Person means, without duplication, (a) all
indebtedness for borrowed money; (b) all obligations issued, undertaken or
assumed as the deferred purchase price of property or services (other than trade
payables entered into in the ordinary course of business on ordinary terms); (c)
all non-contingent reimbursement or payment obligations with respect to Surety
Instruments; (d) all obligations evidenced by notes, bonds, debentures or
similar instruments, including, without limitation, obligations so evidenced
incurred in connection with the acquisition of property, assets or businesses;
(e) all indebtedness created or arising under any conditional sale or other
title retention agreement, or incurred as financing, in either case with respect
to property acquired by the Person (even though the rights and remedies of the
seller or bank under such agreement in the event of default are limited to
repossession or sale of such property); (f) all obligations as lessee under
leases that have been or should be, in accordance with GAAP, recorded as capital
leases; (g) all net obligations with respect to Swap Contracts; (h) all
indebtedness referred to in clauses (a) through (g) above secured by (or for
which the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any Lien upon or in property (including accounts
and contracts rights) owned by such Person, even though such Person has not
assumed or become liable for the payment of such Indebtedness; (i) all Guaranty
Obligations in respect of indebtedness or obligations of others of the kinds
referred to in clauses (a) through (g) above; (j) all Contingent Obligations;
and (k) all other items which, in accordance with GAAP, would be included as
liabilities on the liability side of the balance sheet of such Person as of the
date at which Indebtedness is to be determined.
"Indemnified Liabilities" is defined in Section 8.5.
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<PAGE> 41
"Indemnified Persons" is defined in Section 8.5.
"Indenture" means the Indenture dated as of July 15, 1988 between the
Fund and The First National Bank of Boston, as trustee.
"Insolvency Proceeding" means, with respect to any Person, (a) any case,
action or proceeding before any court or other Governmental Authority relating
to bankruptcy, reorganization, insolvency, liquidation, receivership,
dissolution, winding-up or relief of debtors or (b) any general assignment for
the benefit of creditors, composition, marshalling of assets for creditors, or
other similar arrangement in respect of its creditors generally or any
substantial portion of its creditors, undertaken under U.S. Federal, state or
foreign law, including the Bankruptcy Code.
"Interest Payment Date" means each June 13 and December 13 hereafter
commencing December 13 to and including the Termination Date.
"IRS" means the Internal Revenue Service and any Governmental Authority
succeeding to any of its principal functions under the Code.
"Lien" means any security interest, mortgage, deed of trust, pledge,
hypothecation, assignment, charge or deposit arrangement, segregated asset
arrangement established in connection with reverse repurchase transactions,
encumbrance, lien (statutory or other), or preferential arrangement of any kind
or nature whatsoever in respect of any property (including those created by,
arising under or evidenced by any conditional sale or other title retention
agreement, the interest of a lessor under a capital lease, any financing lease
having substantially the same economic effect as any of the foregoing, or the
filing of any financing statement naming the owner of the asset to which such
lien relates as debtor, under the Uniform Commercial Code or any comparable law)
and any contingent or other agreement to provide any of the foregoing, but not
including the interest of a lessor under an operating lease.
"Loan" means the extension of credit by the Bank to the Fund under
Article II.
"Material Adverse Change" means (a) a material adverse change in, or a
material adverse effect upon, the business, properties, condition (financial or
otherwise) or prospects of the Fund; (b) a material impairment of the ability of
the Fund to make payments of principal and interest on the Loan and to avoid any
Event of Default (not including any Event of Default under Section 7.1(k) or any
Event of Default arising from a
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<PAGE> 42
possible breach of Section 6.12 which has not yet occurred); or (c) a material
adverse effect upon the legality, validity, binding effect or enforceability
against the Fund of the Loan.
"Net Asset Value" means, at any date, Total Assets less Total
Liabilities.
"Non-United States Person" means any corporation, partnership,
association or trust that is organized under the laws of a jurisdiction other
than the United States of America or one of its states.
"Note" means the promissory note of the Fund, substantially in the form
set forth as Exhibit 2.2.
"Obligations" means all obligations (monetary or otherwise) of the Fund
to the Bank under the Credit Documents, including (a) all obligations to make
payments to the Bank of, and in respect of the principal amount of and interest
on, the Loan and (b) all obligations of the Fund to the Bank in respect of fees,
costs, expenses and indemnification under Sections 8.4 and 8.5.
"Organization Documents" means, for the Fund, the Trust Agreement, the
bylaws, any certificate of determination or instrument relating to the rights of
preferred shareholders of the Fund and all applicable resolutions of the board
of trustees (or any committee thereof) of the Fund.
"Other Taxes" means any present or future stamp or documentary taxes or
any other excise or property taxes, charges or similar levies that arise from
any payment made hereunder or from the execution, delivery or registration of,
or otherwise with respect to, this Agreement or any other Credit Documents.
"Participant" is defined in Section 8.7(b).
"Person" means any natural person, corporation, partnership, firm,
association, trust, government, governmental agency or any other entity, whether
acting in an individual, fiduciary or other capacity.
"Plan" means any "pension plan" or "welfare benefit plan" as such terms
are defined in ERISA.
"Regulation U" means the FRB's Regulation U.
"Related Party" means, with respect to the Fund and for purposes of
Section 6.16 only, any Person (i) which directly or indirectly through one or
more intermediaries controls, or is controlled by, or is under common control
with, the Fund, (ii) which beneficially owns or holds 5% or more of the equity
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interest of the Fund or (iii) 5% or more of the equity interest of which is
beneficially owned or held by the Fund. The term "control" means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of a Person, whether through the ownership of voting
securities, by contract or otherwise.
"Requirement of Law" means, as to any Person, any law (statutory or
common), treaty, rule or regulation or determination of an arbitrator or of a
Governmental Authority, in each case applicable to or binding upon the Person or
any of its property or to which the Person or any of its property is subject.
"Senior Extendable Notes" means the notes issued pursuant to the
Indenture.
"Subsidiary" means, with respect to any Person, any corporation of which
more than 50% of the outstanding capital stock having ordinary voting power to
elect a majority of the board of directors of such corporation (irrespective of
whether at the time capital stock of any other class or classes of such
corporation shall or might have voting power upon the occurrence of any
contingency) is at the time directly or indirectly owned by such Person, by such
Person and one or more other Subsidiaries of such Person, or by one or more
other Subsidiaries of such Person.
"Surety Instruments" means all letters of credit (including standby and
commercial), banker's acceptances, bank guaranties, shipside bonds, surety bonds
and similar instruments.
"Swap Contract" means any agreement (including any master agreement and
any agreement, whether or not in writing, relating to any single transaction)
that is an interest rate swap agreement, basis swap, forward rate agreement,
commodity swap, commodity option, equity or equity index swap or option, bond
option, interest rate option, forward foreign exchange agreement, rate cap,
collar or floor agreement, currency swap agreement, cross-currency rate swap
agreement, swaption, currency option or any other similar agreement (including
any option to enter into any of the foregoing).
"Target" has the meaning specified in the definition of "Change in
Control".
"Taxes" means any and all present or future taxes, levies, imposts,
deductions, charges or withholdings, and all liabilities with respect thereto,
excluding, in the case of the Bank, such taxes (including income taxes or
franchise taxes) as are imposed on or measured by the Bank's net income by the
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jurisdiction (or any political subdivision thereof) under the laws of which the
Bank is organized or maintains a lending office.
"Termination Date" means June 14, 1999.
"Total Assets" means, with respect to the Fund as of any date, the
aggregate amount of all items that would be set forth as assets on a balance
sheet of the Fund on such date prepared in accordance with GAAP. The assets of
the Fund shall be valued in accordance with the Act, the rules and regulations
under the Act, and the valuation procedures set forth in its original
prospectus. Upon the written request of the Bank, the Fund shall promptly
furnish all such information as the Bank shall reasonably request relating to
the value of any portfolio security or other asset of the Fund or the assignment
of values thereto by the Fund or any other Person.
"Total Liabilities" means, with respect to the Fund as of any date, the
aggregate amount of all items that would be set forth as liabilities on a
balance sheet of the Fund on such date prepared in accordance with GAAP.
"Trust Agreement" means the Fund's Agreement and Declaration of Trust or
similar instrument, as amended from time to time.
"United States" or "U.S." means the United States of America, its 50
States and the District of Columbia.
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SCHEDULE II
ADDRESSES FOR NOTICES
BANK OF AMERICA ILLINOIS
Bank of America Illinois
231 South LaSalle Street
Chicago, Illinois 60697
Attention: Money Managers Group
Telephone: (312) 828-3014
Facsimile: (312) 987-0889
<PAGE> 46
EXHIBIT 2.2
Non-Negotiable
PROMISSORY NOTE
$27,400,000.00 as of June 14, 1996
FOR VALUE RECEIVED, the undersigned (the "Fund"), promises to pay to
Bank of America Illinois (the "Bank"), as set forth in the Credit Agreement
hereinafter referred to and on the Termination Date (as defined in the Credit
Agreement) the principal sum of TWENTY SEVEN MILLION FOUR HUNDRED THOUSAND AND
00/100 DOLLARS ($27,400,000.00) or, if less, the then aggregate unpaid principal
amount of the Loan, (as such term is defined in the Credit Agreement) as has
been borrowed by the Fund under the Credit Agreement. The Loan and all payments
of principal shall be recorded by the holder in its records.
Anything in this Note to the contrary notwithstanding, the Fund shall be
liable hereunder only for the Loan borrowed by the Fund under the Credit
Agreement and other obligations with respect thereto. The sole source of
repayment of the principal of and interest on the Loan hereunder and other
obligations with respect thereto shall be the revenues and assets of such Fund.
The Fund further promises to pay to the order of the Bank interest on
the aggregate unpaid principal amount hereof from time to time outstanding from
the date hereof until paid in full at the rates per annum which shall be
determined in accordance with the provisions of the Credit Agreement. Accrued
interest shall be payable on the dates specified in the Credit Agreement.
All payments of principal and interest under this Note shall be made in
lawful money of the United States of America in immediately available funds at
Bank of America Illinois, or at such other place as may be designated by the
Bank to the Fund in writing.
This Note is the Note referred to in, and evidences indebtedness
incurred under, a Credit Agreement dated as of June 12, 1996 (herein, as it may
be amended, modified or supplemented from time to time, called the "Credit
Agreement") among the Fund, the other parties thereto and the Bank, to which
Credit Agreement reference is made for a statement of the terms and provisions
thereof, including those under which the Fund is permitted and required to make
prepayments and repayments of principal of such indebtedness and under which
such indebtedness may be declared to be immediately due and payable.
<PAGE> 47
A copy of the Agreement and Declaration of Trust of the Fund is on file
with the Secretary of State of The Commonwealth of Massachusetts and the Clerk
of the City of Boston, and notice is hereby given that none of the shareholders,
trustees, officers, employees and other agents of the Fund shall be personally
bound by or liable for any indebtedness, liability or obligation arising
hereunder, nor shall resort be had to their private property for the
satisfaction of any obligations or claim arising hereunder.
All parties hereto, whether as makers, endorsers or otherwise, severally
waive presentment, demand, protest and notice of dishonor in connection with
this Note.
This Note is made under and governed by the internal laws of the State
of Illinois.
COLONIAL INTERMEDIATE HIGH
INCOME FUND
By:
-------------------------------
Title:
-------------------------------
<PAGE> 48
LOANS AND PRINCIPAL PAYMENTS
Amount of Unpaid
Amount of Principal Principal Notation
Date Loan Made Repaid Balance Total Made By
- ----- --------- ---------- --------- ----- ----------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
<PAGE> 49
EXHIBIT 5.7-1
SCHEDULE OF LITIGATION
NONE
<PAGE> 50
EXHIBIT 5.7-2
SCHEDULE OF CONTINGENT LIABILITIES
NONE
<PAGE> 51
EXHIBIT 6.1
FORM OF BORROWING BASE CERTIFICATE
Reference is made to that certain Credit Agreement, dated as of June
12, 1996 (the "Credit Agreement"), between Colonial Intermediate High Income
Fund and Bank of America Illinois. Capitalized terms used herein and not
otherwise defined shall have the meanings given to such terms in the Credit
Agreement.
Pursuant to the terms of the Credit Agreement, the undersigned (the
"Fund"), hereby represents and certifies to the Bank that as of __________ __,
199_, (i) the Borrowing Base of the Fund was the amount shown in subparagraph
(j) below and (ii) the Asset Coverage Ratio was the ratio set forth in
subparagraph (i) below, each calculated as follows:
(a) Value of Total Assets _____________
(b) minus all liabilities and
indebtedness not represented
by senior securities _____________
(c) minus any asset with respect
to which any payment is due
but unpaid for at least thirty
days or which is classified in
default by the Advisor _____________
(d) minus any asset not rated or
not rated at least B- or B-3 _____________
(e) plus any asset (which is part
of an issue of at least
$100,000,000 underwritten by
at least two major dealers)
subtracted under clause (d)
but rated at least CCC or Caa
(but the amount under this
clause (e) shall not exceed
5% of total assets) _____________
(f) minus (without duplication)
value of assets subject
to Liens ______________
(g) Adjusted Net Asset Value
((a) minus (b) minus (c)
minus (d) plus (e) minus (f)) ______________
<PAGE> 52
(h) Indebtedness ______________
(i) Asset Coverage - Ratio
((g) divided by (h)) ______________
(j) Borrowing Base - Indebtedness
Permitted [(g) times 1/3) ______________
The Asset Coverage Ratio of the Fund as set forth in its prospectus
is not more restrictive than 3 to 1.
A copy of the Agreement and Declaration of Trust of the Fund is on
file with the Secretary of State of The Commonwealth of Massachusetts and the
Clerk of the City of Boston, and notice is hereby given that none of the
shareholders, trustees, officers, employees and other agents of the Fund shall
be personally bound by or liable for any indebtedness, liability or obligation
arising hereunder, nor shall resort be had to their private property for the
satisfaction of any obligations or claim arising hereunder.
Date: _______________ COLONIAL INTERMEDIATE
HIGH INCOME FUND
By:
Title: [Must be an Authorized
Officer]
<PAGE> 1
EXHIBIT (n)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Statement of
Additional Information constituting part of this registration statement on Form
N-2 (the "Registration Statement") of our report dated December 10, 1997,
relating to the financial statements and financial highlights appearing in the
October 31, 1997 Annual Report to Shareholders of Colonial Intermediate High
Income Fund, which are also incorporated by reference into the Registration
Statement. We also consent to the references to us under the headings
"Financial Highlights" and "Experts" in the Prospectus and under the heading
"Independent Accountants," in the Statement of Additional Information.
/s/ Price Waterhouse LLP
- ----------------------------
Price Waterhouse LLP
Boston, Massachusetts
April 14, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS OF COLONIAL INTERMEDIATE HIGH INCOME FUND YEAR END OCT-31-1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS OF COLONIAL
INTERMEDIATE HIGH INCOME FUND, YEAR END OCT-31-1997.
</LEGEND>
<CIK> 0000833021
<NAME> COLONIAL INTERMEDIATE HIGH INCOME FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 129512
<INVESTMENTS-AT-VALUE> 134277
<RECEIVABLES> 4143
<ASSETS-OTHER> 1071
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 139491
<PAYABLE-FOR-SECURITIES> 2669
<SENIOR-LONG-TERM-DEBT> 27400
<OTHER-ITEMS-LIABILITIES> 1648
<TOTAL-LIABILITIES> 31717
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 132746
<SHARES-COMMON-STOCK> 14818
<SHARES-COMMON-PRIOR> 14506
<ACCUMULATED-NII-CURRENT> 263
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (30000)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4765
<NET-ASSETS> 107774
<DIVIDEND-INCOME> 363
<INTEREST-INCOME> 12703
<OTHER-INCOME> 0
<EXPENSES-NET> 2983
<NET-INVESTMENT-INCOME> 10083
<REALIZED-GAINS-CURRENT> 3311
<APPREC-INCREASE-CURRENT> 2525
<NET-CHANGE-FROM-OPS> 15919
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (10294)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 312
<NET-CHANGE-IN-ASSETS> 7849
<ACCUMULATED-NII-PRIOR> 300
<ACCUMULATED-GAINS-PRIOR> (33137)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 680
<INTEREST-EXPENSE> 2048
<GROSS-EXPENSE> 2983
<AVERAGE-NET-ASSETS> 104651
<PER-SHARE-NAV-BEGIN> 6.890
<PER-SHARE-NII> 0.699
<PER-SHARE-GAIN-APPREC> 0.383
<PER-SHARE-DIVIDEND> (0.702)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 7.270
<EXPENSE-RATIO> 0.89
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
