Notes to Financial Statements
(continued)
June 30, 2011 (Unaudited)
Contracts and premiums associated with options contracts written for the six months ended June 30,
2011 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calls
|
|
|
Puts
|
|
|
|
Contracts
|
|
|
Premiums ($)
|
|
|
Contracts
|
|
|
Premiums ($)
|
|
Balance December 31, 2010
|
|
|
783
|
|
|
|
3,014,850
|
|
|
|
325
|
|
|
|
48,647
|
|
Opened
|
|
|
5,891
|
|
|
|
16,943,991
|
|
|
|
2,365
|
|
|
|
316,239
|
|
Closed
|
|
|
(4,709
|
)
|
|
|
(17,493,892
|
)
|
|
|
(1,401
|
)
|
|
|
(178,045
|
)
|
Expired
|
|
|
(292
|
)
|
|
|
(31,902
|
)
|
|
|
(169
|
)
|
|
|
(14,162
|
)
|
Balance June 30, 2011
|
|
|
1,673
|
|
|
|
2,433,047
|
|
|
|
1,120
|
|
|
|
172,679
|
|
Effects of Derivative Transactions in the Financial Statements
The following tables are intended to provide additional information about the effect of derivatives on the financial statements of the Fund including: the fair value of derivatives by risk category and
the location of those fair values in the Statement of Assets and Liabilities; the impact of derivative transactions on the Funds operations over the period including realized gains or losses and unrealized gains or losses. The derivative
schedules following the Portfolio of Investments present additional information regarding derivative instruments outstanding at the end of the period, if any.
Fair Values of Derivative Instruments at June 30, 2011
|
|
|
|
|
|
|
|
|
Liability Derivatives
|
|
Risk Exposure
Category
|
|
Statement of Assets
and Liabilities Location
|
|
Fair Value ($)
|
|
Equity contracts
|
|
Options contracts written, at value
|
|
|
7,059,252
|
|
Effect of Derivative Instruments in the Statement of Operations for the Six Months Ended June 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Realized Gain (Loss) on Derivatives Recognized in
Income
|
|
Risk Exposure
Category
|
|
Forward Foreign
Currency Exchange
Contracts ($)
|
|
|
Option
Contracts ($)
|
|
|
Total ($)
|
|
Equity contracts
|
|
|
|
|
|
|
(4,258,690
|
)
|
|
|
(4,258,690
|
)
|
Foreign exchange contracts
|
|
|
(7,895
|
)
|
|
|
|
|
|
|
(7,895
|
)
|
Total
|
|
|
(7,895
|
)
|
|
|
(4,258,690
|
)
|
|
|
(4,266,585
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Unrealized Appreciation (Depreciation) on Derivatives
Recognized in
Income
|
|
Risk Exposure
Category
|
|
Forward Foreign
Currency Exchange
Contracts ($)
|
|
|
Option
Contracts ($)
|
|
|
Total ($)
|
|
Equity contracts
|
|
|
|
|
|
|
(5,311,691
|
)
|
|
|
(5,311,691
|
)
|
Foreign exchange contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
(5,311,691
|
)
|
|
|
(5,311,691
|
)
|
Volume of Derivative Instruments for the Six Months Ended June 30, 2011
|
|
|
|
|
|
|
Contracts Opened
|
|
Forward Foreign Currency Exchange Contracts
|
|
|
12
|
|
Options Contracts
|
|
|
8,256
|
|
Security Transactions
Security transactions are accounted for on the trade date. Cost is determined and gains (losses) are based upon the specific identification method for both financial statement and federal income tax
purposes.
Income Recognition
Corporate
actions and dividend income are recorded net of any non-reclaimable tax withholdings, on the ex-dividend date or upon receipt of ex-dividend notification in the case of certain foreign securities.
Federal Income Tax Status
The Fund intends to
qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code, as amended, and will distribute substantially all of its taxable income, if any, for its tax year, and as such will not be subject to federal income
taxes. In addition, the Fund intends to distribute in each calendar year substantially all of its net investment income, capital gains and certain other amounts, if any, such that the Fund should not be subject to federal excise tax. Therefore, no
federal income or excise tax provision is recorded.
Foreign Taxes
The Fund may be subject to foreign taxes on income or currency repatriation, a portion of which may be recoverable. The Fund will accrue such taxes and recoveries, as applicable, based upon its current
interpretation of tax rules and regulations that exist in the markets in which it invests.
Realized gains in certain countries may be subject
to foreign taxes at the Fund level, at rates ranging from approximately
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Semiannual Report 2011
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19
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Columbia Seligman Premium Technology Growth Fund
|
Notes to Financial Statements
(continued)
June 30, 2011
(Unaudited)
10% to 15%. The Fund pays for such foreign taxes on net realized gains at the appropriate rate for each jurisdiction.
Dividends to Stockholders
In November 2010, the Fund paid its first dividend under the
Funds new, managed distribution policy adopted by the Funds Board. Prior to the managed distribution policy, the Fund paid distributions pursuant to a level rate distribution policy. Under its former distribution policy and consistent
with the 1940 Act, as amended, the Fund could not distribute long-term capital gains, as defined in the Internal Revenue Code of 1986, more often than once in any one taxable year. In October 2010, the Fund received exemptive relief from the
Securities and Exchange Commission that permits the Fund to distribute long-term capital gains more often than once in any one taxable year. After consideration by the Funds Board, the Fund adopted the current managed distribution policy which
allows the Fund to make periodic distributions of long-term capital gains. Under its managed distribution policy, the Fund intends to make quarterly distributions to Common Stockholders at a rate that reflects the past and projected performance of
the Fund. The Fund expects to receive all or some of its current income and gains from the following sources: (i) dividends received by the Fund that are paid on the equity and equity-related securities in its portfolio; and (ii) capital
gains (short-term and long-term) from option premiums and the sale of portfolio securities. It is possible that the Funds distributions will at times exceed the earnings and profits of the Fund and therefore all or a portion of such
distributions may constitute a return of capital as described below. A return of capital is a return of a portion of an investors original investment. A return of capital is not taxable, but it reduces a Stockholders tax basis in his or
her shares, thus reducing any loss or increasing any gain on a subsequent taxable disposition by the Stockholder of his or her shares. Distributions may vary, and the Funds distribution rate will depend on a number of factors, including the
net earnings on the Funds portfolio investments and the rate at which such net earnings change as a result of changes in the timing of, and rates at which, the Fund receives income from the sources described above. The net investment income of
the Fund consists of all income (other than net short-term and long-term capital gains) less all expenses of the Fund.
The Board may change
the Funds distribution policy and the amount or timing of the distributions, based on a number of factors, including, but not limited to, as the Funds portfolio and market conditions change, the amount of the Funds undistributed
net investment income and net short- and long-term capital gains and historical and projected net investment income and net short- and long-term capital gains. Over time, the Fund will distribute all of its net investment income and
net short-term capital gains. In addition, at least annually, the Fund intends to distribute any net capital gain (which is the excess of net long-term capital gain over net short-term capital
loss) or, alternatively, to retain all or a portion of the years net capital gain and pay federal income tax on the retained gain.
Dividends and other distributions to Stockholders are recorded on ex-dividend dates.
Guarantees and Indemnifications
Under the Funds organizational documents and, in some cases,
by contract, its officers and directors are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, certain of the Funds contracts with its service providers contain general
indemnification clauses. The Funds maximum exposure under these arrangements is unknown since the amount of any future claims that may be made against the Fund cannot be determined, and the Fund has no historical basis for predicting the
likelihood of any such claims.
Note 3. Fees and Compensation Paid to Affiliates
Investment Management Fees
Under an Investment Management Services Agreement (IMSA), the Investment
Manager determines which securities will be purchased, held or sold. The management fee is an annual fee that is equal to 1.00% of the Funds average daily Managed Assets. Managed Assets means the net asset value of the Funds
outstanding Common Stock plus the liquidation preference of any issued and outstanding Preferred Stock of the Fund and the principal amount of any borrowings used for leverage.
Administration Fees
Under an Administrative Services Agreement, the Investment Manager serves as the
Fund Administrator. The Fund pays the Fund Administrator an annual fee for administration and accounting services equal to 0.06% of the Funds average daily Managed Assets.
Other Fees
Other expenses are for, among other things, certain expenses of the Fund or the Board
including: Fund boardroom and office expense, employee compensation, employee health and retirement benefits, and certain other expenses. Payment of these Fund and Board expenses is facilitated by a company providing limited administrative services
to the Fund and the
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20
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Semiannual Report 2011
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Columbia Seligman Premium Technology Growth Fund
|
|
|
Notes to Financial Statements
(continued)
June 30, 2011 (Unaudited)
Board. For the six months ended June 30, 2011, there were no expenses incurred for these particular items.
Compensation of Board Members
Under a Deferred Compensation Plan (the Plan), the board members who
are not interested persons of the Fund as defined under the 1940 Act may defer receipt of their compensation. Deferred amounts are treated as though equivalent dollar amounts had been invested in shares of the Fund or certain other funds
managed by the Investment Manager. The Funds liability for these amounts is adjusted for market value changes and remains in the Fund until distributed in accordance with the Plan.
Organization Expenses and Offering Costs
The Investment Manager paid all organization expenses of
the Fund. With respect to the Funds initial public offering, the Investment Manager paid all offering costs (other than sales load) that exceeded $0.04 per share of Common Stock. The Fund paid offering costs of $21,800 from the proceeds of the
initial public offering costs for the period ended December 31, 2010. Offering costs paid by the Fund were charged as a reduction of paid-in capital at the completion of the Fund offering.
Note 4. Federal Tax Information
The timing
and character of income and capital gain distributions are determined in accordance with income tax regulations, which may differ from GAAP. Reclassifications are made to the Funds capital accounts for permanent tax differences to reflect
income and gains available for distribution (or available capital loss carryforwards) under income tax regulations.
At June 30, 2011, the
cost of investments for federal income tax purposes was approximately $277,406,000 and the approximate unrealized appreciation and depreciation based on that cost was:
|
|
|
|
|
Unrealized appreciation
|
|
|
$35,648,000
|
|
Unrealized depreciation
|
|
|
(8,860,000
|
)
|
Net unrealized appreciation
|
|
|
$26,788,000
|
|
Management of the Fund has concluded that there are no significant uncertain tax positions that would require recognition
in the financial statements. However, managements conclusion may be subject to review and adjustment at a later date based on factors including, but not limited to, new tax laws, regulations, and administrative interpretations (including
relevant court decisions). Generally, the Funds federal tax returns for the prior three fiscal years
remain subject to examination by the Internal Revenue Service.
Note 5. Portfolio
Information
The cost of purchases and proceeds from sales of securities, excluding short-term obligations, aggregated to $128,066,443 and
$141,046,175, respectively, for the six months ended June 30, 2011.
Note 6. Dividend Investment Plan and Stock Repurchase Program
The Fund, in connection with its Dividend Investment Plan (the Plan), issues shares of its own Common Stock, as needed, to satisfy Plan
requirements. A total of 93,163 shares were issued to Plan participants during the six months ended June 30, 2011 for proceeds of $1,841,745, a weighted average discount of 2.37% from the net asset value of those shares.
Pursuant to the Plan, unless a Common Stockholder elects otherwise, all cash dividends, capital gains distributions, and other distributions are
automatically reinvested in additional Common Stock. If you hold your shares in street name or other nominee (i.e., through a broker), you should contact them to determine their policy, as the broker firms policy with respect to Fund
distributions may be to default to a cash payment. Common Stockholders who elect not to participate in the Plan (including those whose intermediaries do not permit participation in the Plan by their customers) will receive all dividends and
distributions payable in cash directly to the Common Stockholder of record (or, if the shares of Common Stock are held in street or other nominee name, then to such nominee). Common Stockholders may elect not to participate in the Plan and to
receive all distributions of dividends and capital gains or other distributions in cash by sending written instructions to American Stock Transfer & Trust Company, LLC (AST), 59 Maiden Lane Plaza Level, New York, New York 10038.
Participation in the Plan may be terminated or resumed at any time without penalty by written notice if received by AST, prior to the record date for the next distribution. Otherwise, such termination or resumption will be effective with respect to
any subsequently declared distribution.
Under the Plan, Common Stockholders receive shares of Common Stock in lieu of cash distributions
unless they have elected otherwise as described above. Common Stock will be issued in lieu of cash by the Fund from previously authorized but unissued Common Stock. If the market price of a share on the
ex-dividend
date of such a distribution is at or above the Funds net asset value per share on such date, the number of shares to be issued by the Fund to each Common Stockholder
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Semiannual Report 2011
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21
|
|
|
|
|
|
|
|
|
Columbia Seligman Premium Technology Growth Fund
|
Notes to Financial Statements
(continued)
June 30, 2011
(Unaudited)
receiving shares in lieu of cash distributions will be determined by dividing the amount of the cash distribution to which such Common Stockholder would be entitled by the greater of the net
asset value per share on such date or 95% of the market price of a share on such date. If the market price of a share on such an ex-dividend date is below the net asset value per share, the number of shares to be issued to such Common Stockholders
will be determined by dividing such amount by the per share market price. The issuance of Common Stock at less than net asset value per share will dilute the net asset value of all Common Stock outstanding at that time. Market price on any day means
the closing price for the Common Stock at the close of regular trading on the NYSE on such day or, if such day is not a day on which the Common Stock trades, the closing price for the Common Stock at the close of regular trading on the immediately
preceding day on which trading occurs.
The Fund, under its stock repurchase program, currently intends to make open market purchases of its
Common Stock from time to time when the Funds Common Stock is trading at a discount to its net asset value, in an amount approximately sufficient to offset the growth in the number of shares of Common Stock issued as a result of the
reinvestment of the portion of its distributions to Common Stockholders that are attributable to distributions received by the Fund from its underlying portfolio investments less fund expenses. No shares were purchased in the open market during the
six months ended June 30, 2011.
The Fund reserves the right to amend or terminate the Plan as applied to any distribution paid subsequent
to written notice of the change sent to participants in the Plan at least 90 days before the record date for such distribution. There are no service or brokerage charges to participants in the Plan; however, the Fund reserves the right to amend
the Plan to include a service charge payable to the Fund by the participants. The Fund reserves the right to amend the Plan to provide for payment of brokerage fees by Plan participants in the event the Plan is changed to provide for open market
purchases of Common Stock on behalf of Plan participants. All correspondence concerning the Plan should be directed to AST.
Note 7. Affiliated
Money Market Fund
The Fund may invest its daily cash balances in Columbia Short-Term Cash Fund, a money market fund established for the
exclusive use by the Fund and other affiliated Funds. The income earned by the Fund from such investments is included as Dividends from affiliates in the Statement of Operations. As an investing fund, the Fund indirectly bears its
proportionate share of the expenses of Columbia Short-Term Cash Fund.
Note 8. Significant
Risks
Non-Diversification Risk
The
Fund is a non-diversified fund. A non-diversified fund is permitted to invest a greater percentage of its total assets in fewer companies than a diversified fund. The Fund may, therefore, have a greater risk of loss from a few issuers than a similar
fund that invests more broadly.
Technology and Technology-related Investment Risk
The Fund invests a substantial portion of its assets in technology and technology-related companies. The market prices of technology and technology related stocks tend to exhibit a greater degree of
market risk and price volatility than other types of investments. These stocks may fall in and out of favor with investors rapidly, which may cause sudden selling and dramatically lower market prices. These stocks also may be affected adversely by
changes in technology, consumer and business purchasing patterns, government regulation and/or obsolete products or services. In addition, a rising interest rate environment tends to negatively affect technology and technology-related companies. In
such an environment, those companies with high market valuations may appear less attractive to investors, which may cause sharp decreases in the companies market prices. Further, those technology or technology-related companies seeking to
finance their expansion would have increased borrowing costs, which may negatively impact their earnings. As a result, these factors may negatively affect the performance of the Fund. Finally, the Fund may be susceptible to factors affecting the
technology and technology-related industries, and the Funds net asset value may fluctuate more than a fund that invests in a wider range of industries. Technology and technology-related companies are often smaller and less experienced
companies and may be subject to greater risks than larger companies, such as limited product lines, markets and financial and managerial resources. These risks may be heightened for technology companies in foreign markets.
Writing Call Options Risk
A principal aspect of
the Funds investment strategy involves writing call options on the NASDAQ 100. This part of the Funds strategy subjects the Fund to certain additional risks. A decision as to whether, when and how to use options involves the exercise of
skill and judgment, and even a well-conceived transaction may be unsuccessful to some degree because of market behavior or unexpected events. The principal factors
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22
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Semiannual Report 2011
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|
Columbia Seligman Premium Technology Growth Fund
|
|
|
Notes to Financial Statements
(continued)
June 30, 2011 (Unaudited)
affecting the market value of an option include supply and demand, interest rates, the current market price of the underlying index or security in relation to the exercise price of the option,
the actual or perceived volatility of the underlying index or security and the time remaining until the expiration date.
The Fund intends to
write call options on the NASDAQ 100; however, it does not intend to have a portfolio of securities that mirrors the securities in the NASDAQ 100. As a result, during a period when the Fund has outstanding call options written on the NASDAQ 100, the
NASDAQ 100 may appreciate to a greater extent than the securities in the Funds portfolio. If the call options are exercised in these circumstances, the Funds loss on the options will be greater because it will be paying the option holder
not only an amount effectively representing appreciation on securities in its own portfolio but also an amount representing the greater appreciation experienced by the securities in the NASDAQ 100 that the Fund does not own. If, at a time these call
options may be exercised, the securities underlying these options have market values above the exercise price, then these call options will be exercised and the Fund will be obligated to deliver to the option holder either the securities underlying
these options or to deliver the cash value of those securities, in exchange for which the option holder will pay the Fund the exercise price. In either case, the Fund will incur losses to the extent the market value of the underlying securities
exceed the sum of the premium the Fund received from writing the call options and the exercise price of the call options, which loss may be very substantial.
To the extent all or part of the Funds call options are covered, the Fund forgoes, during the options life, the opportunity to profit from increases in the market value of the security
underlying the call option above the sum of the option premium received and the exercise price of the call, but has retained the risk of loss should the price of the underlying security decline below the exercise price minus the option premium
received. The writer of an exchange-listed option on a security has no control over when during the exercise period of the option (which may be a single day or multiple days) it may be required to fulfill its obligation as a writer of the option.
Once an option writer has received an exercise notice, it would be obligated to deliver the underlying security at the exercise price. Thus, the writing of call options may require the Fund to sell portfolio securities at inopportune times or for
prices other than current market values and will limit the amount of appreciation the Fund can realize above the exercise price of an option.
The Fund may be required to sell investments from its portfolio to effect cash settlement (or transfer ownership of a
stock or other instrument to physically settle) on any written call options that are exercised. Such sales (or transfers) may occur at inopportune times, and the Fund may incur transaction costs
that increase the expenses borne by Common Stockholders. The Fund may sell written call options over an exchange or in the OTC market. The options in the OTC markets may not be as liquid as exchange-listed options. The Fund may be limited in the
number of counterparties willing to take positions opposite the Fund or may find the terms of such counterparties to be less favorable than the terms available for listed options. The Fund cannot guarantee that its options strategies will be
effective. Moreover, OTC options may provide less favorable tax treatment than listed options.
The value of options may be adversely affected
if the market for such options becomes less liquid or smaller. There can be no assurance that a liquid market will exist when the Fund seeks to close out an option position, in the case of a call option written, by buying the option back. Reasons
for the absence of a liquid secondary market on an exchange include the following: (i) there may be insufficient trading interest in certain 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 options; (iv) unusual or unforeseen circumstances may interrupt normal operations on an exchange;
(v) the facilities of an exchange or the Options Clearing Corporation (OCC) 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 to
discontinue the trading of options (or a particular class or series of options) at some future date. If trading were discontinued, the secondary market on that exchange (or in that class or series of options) would cease to exist. However,
outstanding options on that exchange that had been issued by the OCC as a result of trades on that exchange would continue to be exercisable in accordance with their terms. The Funds ability to terminate OTC options will be more limited than
with exchange-traded options and may involve the risk that broker-dealers participating in such transactions will not fulfill their obligations.
The hours of trading for options may not conform to the hours during which the underlying securities are traded. To the extent that the options markets
close before the markets for the underlying securities, significant price and rate movements can take place in the underlying markets that would not be reflected concurrently in the options markets. Call options are marked to market daily and their
value will be affected by changes in the value of and dividend rates of the underlying common stocks, changes in interest rates, changes in the
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Semiannual Report 2011
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23
|
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Columbia Seligman Premium Technology Growth Fund
|
Notes to Financial Statements
(continued)
June 30, 2011
(Unaudited)
actual or perceived volatility of the stock market and the underlying common stocks and the remaining time to the options expiration. Additionally, the exercise price of an option may be
adjusted downward before the options expiration as a result of the occurrence of certain corporate events affecting the underlying equity security, such as extraordinary dividends, stock splits, merger or other
extraordinary distributions or events. A reduction in the exercise price of an option would reduce the Funds capital appreciation potential on the
underlying security.
The Funds options transactions will be subject to limitations established by each of the exchanges, boards of trade
or other trading facilities on which such options are traded. These limitations govern the maximum number of options in each class which may be written or purchased by a single investor or group of investors acting in concert, regardless of whether
the options are written or purchased on the same or different exchanges, boards of trade or other trading facilities or are held or written in one or more accounts or through one or more brokers. Thus, the number of options which the Fund may write
or purchase may be affected by options written or purchased by other investment advisory clients of the Investment Manager. An exchange, board of trade or other trading facility may order the liquidation of positions found to be in excess of these
limits, and may impose certain other sanctions.
Options Risk
The Fund engages in transactions in options on securities, indices, exchange traded funds and market baskets of securities on exchanges and in the OTC markets. In general, exchange-traded options have
standardized exercise prices and expiration dates and require the parties to post margin against their obligations, and the performance of the parties obligations in connection with such options is guaranteed by the exchange or a related
clearing corporation. OTC options have more flexible terms negotiated between the buyer and the seller, but generally do not require the parties to post margin and are subject to greater credit risk. OTC options also involve greater liquidity risk.
In addition to writing call options as described above, the Fund may purchase put options. By buying a put option, the Fund will pay a premium
to acquire a right to sell the securities or instruments underlying the put at the exercise price of the option. The Fund will lose money if the securities or instruments underlying the option do not decline in value below the exercise price of the
option by an amount sufficient to offset the premium paid to acquire the option. To the extent the Fund purchases put options in the OTC market, the Fund will be subject to the credit risk of the seller of the option. The
Fund also may write put options on the types of securities or instruments that may be held by the Fund, provided that such put options are secured by segregated, liquid instruments. The Fund will
receive a premium for writing a put option, which increases the Funds return. In exchange for the premium received, the Fund has the obligation to buy the securities or instruments underlying the option at an
agreed-upon
exercise price if the securities or instruments decrease below the exercise price of the option. The Fund will lose money if the securities or instruments decrease in value so that the amount the
Fund is obligated to pay the counterparty to the option to purchase the securities underlying the option upon exercise of the option exceeds the value of those securities by an amount that is greater than the premium received by the Fund for writing
the option.
The Fund may purchase call options on any of the types of securities or instruments in which it may invest. In exchange for paying
the option premium, a purchased call option gives the Fund the right to buy, and obligates the seller to sell, the underlying security or instrument at the exercise price. The Fund will lose money if the securities or instruments underlying the
option do not appreciate in value in an amount sufficient to offset the premium paid by the Fund to acquire the option.
Small and Mid-cap Companies
Risk
The Fund may invest all or a substantial portion of its assets in companies whose market capitalization is considered small- or
mid-cap. These companies often are newer or less established companies than larger companies. Investments in these companies carry additional risks because earnings of these companies tend to be less predictable; they often have limited product
lines, markets, distribution channels or financial resources; and the management of such companies may be dependent upon one or a few key people. The market movements of equity securities of small-cap and mid-cap companies may be more abrupt or
erratic than the market movements of equity securities of larger, more established companies or the stock market in general. Historically, small-cap and mid-cap companies have sometimes gone through extended periods when they did not perform as well
as larger companies. In addition, equity securities of these companies generally are less liquid than those of larger companies. This means that the Fund could have greater difficulty selling such securities at the time and price that the Fund would
like. Smaller-company stocks, as a whole, may experience larger price fluctuations than large-company stocks or other types of investments. During periods of investor uncertainty, investor sentiment may favor large, well-known companies over small,
lesser-known companies. There may be less trading in a smaller companys stock, which means that buy and sell
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24
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Semiannual Report 2011
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Columbia Seligman Premium Technology Growth Fund
|
|
|
Notes to Financial Statements
(continued)
June 30, 2011 (Unaudited)
transactions in that stock could have a larger impact on the stocks price than is the case with larger company stocks.
Foreign Securities Risk
The Fund may invest up to 25% of its Managed Assets in securities of
companies organized outside the United States. Investments in foreign securities involve certain risks not associated with investments in U.S. companies. Securities markets in certain foreign countries are not as developed, efficient or liquid
as securities markets in the United States. Therefore, the prices of foreign securities are often volatile and trading costs are higher. Certain foreign countries may impose restrictions on the ability of issuers of foreign securities to make
payments of principal and interest to investors located outside the country, due to blockage of foreign currency exchanges or otherwise. Generally, there is less publicly available information about foreign companies due to less rigorous disclosure
or accounting standards and regulatory practices. In addition, the Fund will be subject to risks associated with adverse political and economic developments in foreign countries, which could cause the Fund to lose money on its investments in foreign
securities.
The Fund may invest in securities of issuers located or doing substantial business in emerging markets (lesser
developed countries). Because of the less developed markets and economics and, in some countries, less mature governments and governmental institutions, the risks of investing in foreign securities can be intensified in the case of investments in
issuers domiciled or doing substantial business in emerging markets. These risks include a high concentration of market capitalization and trading volume in a small number of issuers representing a limited number of industries, as well as a high
concentration of investors and financial intermediaries; political and social uncertainties; over-dependence on exports, especially with respect to primary commodities, making these economies vulnerable to changes in commodity prices; overburdened
infrastructure and obsolete or unseasoned financial systems; environmental problems; less developed legal systems; and less reliable custodial services and settlement practices.
Note 9. Subsequent Events
Management has evaluated the events and transactions that have
occurred through the date the financial statements were issued and noted no items requiring adjustment of the financial statements or additional disclosure.
Note 10. Information Regarding Pending and Settled Legal Proceedings
In June 2004, an action captioned
John E. Gallus et al. v. American Express Financial Corp. and American Express Financial Advisors Inc.
was
filed in the United States District Court for the District of Arizona. The plaintiffs allege that they are investors in several American Express Company mutual funds (branded as Columbia or RiverSource) and they purport to bring the action
derivatively on behalf of those funds under the Investment Company Act of 1940. The plaintiffs allege that fees allegedly paid to the defendants by the funds for investment advisory and administrative services are excessive. The plaintiffs seek
remedies including restitution and rescission of investment advisory and distribution agreements. The plaintiffs voluntarily agreed to transfer this case to the United States District Court for the District of Minnesota (the District Court). In
response to defendants motion to dismiss the complaint, the District Court dismissed one of plaintiffs four claims and granted plaintiffs limited discovery. Defendants moved for summary judgment in April 2007. Summary judgment was
granted in the defendants favor on July 9, 2007. The plaintiffs filed a notice of appeal with the Eighth Circuit Court of Appeals (the Eighth Circuit) on August 8, 2007. On April 8, 2009, the Eighth Circuit reversed summary
judgment and remanded to the District Court for further proceedings. On August 6, 2009, defendants filed a writ of certiorari with the U.S. Supreme Court (the Supreme Court), asking the Supreme Court to stay the District Court proceedings while
the Supreme Court considers and rules in a case captioned
Jones v. Harris Associates,
which involves issues of law similar to those presented in the Gallus case. On March 30, 2010, the Supreme Court issued its ruling in
Jones v.
Harris Associates,
and on April 5, 2010, the Supreme Court vacated the Eighth Circuits decision in the Gallus case and remanded the case to the Eighth Circuit for further consideration in light of the Supreme Courts decision in
Jones v. Harris Associates
. On June 4, 2010, the Eighth Circuit remanded the Gallus case to the District Court for further consideration in light of the Supreme Courts decision in
Jones v. Harris Associates
. On
December 9, 2010, the District Court reinstated its July 9, 2007 summary judgment order in favor of the defendants. On January 10, 2011, plaintiffs filed a notice of appeal with the Eighth Circuit. In response to the plaintiffs
opening appellate brief filed on March 18, 2011, the defendants filed a response brief on May 4, 2011 with the Eighth Circuit. The plaintiffs filed a reply brief on May 26, 2011.
In December 2005, without admitting or denying the allegations, American Express Financial Corporation (AEFC, which is now known as Ameriprise
Financial, Inc.
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Notes to Financial Statements
(continued)
June 30, 2011
(Unaudited)
(Ameriprise Financial)), entered into settlement agreements with the Securities and Exchange Commission (SEC) and Minnesota Department of Commerce (MDOC) related to market timing activities. As a
result, AEFC was censured and ordered to cease and desist from committing or causing any violations of certain provisions of the Investment Advisers Act of 1940, the Investment Company Act of 1940, and various Minnesota laws. AEFC agreed to pay
disgorgement of $10 million and civil money penalties of $7 million. AEFC also agreed to retain an independent distribution consultant to assist in developing a plan for distribution of all disgorgement and civil penalties ordered by the
SEC in accordance with various undertakings detailed at www.sec.gov/litigation/admin/ia-2451.pdf. Ameriprise Financial and its affiliates have cooperated with the SEC and the MDOC in these legal proceedings, and have made regular reports to the
funds Boards of Directors/Trustees.
Ameriprise Financial and certain of its affiliates have historically been involved in a number of
legal, arbitration and regulatory proceedings, including routine litigation, class actions, and governmental actions, concerning matters arising in connection with the conduct of their business activities. Ameriprise Financial believes that the
Funds are not currently the subject of, and that neither Ameriprise Financial nor any of its affiliates are the subject of, any pending legal, arbitration or regulatory proceedings that are likely to have a material adverse effect on the Funds or
the ability of Ameriprise Financial or its affiliates to perform under their contracts with the Funds. Ameriprise Financial is required to make
10-Q,
10-K
and, as
necessary,
8-K
filings with the Securities and Exchange Commission on legal and regulatory matters that relate to Ameriprise Financial and its affiliates. Copies of these filings may be obtained by accessing
the SEC website at www.sec.gov.
There can be no assurance that these matters, or the adverse publicity associated with them, will not result
in increased fund redemptions, reduced sale of fund shares or other adverse consequences to the Funds. Further, although we believe proceedings are not likely to have a material adverse effect on the Funds or the ability of Ameriprise Financial or
its affiliates to perform under their contracts with the Funds, these proceedings are subject to uncertainties and, as such, we are unable to estimate the possible loss or range of loss that may result. An adverse outcome in one or more of these
proceedings could result in adverse judgments, settlements, fines, penalties or other relief that could have a material adverse effect on the consolidated financial condition or results of operations of Ameriprise Financial.
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Proxy Voting
The policy of the Board is to vote the proxies of the companies in which the Fund holds investments consistent with the procedures that can be found by
visiting columbiamanagement.com. Information regarding how the Fund voted proxies relating to portfolio securities is filed with the SEC by August 31 for the most recent
12-month
period ending
June 30 of that year, and is available without charge by visiting columbiamanagement.com; or searching the website of the SEC at www.sec.gov.
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Columbia Seligman Premium Technology Growth Fund
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Approval of Investment Management Services
Agreement
Columbia Management Investment Advisers, LLC
(Columbia Management or the investment manager), a wholly-owned subsidiary of Ameriprise Financial, Inc. (Ameriprise Financial), serves as the investment manager to Columbia Seligman Premium Technology Growth
Fund, Inc. (the Fund). Under an investment management services agreement (the IMS Agreement), Columbia Management provides investment advice and other services to the Fund and all funds distributed by Columbia Management
Investment Distributors, Inc. (collectively, the Funds).
On an annual basis, the Funds Board of Directors (the
Board), including the independent Board members (the Independent Directors), considers renewal of the IMS Agreement. Columbia Management prepared detailed reports for the Board and its Contracts Committee in March and
April 2011, including reports based on analyses of data provided by independent organizations and a comprehensive response to each item of information requested by independent legal counsel to the Independent Directors (Independent Legal
Counsel) in a letter to the investment manager, to assist the Board in making this determination. All of the materials presented in March and April were first supplied in draft form to designated representatives of the Independent Directors,
i.e.
, Independent Legal Counsel, the Boards Chair and the Chair of the Contracts Committee, and the final materials were revised to reflect comments provided by these Board representatives. In addition, throughout the year, the Board
(or its committees) regularly meets with portfolio management teams and reviews information prepared by Columbia Management addressing the services Columbia Management provides and Fund performance. The Board accords particular weight to the work,
deliberations and conclusions of the Contracts Committee, the Investment Review Committee and the Compliance Committee in determining whether to continue the IMS Agreement.
At the
April 12-14,
2011 in-person Board meeting, Independent Legal Counsel reviewed with the Independent Directors various factors relevant to the
Boards consideration of advisory agreements and the Boards legal responsibilities related to such consideration. Following an analysis and discussion of the factors identified below, the Board, including all of the Independent Directors,
approved renewal of the IMS Agreement.
Nature, Extent and Quality of Services Provided by Columbia Management:
The Independent
Directors analyzed various reports and presentations they had received detailing the services performed by Columbia Management, as well as its expertise, resources and capabilities. The Independent Directors specifically considered many developments
during the past year concerning the services provided by Columbia Management, including, in particular, the continued investment in, and resources dedicated to, the Funds operations, most notably, the close of the acquisition by Ameriprise
Financial of the long-term asset management business of Columbia Management Group, LLC (the Columbia Transaction) and the successful execution of various integration and other business initiatives in 2010, including, implementation of
complex-wide rationalized fee structures and the rebranding of the retail fund complex. The Independent Directors noted the information they received concerning Columbia Managements ability to retain key personnel in certain targeted areas and
its expectations in this regard. In that connection, the Independent Directors took into account their meetings with Columbia Managements new Chief Investment Officer and considered the additional risk and portfolio management oversight now
applied to the Funds as a result. The Independent Directors also assessed the adequacy of the current level and quality of Columbia Managements technological resources and considered managements commitments to enhance existing resources
in this area.
Moreover, in connection with the Boards evaluation of the overall package of services provided by Columbia Management, the
Board considered the quality of administrative services provided to the Fund by Columbia Management. The Board also reviewed the financial condition of Columbia Management (and its affiliates) and each entitys ability to carry out its
responsibilities under the IMS Agreement. In addition, the Board discussed the acceptability of the terms of the IMS Agreement (including the relatively broad scope of services required to be performed by Columbia Management). The Board concluded
that the services being performed under the IMS Agreement were of a reasonably high quality.
Based on the foregoing, and based on other
information received (both oral and written, including the information on investment performance referenced below) and other considerations, the Board concluded that Columbia Management and its affiliates were in a position to continue to provide a
high quality and level of services to the Fund.
Investment Performance:
For purposes of evaluating the nature, extent and quality of
services provided under the IMS Agreement, the Board carefully reviewed the investment performance of the Fund. In this regard, the Board considered detailed reports providing the results of analyses performed by an independent organization showing,
for various periods, the performance of the Fund, the performance of a benchmark index, the percentage ranking of the Fund among its comparison group and the net assets of the Fund. The Independent Directors observed that while the Fund
underperformed its benchmark on a market-price basis, it outperformed its benchmark on a NAV basis and ranked in the 22nd percentile (1st quartile) of its peer group. The Independent Directors determined that the Funds investment performance
met expectations.
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Approval of Investment
Management Services Agreement
(continued)
Comparative Fees, Costs of Services Provided and the Profits Realized By
Columbia Management and its Affiliates from their Relationships with the Fund:
The Board reviewed comparative fees and the costs of services provided under the IMS Agreement. The Board members considered detailed comparative information set
forth in an annual report on fees and expenses, including, among other things, data (based on analyses conducted by an independent organization) showing a comparison of the Funds expenses with median expenses paid by funds in its peer group,
as well as data showing the Funds contribution to Columbia Managements profitability.
The Board accorded particular weight to the
notion that the level of fees should reflect a rational pricing model applied consistently across the various product lines in the fund family, while assuring that the overall fees for each fund (with few defined exceptions) are generally in line
with the pricing philosophy (
i.e.
, that the total expense ratio of the Funds are at, or below, the median expense ratio of funds in the same comparison group). The Board reviewed information they received with respect to the
Fund demonstrating that its total net expense ratio was in line with its peer group median expense ratio. The Board also noted that, unlike many funds in the peer group, the Fund employs a unique options-writing strategy designed to cushion its
downside performance. Based on its review, the Board concluded that the Funds management fee was fair and reasonable in light of the extent and quality of services that the Fund receives.
The Board also considered the profitability of Columbia Management and its affiliates in connection with Columbia Management providing investment
management services to the Fund. In this regard, the Board referred to a detailed profitability report, discussing the profitability to Columbia Management and Ameriprise Financial from managing, operating and distributing the Funds, including
information depicting, to the extent reasonably practicable, the expected impact of the Columbia Transaction and the integration initiatives on profitability. In this regard, the Board observed that 2010 profitability was generally in line with the
reported profitability of other asset management firms. The Board also considered the indirect economic benefits flowing to Columbia Management or its affiliates in connection with managing or distributing the Funds, such as the enhanced ability to
offer various other financial products to Ameriprise Financial customers, soft dollar benefits and overall reputational advantages. The Board noted that the fees paid by the Fund should permit the investment manager to offer competitive compensation
to its personnel, make necessary investments in its business and earn an appropriate profit. The Board concluded that profitability levels were reasonable.
Economies of Scale to be Realized:
The Board noted that the management fee schedule does not contain breakpoints that reduce the fee rate on assets above specified levels. However, due to the
Funds closed-end structure, the Board did not view the potential for realization of economies of scale as the Funds assets grow to be a material factor in its deliberations.
Based on the foregoing, the Board, including all of the Independent Directors, concluded that the investment management service fees were fair and reasonable in light of the extent and quality of services
provided. In reaching this conclusion, no single factor was determinative. On April 14, 2011, the Board, including all of the Independent Directors, approved the renewal of the IMS Agreement for an additional annual period.
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Columbia Seligman Premium Technology Growth Fund
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Results of Meeting of Stockholders