Notes to Financial Statements
(continued)
June 30, 2013 (Unaudited)
At June 30, 2013, the cost of investments for federal income tax purposes was approximately
$1,161,479,000 and the aggregate gross approximate unrealized appreciation and depreciation based on that cost was:
|
|
|
|
|
Unrealized appreciation
|
|
|
$175,549,000
|
|
Unrealized depreciation
|
|
|
(18,096,000
|
)
|
Net unrealized appreciation
|
|
|
$157,453,000
|
|
The following capital loss carryforward, determined as of December 31, 2012 may be available to reduce taxable income
arising from future net realized gains on investments, if any, to the extent permitted by the Internal Revenue Code:
|
|
|
|
|
Year of Expiration
|
|
Amount ($)
|
|
2016
|
|
|
(49,455,851
|
)
|
2017
|
|
|
(556,508,807
|
)
|
Total
|
|
|
(605,964,658
|
)
|
Unlimited capital loss carryforwards are required to be utilized prior to any capital losses which carry an expiration
date. As a result of this ordering rule, capital loss carryforwards which carry an expiration date may be more likely to expire unused.
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
$423,857,091 and $418,661,542, respectively, for the six months ended June 30, 2013.
Note 6. Capital Stock Transactions
Under the Funds Charter, dividends on Common Stock cannot be declared unless net assets, after deducting the amount of such dividends and all unpaid
dividends declared on Preferred Stock, equal at least $100 per share of Preferred Stock outstanding. The Preferred Stock is subject to redemption at the Funds option at any time on 30 days notice at $55 per share (or a total of
$41,400,700 for the shares outstanding) plus accrued dividends, and entitled in liquidation to $50 per share plus dividends accrued or in arrears, as the case may be.
Automatic Dividend and Cash Purchase Plan
The Fund, in connection with its Automatic Dividend Investment and Cash Purchase Plan (the Plan) and other Stockholder plans, acquires and issues shares of its own Common Stock, as needed, to satisfy Plan
requirements. A total of 54,333 shares were issued to Plan participants during the period for proceeds of $940,881, a weighted average discount of 13.2% from the net asset value of those shares. In addition, a total of 376,318 shares were issued at
market price in distributions during the period for proceeds of 6,669,143, a weighted average discount of 12.1% from the net asset value of those shares.
For Stockholder accounts established after June 1, 2007, unless the Stockholder Servicing Agent is otherwise instructed by the Stockholder, distributions on the Common Stock are paid in book shares
of Common Stock which are entered in the Stockholders account as book credits. Each Stockholder may also elect to receive distributions 75% in shares and 25% in cash, 50% in shares and 50% in cash, or 100% in cash. Any such
election must be received by the Stockholder Servicing Agent by the record date for a distribution. If the Stockholder holds shares of Common Stock through a financial intermediary (such as a broker), the Stockholder should contact the financial
intermediary to discuss reinvestment and distribution options. Elections received after a record date for a distribution will be effective in respect of the next distribution. Shares issued to the Stockholder in respect of distributions will be at a
price equal to the lower of: (i) the closing sale price of the Common Stock on the NYSE on the ex-dividend date or (ii) the greater of net asset value per share of Common Stock and 95% of the closing price of the Common Stock on the NYSE
on the ex-dividend date. 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.
For the six months ended June 30, 2013, the Fund purchased 312,346 shares of its Common Stock in the open market at an aggregate cost of $5,533,112, which represented a weighted average discount of
13.0% from the net asset value of those acquired shares. For the six months ended June 30, 2013, the Fund purchased 497,887 shares of its Common Stock from Plan participants at a cost of $8,715,658, which represented a weighted average discount
of 13.2% from the net asset value of those acquired shares. Shares of Common Stock repurchased to satisfy Plan requirements or in the open market are retired and no longer outstanding.
Under the Funds stock repurchase program for 2012, the amount of the Funds outstanding Common Stock that the Fund may repurchase from Stockholders and in the open
|
|
|
|
|
Semiannual Report 2013
|
|
|
25
|
|
|
|
|
|
|
|
|
Tri-Continental Corporation
|
Notes to Financial Statements
(continued)
June 30, 2013 (Unaudited)
market is 5%, provided that, with respect to shares purchased in the open market, the discount must be greater than 10%. The intent of the stock repurchase program is, among other things, to
moderate the growth in the number of shares outstanding, increase the NAV of the Funds outstanding shares, reduce the dilutive impact on stockholders who do not take capital gain distributions in additional shares and increase the liquidity of
the Funds Common Stock in the marketplace.
Warrants
At June 30, 2013, the Fund reserved 197,100 shares of Common Stock for issuance upon exercise of 8,148 Warrants, each of which entitled the holder to purchase 24.19 shares of Common Stock at $0.93
per share.
Assuming the exercise of all Warrants outstanding at June 30, 2013, net assets would have increased by $183,303 and the net
asset value of the Common Stock would have been $20.48 per share. The number of Warrants exercised during the six months ended June 30, 2013 and the year ended December 31, 2012 was 0 and 1,343, respectively.
Note 7. Affiliated Money Market Fund
The Fund
invests its daily cash balances in Columbia Short-Term Cash Fund, an affiliated 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 affiliated issuers 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. Lehman Brothers Holdings Inc. Equity-Linked Notes
The Fund holds investments in two equity-linked notes (notes) for which Lehman Brothers Holdings Inc. (Lehman Brothers) is the counterparty. The notes (with an aggregate principal amount of $29.7 million)
defaulted as of their respective maturity dates, September 14, 2008 and October 2, 2008. Lehman Brothers filed a Chapter 11 bankruptcy petition on September 15, 2008, and as such, it is likely that the Fund will receive less than the maturity value
of the notes, pending the outcome of the bankruptcy proceedings. Based on the bankruptcy proceedings, the Fund recorded receivables aggregating $2.9 million based on the estimated amounts recoverable for the notes and recognized realized losses of
$26.8 million. The estimates of the amounts recoverable for the notes are based on the current information regarding the claim provided by the bankruptcy court and any amounts received as payments for the claim, which provide an indication of
amounts recoverable through the bankruptcy proceedings. To date, the Fund has received $3.0 million on
this claim. Any changes to the receivable balances resulting from such adjustments are recorded as a change in unrealized appreciation or depreciation in the Statement of Operations. At June 30,
2013, the value of the receivable balances was approximately $1.9 million, which represented 0.15% of the Funds net assets.
Note 9. Significant
Risks
Large-Capitalization Risk
To
the extent that the Fund invests a substantial percentage of its assets in an industry, the Funds performance may be negatively affected if that industry falls out of favor. Stocks of large-capitalization companies have at times experienced
periods of volatility and negative performance. During such periods, the value of the stocks may decline and the Funds performance may be negatively affected.
Note 10. 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 11. Information Regarding Pending and Settled Legal Proceedings
In December 2005, without admitting or denying the allegations, American Express Financial Corporation (AEFC, which is now known as Ameriprise Financial, Inc. (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.
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
|
|
|
26
|
|
Semiannual Report 2013
|
|
|
|
|
|
Tri-Continental Corporation
|
|
|
Notes to Financial Statements
(continued)
June 30, 2013 (Unaudited)
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.
|
|
|
|
|
Semiannual Report 2013
|
|
|
27
|
|
|
|
|
|
|
|
|
Tri-Continental Corporation
|
Results of Meeting of Stockholders
(Unaudited)
The 83rd Annual Meeting of Stockholders of Tri-Continental Corporation (the Corporation) was held on April 17, 2013. Stockholders voted in favor of each of the two proposals. The description of each
proposal and number of shares voted are as follows:
Proposal 1
To elect two Directors to the Corporations Board, each to hold office until the 2016 Annual Meeting of Stockholders and all until their successors are elected and qualify:
|
|
|
|
|
|
|
|
|
Director
|
|
For
|
|
|
Withheld
|
|
Leroy C. Richie
|
|
|
39,367,764
|
|
|
|
8,229,988
|
|
William F. Truscott
|
|
|
39,402,005
|
|
|
|
8,195,747
|
|
Proposal 2
To
ratify the selection of PricewaterhouseCoopers LLP as the Corporations independent registered public accounting firm for 2013:
|
|
|
|
|
|
|
|
|
For
|
|
Against
|
|
|
Abstain
|
|
42,035,837
|
|
|
3,396,943
|
|
|
|
2,164,976
|
|
|
|
|
28
|
|
Semiannual Report 2013
|
|
|
|
|
|
Tri-Continental Corporation
|
|
|
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 Tri-Continental Corporation (the Corporation). Under an investment management services agreement (the IMS Agreement), Columbia Management provides investment
advice and other services to the Corporation and other funds distributed by Columbia Management Investment Distributors, Inc. (collectively, the Funds).
On an annual basis, the Corporations 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 January, March and April 2013, including reports based on analyses of data provided by an independent organization (Lipper) 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 January, March and
April were first supplied in draft form to designated representatives of the Independent Directors,
i.e.
, Independent Legal Counsel, the Chair of the Board and the Chair of the Contracts Committee, and the final materials (including proposed
additional breakpoints in IMS fees for certain Funds) were revised to reflect discussion and subsequent requests made by the Contracts Committee. In addition, throughout the year, the Board (or its committees) regularly meets with portfolio
management teams and senior management personnel, and reviews information prepared by Columbia Management addressing the services Columbia Management provides and Fund performance. Further, the Board retained an independent consulting firm, Bobroff
Consulting (the Independent Consultant), to assist the Independent Directors in their review of IMS fees, expense caps and Ameriprise Financials profitability. The Board also accords appropriate 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.
The Board, at its April 15-17, 2013 in-person Board meeting (the April Meeting), considered the renewal of the IMS Agreement for an additional one-year term. At the April 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 the 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 recent globalization initiative, which fosters increased worldwide investment support of global products, continued investment in upgrading technology (such as the implementation of new systems and
hardware), the hiring of a Chief Interest Rate Strategist as part of Columbia Managements fixed income team and the addition of Columbia Management investment personnel to the Asset Allocation, Quantitative and Technology teams. The
Independent Directors noted the information they received concerning Columbia Managements ability to retain its key portfolio management personnel. In this regard, the Independent Directors took into account their comprehensive discussions
with Columbia Managements Chief Investment Officer (the CIO), observing the organizational depth of Columbia Management and the capabilities of its investment personnel. The Independent Directors also recalled the information the CIO provided
them identifying the strengths and areas for enhancement of each Columbia Management investment team, as well as the discussion with the CIO regarding the investment personnel talent being infused to enhance support for certain Funds. The
Independent Directors also observed the materials demonstrating the strength and depth of Columbia Managements equity and fixed income research departments.
In connection with the Boards evaluation of the overall package of services provided by Columbia Management, the Board also considered the quality of administrative services provided to the
Corporation by Columbia Management, recalling the information it received highlighting significant achievements in 2012 in the performance of administrative services (such as strong accounting performance measures, refined derivatives processing and
enhancements to the electronic communications under the affiliated and unaffiliated service provider oversight program). In evaluating the quality of services provided under the IMS Agreement and the Corporations Administrative Services
Agreement, the Independent Directors also took into account the organization and strength of the Corporations and its service providers compliance programs. In addition, 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 and the Corporations other services agreements with affiliates of Ameriprise Financial, observing the financial strength
of Ameriprise Financial, with its solid balance sheet. The Board also discussed the
|
|
|
|
|
Semiannual Report 2013
|
|
|
29
|
|
|
|
|
|
|
|
|
Tri-Continental Corporation
|
Approval of Investment Management Services Agreement
(continued)
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 Corporation.
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 Corporation. 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 Corporation, the performance of a benchmark index, the percentage ranking of the
Corporation among its comparison group and the net assets of the Corporation. The Board observed that the Corporations investment performance met expectations.
Comparative Fees, Costs of Services Provided and the Profits Realized by Columbia Management and its Affiliates from their Relationships with the Corporation
The Board reviewed comparative fees and the costs of services to be 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 Corporations expenses with median expenses paid by
funds in its comparative peer universe, as well as data showing the Corporations 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 Fund is no higher than
the median expense ratio of funds in the same comparison universe of the Fund). In this connection, the Board also considered the Independent Consultants report that concluded that the Funds expense cap philosophy of assuring that each
Funds total expense ratio is not above its peer universe median ratio is reasonable. The Board took into account that the Corporations total expense ratio (after considering proposed expense caps/waivers) was below the peer
universes median expense ratio shown in the reports. Based on its review, the Board concluded that the Corporations investment management fee was fair and reasonable in light of the extent and quality of services that the Corporation
receives.
The Board also considered the expected profitability of Columbia Management and its affiliates in connection with Columbia
Management providing investment management services to the Corporation. 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. In this regard, the Board observed that 2012 profitability approximates 2011 profitability and that, as was the case in 2011, 2012 profitability remained generally in line with (and, in many cases, lower than) the reported
profitability of other asset management firms. Further, the Board considered the Independent Consultants report that concluded that Columbia Managements profitability, particularly in comparison to industry competitors, was reasonable
and not excessive. It also took into account 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 Funds 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 Corporations closed-end structure, the Board did not view the potential for realization of economies of scale as the Corporations 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 17, 2013, the Board, including all of the Independent Directors, approved the renewal of the IMS
Agreement.
|
|
|
30
|
|
Semiannual Report 2013
|
|
|
|
|
|
Tri-Continental Corporation
|
|
|
[THIS PAGE
INTENTIONALLY LEFT BLANK]
|
|
|
|
|
Semiannual Report 2013
|
|
|
31
|
|
|
|
|
|
|
|
|
Tri-Continental Corporation
|
[THIS PAGE INTENTIONALLY LEFT BLANK]
|
|
|
32
|
|
Semiannual Report 2013
|
|
|
|
|
|
Tri-Continental Corporation
|
|
|
Important Information About This Report
Each fund mails one stockholder report to each stockholder address. If you
would like more than one report, please call shareholder services at 800.345.6611 and additional reports will be sent to you.
The policy of
the Board is to vote the proxies of the companies in which each fund holds investments consistent with the procedures as stated in the Statement of Additional Information (SAI). You may obtain a copy of the SAI without charge by calling
800.345.6611; contacting your financial intermediary; visiting columbiamanagement.com; or searching the website of the Securities and Exchange Commission (SEC) at sec.gov. Information regarding how each 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 sec.gov.
Each fund files a complete schedule of portfolio holdings with the SEC for the first and third quarters of each
fiscal year on
Form N-Q.
Each funds
Form N-Q
is available on the SECs website at sec.gov and may be reviewed and copied at the SECs Public
Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 800.SEC.0330. Each funds complete schedule of portfolio holdings, as filed on
Form N-Q,
can also be obtained without charge, upon request, by calling 800.345.6611.
|
|
|
|
|
Semiannual Report 2013
|
|
|
33
|
|
Tri-Continental Corporation
P.O. Box 8081
Boston, MA 02266-8081
columbiamanagement.com
You should consider the investment objectives, risks, charges and expenses of the Fund carefully before investing. A prospectus containing information about the Fund (including its investment objectives, risks,
charges, expenses and other information about the Fund) may be obtained by contacting your financial advisor or Columbia Management Investment Services Corp. at 800.345.6611. The prospectus should be read carefully before investing in the Fund.
Tri-Continental is managed by Columbia Management Investment Advisers, LLC. This material is distributed by Columbia Management Investment Distributors, Inc., member FINRA.
© 2013 Columbia Management Investment Advisers, LLC. All rights reserved.
SAR240_12_C01_(08/13)