COLONIAL INTERMEDIATE HIGH INCOME FUND ANNUAL REPORT
OCTOBER 31, 2002
[photo of calculator and newspaper]
President's Message
DEAR SHAREHOLDER:
The high-yield bond market was vulnerable to the same economic, accounting and
management concerns that undermined confidence in the stock market during the
12-month period that ended October 31, 2002. Although high-yield bonds staged a
modest comeback in the fourth quarter of 2001, a string of high-profile
bankruptcies and the highest rate of bankruptcies in more than a decade cut the
group's rally short. Continued uncertainty about the economy and the prospects
for war in Iraq added to investor fears. As investors sought the safety of the
highest quality bonds, high-yield bonds continued to lose ground and the
lowest-quality high-yield bonds were the hardest hit.
We were disappointed in the returns generated by high-yield bonds during the
year. However, based on their yields in comparison to US Treasury bond yields,
we believe these bonds represented attractive relative values by the end of the
fund's fiscal year.
The following report will provide you with detailed information about the fund's
performance and the strategies used by portfolio managers Scott Richards and
Greg Smalley. As always, we thank you for investing in Colonial Intermediate
High Income Fund and for giving us the opportunity to help you build a strong
financial future.
Sincerely,
/s/ Keith T. Banks
Keith T. Banks
President
o NOT FDIC INSURED o MAY LOSE VALUE o NO BANK GUARANTEE
Economic and market conditions change frequently. There is no assurance that
trends described in this report will continue or commence.
PORTFOLIO MANAGERS' REPORT
ANOTHER CHALLENGING YEAR
Colonial Intermediate High Income Fund returned negative 10.94% at net asset
value (NAV) for the fiscal year ended October 31, 2002. The fund's results were
in line with its high-yield closed-end fund peers. The Lipper High Current Yield
Funds (Leveraged) Category Average returned negative 10.58%.1
For the past year, high-yield investors have borne the brunt of continued
concerns about economic weakness, the quality of reported earnings, fraudulent
accounting practices and downgrades of investment-grade bonds by credit rating
agencies. These factors created a volatile investment climate that sharply
reduced your fund's potential earning power. Nevertheless, the fund performed in
line with its peer group, despite having the majority of its assets in the
credit-sensitive B-rated sector. During most of the year, B-rated issues did not
perform as well as higher quality BB securities.
As a closed-end mutual fund, Colonial Intermediate High Income Fund remained
fully invested and leveraged during the fiscal year. In a rising market, this
strategy has had the potential to outperform open-end, high-yield mutual funds.
However, in a declining market it was a drag on performance. As the price of
high-yield bonds declined, we were required to repay borrowed funds in order to
keep the required 3-to-1 ratio of assets versus leverage. At the end of the
period, the fund's dividend yield of 11.61%, was in line with its closed-end
fund peers.
FUNDAMENTAL CREDIT ANALYSIS HELPED MINIMIZE LOSSES
Maintaining a disciplined approach to fundamental credit analysis played a key
role in our investment process, especially during the difficult environment
faced this year. We entered the year overweight in B-rated securities and
underweight in BB-rated bonds, which was consistent with our long-standing
strategy. As economic recovery remained elusive in early 2002, we continued to
sell lower-quality issues and replace them with higher-quality bonds.
Higher-quality bonds held up better as a result of greater cash flow stability
and better liquidity as investor demand for these securities remained high.
-------------
1 Lipper Inc., a widely respected data provider, calculates an average total
return for mutual funds with similar investment objectives.
TOP CORPORATE ISSUES AS OF 10/31/02 (%)
Allied Waste North
American 2.01
----------------------------------
Premier International
Foods 1.93
----------------------------------
Hollywood Casino 1.68
----------------------------------
Sovereign Bancorp 1.61
----------------------------------
K. Hovnanian Enterprises 1.54
----------------------------------
Corporate issues are calculated as a percentage of total investments including
short-term investments.
TOP 5 SECTOR BREAKDOWNS AS OF 10/31/02 (%)
Amusement & recreation 12.9
------------------------------------
Oil & gas extraction 10.5
------------------------------------
Health services 9.7
------------------------------------
Chemicals & allied products 9.6
------------------------------------
Building construction 8.4
------------------------------------
Sector breakdowns are calculated as a percentage of net assets.
Because the fund is actively managed, there can be no guarantee the fund will
continue to hold securities of these issuers or these sectors in the future.
12-MONTH DISTRIBUTIONS
DECLARED PER SHARE AS OF
10/31/02 ($)
0.37
--------------------------------
12-MONTH TOTAL RETURNS,
ASSUMING REINVESTMENT OF
ALL DISTRIBUTIONS (%)
NAV -10.94
--------------------------------
Market price -10.43
--------------------------------
PRICE PER SHARE ON 10/31/02
NAV $2.79
--------------------------------
Market price $2.79
--------------------------------
1
PORTFOLIO MANAGERS' REPORT (CONTINUED)
We also shifted the fund's assets out of the depressed cable sector and into
more stable industries when it became apparent that this sector would generate
sub-par results in 2002. Notable among our dispositions was Adelphia, whose
securities we began selling aggressively upon initial indications that the
company's financial position had been misrepresented. We managed to sell
Adelphia securities at significantly higher values than where they were trading
at the end of the period. We added higher-rated credits such as FMC, American
Greetings and Yum! Brands (0.7%, 0.5% and 1.3% of net assets, respectively)2 to
the portfolio.
We have maintained greater exposure to less economically-sensitive, more stable
industries such as healthcare and food. And we began to add to oil and gas,
gaming, lodging and broadcasting holdings during the second half of the year.
These industries have generally enjoyed stable cash flows that enable them to
make regular income payments on the debt they owe.
COLONIAL INTERMEDIATE HIGH INCOME FUND VS.
LIPPER HIGH CURRENT YIELD FUNDS
(LEVERAGED) CATEGORY AVERAGE
10/31/01-10/31/02
[bar chart data]:
COLONIAL
INTERMEDIATE
HIGH INCOME FUND -10.94%*
LIPPER HIGH
CURRENT YIELD
FUNDS (LEVERAGED)
CATEGORY AVERAGE -10.58
Past performance cannot predict future results. The returns and value of an
investment may vary, resulting in a gain or loss on sale. All results shown
assume reinvestment of distributions.
* Return is computed at net asset value.
Lipper, Inc., a widely respected data provider, calculates an average total
return for mutual funds with similar investment objectives.
------------
2 Holdings are disclosed as of October 31, 2002 and are subject to change.
2
PORTFOLIO MANAGERS' REPORT (CONTINUED)
ECONOMIC OUTLOOK IS MIXED
With no clear direction in the US economy, we believe high-yield bonds could
remain volatile. Although there have been fewer negative surprises, many
industries continue to struggle financially, and banks have made it more
difficult to borrow money, putting additional pressure on borrowers. Until
business prospects improve, we favor the higher quality tiers of the high-yield
bond market. We also plan to acquire lower-rated credits opportunistically. We
will continue to use our fundamental credit analysis to identify attractive
issues backed by solid companies with above-average cash flow prospects.
Sincerely,
/s/ Scott B. Richards /s/ Gregg R. Smalley
Scott B. Richards Gregg R. Smalley
Scott B. Richards and Gregg R. Smalley are portfolio co-managers of the Colonial
Intermediate High Income Fund. Mr. Richards is a senior vice president of
Colonial Management Associates (Colonial). Mr. Smalley is a vice president of
Colonial. Colonial is an affiliate of Columbia Management Group, Inc.
Past performance is no guarantee of future investment results.
Investing in high-yield bonds involves greater credit risk and other risks not
associated with investing in higher-quality bonds. Bond investing also involves
interest rate risk, which means that bond prices may change as interest rates
increase or decrease.
3
INVESTMENT PORTFOLIO
October 31, 2002
CORPORATE FIXED-INCOME
BONDS & NOTES - 134.8% PAR VALUE
-----------------------------------------------------------
CONSTRUCTION - 8.4%
BUILDING CONSTRUCTION - 8.4%
Associated Materials, Inc.,
9.750% 04/15/12 (a) $ 335,000 $ 341,700
Atrium Companies, Inc.,
10.500% 05/01/09 210,000 197,400
D.R. Horton, Inc.,
9.750% 09/15/10 955,000 940,675
KB Home,
8.625% 12/15/08 490,000 492,450
K. Hovnanian Enterprises, Inc.:
8.875% 04/01/12 170,000 146,200
10.500% 10/01/07 1,060,000 1,113,000
Lennar Corp.,
7.625% 03/01/09 525,000 528,937
Ryland Group, Inc.,
9.125% 06/15/11 375,000 393,750
Standard Pacific Corp.,
9.250% 04/15/12 740,000 717,800
-----------
4,871,912
-----------
-----------------------------------------------------------
CONSUMER STAPLES - 0.3%
HOUSEHOLD PRODUCTS - 0.3%
Armkel LLC,
9.500% 08/15/09 180,000 191,700
-----------
-----------------------------------------------------------
FINANCE, INSURANCE & REAL ESTATE - 4.0%
DEPOSITORY INSTITUTIONS - 2.3%
Sovereign Bancorp, Inc.,
10.500% 11/15/06 1,180,000 1,309,800
-----------
FINANCIAL SERVICES - 0.9%
MDP Acquisitions PLC,
9.625% 10/01/12 (a) 525,000 540,750
-----------
INSURANCE AGENTS & BROKERS - 0.5%
Willis Corroon Corp.,
9.000% 02/01/09 295,000 309,750
-----------
REAL ESTATE - 0.3%
iStar Financial, Inc.,
8.750% 08/15/08 185,000 185,000
-----------
-----------------------------------------------------------
MANUFACTURING - 44.1%
APPAREL - 0.4%
William Carter Co.,
10.875% 08/15/11 225,000 243,000
-----------
CHEMICALS & ALLIED PRODUCTS - 9.6%
Avecia Group PLC,
11.000% 07/01/09 840,000 705,600
FMC Corp.,
10.250% 11/01/09 (a) 420,000 431,550
Huntsman ICI Holdings LLC,
(b) 12/31/09 3,975,000 834,750
PAR VALUE
-----------------------------------------------------------
Koppers Industries, Inc.,
9.875% 12/01/07 $ 725,000 $ 696,000
Lyondell Chemical Co.:
9.625% 05/01/07 450,000 429,750
11.125% 07/15/12 475,000 463,125
MacDermid, Inc.,
9.125% 07/15/11 375,000 399,375
Terra Capital, Inc.,
12.875% 10/15/08 910,000 937,300
Texas Petrochemicals Corp.,
11.125% 07/01/06 1,125,000 675,000
-----------
5,572,450
-----------
ELECTRONIC & ELECTRICAL EQUIPMENT - 2.4%
Amphenol Corp.,
9.875% 05/15/07 735,000 757,050
Flextronics International Ltd.,
9.875% 07/01/10 600,000 627,000
-----------
1,384,050
-----------
FABRICATED METAL - 0.7%
Earle M. Jorgensen Co.,
9.750% 06/01/12 425,000 416,500
-----------
FOOD & KINDRED PRODUCTS - 7.7%
Constellation Brands, Inc.,
8.125% 01/15/12 270,000 280,800
Del Monte Corp.,
9.250% 05/15/11 500,000 497,500
Dole Food Co., Inc.,
7.250% 05/01/09 455,000 414,050
Johnsondiversey, Inc.,
9.625% 05/15/12 (a) 500,000 507,500
New World Pasta Co.,
9.250% 02/15/09 275,000 261,250
Premier International Foods PLC,
12.000% 09/01/09 1,500,000 1,575,000
Roundy's Inc.,
8.875% 06/15/12 (a) 410,000 393,600
Smithfield Foods, Inc.,
8.000% 10/15/09 525,000 526,312
-----------
4,456,012
-----------
FURNITURE & FIXTURES - 1.0%
Congoleum Corp.,
8.625% 08/01/08 225,000 184,500
Juno Lighting, Inc.,
11.875% 07/01/09 295,000 297,950
Simmons Co.,
10.250% 03/15/09 100,000 106,000
-----------
588,450
-----------
MEASURING & ANALYZING INSTRUMENTS - 0.7%
Fisher Scientific International, Inc.,
8.125% 05/01/12 375,000 384,375
-----------
See notes to investment portfolio.
4
INVESTMENT PORTFOLIO (CONTINUED)
October 31, 2002
CORPORATE FIXED-INCOME
BONDS & NOTES (CONTINUED) PAR VALUE
-----------------------------------------------------------
MISCELLANEOUS MANUFACTURING - 6.6%
Actuant Corp.,
13.000% 05/01/09 $ 351,000 $ 401,895
AGCO Corp.,
9.500% 05/01/08 400,000 420,000
Applied Extrusion Technologies, Inc.,
10.750% 07/01/11 320,000 182,400
Ball Corp.,
8.250% 08/01/08 250,000 257,500
Dana Corp.:
9.000% 08/15/11 210,000 193,200
10.125% 03/15/10 200,000 194,000
Flowserve Corp.,
12.250% 08/15/10 361,000 380,855
JLG Industries, Inc.,
8.375% 06/15/12 245,000 176,400
Owens-Illinois, Inc.:
7.150% 05/15/05 150,000 142,500
7.500% 05/15/10 600,000 534,000
Tekni-Plex, Inc.,
12.750% 06/15/10 915,000 823,500
Terex Corp.,
10.375% 04/01/11 145,000 130,500
-----------
3,836,750
-----------
PAPER PRODUCTS - 1.6%
Corp. Durango SA de CV,
13.125% 08/01/06 525,000 333,375
Jefferson Smurfit Corp.,
8.250% 10/01/12 (a) 250,000 251,250
Tembec Industries, Inc.,
8.500% 02/01/11 350,000 353,500
-----------
938,125
-----------
PRIMARY METAL - 2.7%
AK Steel Corp.,
7.750% 06/15/12 (a) 270,000 264,600
Bayou Steel Corp.,
9.500% 05/15/08 1,000,000 450,000
Kaiser Aluminum & Chemical Corp.,
10.875% 10/15/06 (c) 780,000 468,000
Oregon Steel Mills, Inc.,
10.000% 07/15/09 (a) 205,000 205,000
WCI Steel, Inc.,
10.000% 12/01/04 665,000 146,300
Wheeling-Pittsburgh Corp.,
9.250% 11/15/07 (c) 2,000,000 60,000
-----------
1,593,900
-----------
PRINTING & PUBLISHING - 5.1%
American Greetings Corp.,
11.750% 07/15/08 255,000 272,850
Dex Media East LLC,
12.125% 11/15/12 (a) 430,000 441,825
PriMedia, Inc.,
8.875% 05/15/11 445,000 378,250
Quebecor Media, Inc.,
11.125% 07/15/11 925,000 656,750
PAR VALUE
-----------------------------------------------------------
Von Hoffman Corp.,
10.250% 03/15/09 $ 495,000 $ 455,400
Yell Finance BV,
10.750% 08/01/11 750,000 750,000
-----------
2,955,075
-----------
STONE, CLAY, GLASS & CONCRETE - 0.8%
Anchor Glass Container Corp.,
11.250% 04/01/05 (c) 500,000 472,500
-----------
TRANSPORTATION EQUIPMENT - 4.8%
BE Aerospace, Inc.,
8.875% 05/01/11 575,000 372,313
Collins & Aikman Products Co.,
10.750% 12/31/11 725,000 667,000
Dura Operating Corp.,
8.625% 04/15/12 345,000 332,925
Lear Corp.,
8.110% 05/15/09 500,000 522,500
Newcor, Inc.,
9.875% 03/01/08 (c) 1,170,000 210,600
Pennzoil-Quaker State Co.,
10.000% 11/01/08 460,000 542,800
Sequa Corp.,
8.875% 04/01/08 200,000 166,000
-----------
2,814,138
-----------
-----------------------------------------------------------
MINING & ENERGY - 11.2%
METAL MINING - 0.6%
TriMas Corp.,
9.875% 06/15/12 (a) 340,000 323,000
-----------
OIL & GAS EXTRACTION - 10.1%
Benton Oil & Gas Co.,
9.375% 11/01/07 485,000 452,263
Compton Petroleum Corp.,
9.900% 05/15/09 (a) 325,000 340,073
Denbury Management, Inc.,
9.000% 03/01/08 125,000 126,250
El Paso Energy Partners LP,
8.500% 06/01/11 (a) 165,000 148,088
Encore Acquisition Co.,
8.375% 06/15/12 (a) 325,000 328,250
Forest Oil Corp.,
8.000% 06/15/08 400,000 424,000
Magnum Hunter Resources, Inc.,
10.000% 06/01/07 925,000 966,625
Mariner Energy, Inc.,
10.500% 08/01/06 690,000 641,700
Petsec Energy, Inc.,
9.500% 06/15/07 (d) 2,000,000 20,000
Pioneer Natural Resources Co.:
7.500% 04/15/12 105,000 110,775
9.625% 04/01/10 10,000 11,600
See notes to investment portfolio.
5
INVESTMENT PORTFOLIO (CONTINUED)
October 31, 2002
CORPORATE FIXED-INCOME
BONDS & NOTES (CONTINUED) PAR VALUE
-----------------------------------------------------------
MINING & ENERGY (CONTINUED)
OIL & GAS EXTRACTION (CONTINUED)
Pogo Producing Co.,
8.250% 04/15/11 $ 965,000 $ 1,003,600
Stone Energy Corp.,
8.250% 12/15/11 220,000 223,300
Trico Marine Services, Inc.,
8.875% 05/15/12 275,000 222,750
XTO Energy, Inc.,
7.500% 04/15/12 800,000 844,000
-----------
5,863,274
-----------
OIL & GAS FIELD SERVICES - 0.5%
Newpark Resources, Inc.,
8.625% 12/15/07 290,000 274,050
-----------
-----------------------------------------------------------
RETAIL TRADE - 3.8%
FOOD STORES - 0.8%
Pathmark Stores, Inc.,
8.750% 02/01/12 200,000 170,000
Winn-Dixie Stores, Inc.,
8.875% 04/01/08 310,000 306,900
-----------
476,900
-----------
MISCELLANEOUS RETAIL - 1.7%
JC Penney Co., Inc.,
9.000% 08/01/12 (a) 450,000 423,000
Steinway Musical Instruments, Inc.,
8.750% 04/15/11 550,000 544,500
-----------
967,500
-----------
RESTAURANTS - 1.3%
Yum! Brands, Inc.:
7.700% 07/01/12 305,000 315,675
8.875% 04/15/11 395,000 426,600
-----------
742,275
-----------
-----------------------------------------------------------
SERVICES - 27.8%
AMUSEMENT & RECREATION - 12.9%
Ameristar Casinos, Inc.,
10.750% 02/15/09 400,000 430,000
Argosy Gaming Co.,
10.750% 06/01/09 335,000 368,500
Boyd Gaming Corp.,
9.500% 07/15/07 250,000 253,750
Circus-Circus & Eldorado/Silver Legacy,
10.125% 03/01/12 455,000 450,450
Coast Hotels & Casinos, Inc.,
9.500% 04/01/09 500,000 522,500
Hollywood Casino Corp.,
11.250% 05/01/07 400,000 432,000
Hollywood Casino Shreveport,
13.000% 08/01/06 900,000 936,000
Hollywood Park, Inc.,
9.500% 08/01/07 1,000,000 840,000
Majestic Investor Holdings,
11.653% 11/30/07 225,000 195,750
PAR VALUE
-----------------------------------------------------------
Mohegan Tribal Gaming Authority,
8.000% 04/01/12 $ 500,000 $ 512,500
Penn National Gaming, Inc.,
11.125% 03/01/08 1,050,000 1,123,500
Regal Cinemas, Inc.,
9.375% 02/01/12 600,000 627,000
Riviera Holdings Corp.,
11.000% 06/15/10 (a) 30,000 27,300
Six Flags, Inc.,
9.500% 02/01/09 485,000 438,925
Venetian Casino Resort LLC,
11.000% 06/15/10 (a) 325,000 333,125
-----------
7,491,300
-----------
AUTO EQUIPMENT & RENTAL SERVICES - 0.8%
United Rentals, Inc.:
8.800% 08/15/08 325,000 230,750
9.500% 06/01/08 275,000 203,500
-----------
434,250
-----------
FUNERAL SERVICES - 2.0%
Service Corp. International,
7.700% 04/15/09 875,000 739,375
Stewart Enterprises, Inc.,
10.750% 07/01/08 400,000 434,000
-----------
1,173,375
-----------
HEALTH SERVICES - 9.7%
Alliance Imaging, Inc.,
10.375% 04/15/11 415,000 429,525
AmerisourceBergen Corp.,
8.125% 09/01/08 330,000 351,450
Bio-Rad Laboratories, Inc.,
11.625% 02/15/07 600,000 669,000
Coventry Health Care, Inc.,
8.125% 02/15/12 525,000 540,750
HCA, Inc.,
8.750% 09/01/10 670,000 752,035
InSight Health Services Corp.,
9.875% 11/01/11 675,000 644,625
Magellan Health Services, Inc.:
9.000% 02/15/08 790,000 134,300
9.375% 11/15/07 (a) 385,000 227,150
MedQuest Inc.,
11.875% 08/15/12 (a) 500,000 492,500
PacifiCare Health Systems, Inc.,
10.750% 06/01/09 210,000 216,300
Radiologix, Inc.,
10.500% 12/15/08 400,000 396,000
Res-Care, Inc.,
10.625% 11/15/08 455,000 364,000
United Surgical Partners International, Inc.,
10.000% 12/15/11 400,000 396,000
Vanguard Health Systems, Inc.,
9.750% 08/01/11 55,000 51,150
-----------
5,664,785
-----------
See notes to investment portfolio.
6
INVESTMENT PORTFOLIO (CONTINUED)
October 31, 2002
CORPORATE FIXED-INCOME
BONDS & NOTES (CONTINUED) PAR VALUE
-----------------------------------------------------------
HOTELS, CAMPS & LODGING - 2.4%
Host Marriott LP,
9.500% 01/15/07 $ 800,000 $ 796,000
Starwood Hotels & Resorts Worldwide, Inc.,
7.875% 05/01/12 (a) 625,000 595,313
-----------
1,391,313
-----------
-----------------------------------------------------------
TRANSPORTATION, COMMUNICATIONS, ELECTRIC,
GAS & SANITARY SERVICES - 34.5%
AEROSPACE - 2.3%
L-3 Communications Corp.,
7.625% 06/15/12 450,000 465,750
TransDigm, Inc.,
10.375% 12/01/08 850,000 867,000
-----------
1,332,750
-----------
AIR TRANSPORTATION - 1.8%
Northwest Airlines, Inc.,
9.875% 03/15/07 615,000 264,450
U.S. Airways, Inc.,
10.375% 03/01/13 (c) 1,600,000 800,000
-----------
1,064,450
-----------
BROADCASTING - 7.5%
Advanstar Communications, Inc.,
12.000% 02/15/11 500,000 300,000
Allbritton Communications Co.,
9.750% 11/30/07 600,000 621,000
CanWest Media, Inc.,
10.625% 05/15/11 500,000 532,500
Corus Entertainment, Inc.,
8.750% 03/01/12 200,000 205,000
Cumulus Media, Inc.,
10.375% 07/01/08 225,000 237,938
Emmis Communications Corp.,
(e) 03/15/11
(12.500% 03/15/06) 561,000 440,385
LIN Holdings Corp.,
(e) 03/01/08
(10.000% 03/01/03) 725,000 736,781
Sinclair Broadcast Group, Inc.,
8.750% 12/15/11 600,000 630,000
TV Azteca SA de CV,
10.500% 02/15/07 745,000 670,500
-----------
4,374,104
-----------
CABLE - 6.4%
Cable Satisfaction International, Inc.,
12.750% 03/01/10 595,000 190,400
Charter Communications Holdings LLC:
(e) 04/01/11
(9.920% 04/01/04) 795,000 246,450
10.000% 04/01/09 325,000 139,750
10.750% 10/01/09 275,000 121,688
11.125% 01/15/11 675,000 298,687
Comcast UK Cable Partners Ltd.,
11.200% 11/15/07 750,000 540,000
PAR VALUE
-----------------------------------------------------------
Diamond Cable Communications PLC,
10.750% 02/15/07 (c) $1,085,000 $ 75,950
EchoStar DBS Corp.,
9.250% 02/01/06 1,005,000 1,015,050
Insight Communications Co., Inc.,
(e) 02/15/11
(12.250% 02/15/06) 770,000 292,600
Northland Cable Television, Inc.,
10.250% 11/15/07 1,350,000 783,000
-----------
3,703,575
-----------
COMMUNICATIONS - 0.6%
XM Satellite Radio Holdings, Inc.,
14.000% 03/15/10 830,000 340,300
-----------
COMMUNICATIONS SERVICES - 0.9%
Crown Castle International Corp.:
(e) 05/15/11
(10.375% 05/15/04) 250,000 132,500
10.750% 08/01/11 250,000 191,250
SBA Communications Corp.,
10.250% 02/01/09 440,000 211,200
-----------
534,950
-----------
ELECTRIC, GAS & SANITARY SERVICES - 3.8%
Allied Waste North America, Inc.:
8.500% 12/01/08 475,000 465,500
10.000% 08/01/09 1,215,000 1,170,956
HydroChem Industrial Services, Inc.,
10.375% 08/01/07 750,000 562,500
-----------
2,198,956
-----------
ELECTRIC SERVICES - 4.1%
AES Corp.,
9.500% 06/01/09 450,000 198,000
Beaver Valley Funding Corp.,
9.000% 06/01/17 590,000 593,198
Caithness Coso Funding Corp.,
9.050% 12/15/09 582,754 559,444
Calpine Corp.,
8.500% 02/15/11 875,000 280,000
Nevada Power Co.,
10.875% 10/15/09 (a) 260,000 248,123
PSE&G Energy Holdings, Inc.,
8.625% 02/15/08 395,000 260,700
Western Resources, Inc.,
7.875% 05/01/07 275,000 266,750
-----------
2,406,215
-----------
MOTOR FREIGHT & WAREHOUSING - 0.6%
QDI LLC:
12.000% 06/15/09 (a) 150,687 22,603
12.500% 06/15/08 (a) 651,000 325,500
-----------
348,103
-----------
POLLUTION CONTROL - 0.5%
EnviroSource, Inc.,
14.000% 12/15/08 318,192 286,373
-----------
See notes to investment portfolio.
7
INVESTMENT PORTFOLIO (CONTINUED)
October 31, 2002
CORPORATE FIXED-INCOME
BONDS & NOTES (CONTINUED) PAR VALUE
-----------------------------------------------------------
TRANSPORTATION, COMMUNICATIONS, ELECTRIC,
GAS & SANITARY SERVICES (CONTINUED)
RADIOTELEPHONE COMMUNICATIONS - 2.2%
AirGate PCS, Inc.,
(e) 10/01/09
(13.500% 10/01/04) $ 399,000 $ 31,920
Nextel Communications, Inc.,
9.375% 11/15/09 870,000 748,200
Nextel Partners, Inc.,
11.000% 03/15/10 90,000 67,500
Rogers Cantel, Inc.,
9.750% 06/01/16 450,000 337,500
US Unwired, Inc.,
(e) 11/01/09
(13.375% 11/01/04) 800,000 64,000
-----------
1,249,120
-----------
RAILROAD - 1.3%
Kansas City Southern Railway Co.,
7.500% 06/15/09 365,000 377,319
TFM SA de CV,
12.500% 06/15/12 (a) 380,000 371,450
-----------
748,769
-----------
TELECOMMUNICATIONS - 1.6%
AT&T Wireless Services, Inc.,
7.875% 03/01/11 335,000 291,450
Carrier 1 International SA,
13.250% 02/15/09 (c) 750,000 22,500
Horizon PCS, Inc.,
13.750% 06/15/11 415,000 78,850
Ono Finance PLC,
(b) 12/31/09 175 2
RCN Corp.,
11.125% 10/15/07 750,000 135,000
Time Warner Telecom, Inc.:
9.750% 07/15/08 470,000 211,500
10.125% 02/01/11 405,000 186,300
-----------
925,602
-----------
TRANSPORTATION SERVICES - 0.9%
Petroleum Helicopters, Inc.,
9.375% 05/01/09 530,000 553,850
-----------
-----------------------------------------------------------
WHOLESALE TRADE - 0.7%
DURABLE GOODS - 0.7%
Playtex Products, Inc.,
9.375% 06/01/11 380,000 404,700
-----------
TOTAL CORPORATE FIXED-INCOME
BONDS & NOTES
(cost of $97,869,781) 78,338,076
-----------
PREFERRED STOCKS - 2.4% SHARES VALUE
-----------------------------------------------------------
TRANSPORTATION, COMMUNICATIONS, ELECTRIC,
GAS & SANITARY SERVICES - 2.4%
BROADCASTING - 0.6%
Granite Broadcasting Corp.,
12.750% 1 $ 629
Sinclair Broadcast Group, Inc.
11.625% 3,250 340,031
-----------
340,660
-----------
CABLE - 1.6%
CSC Holdings Ltd.:
11.125% 7,681 460,847
11.750% 7,979 478,726
-----------
939,573
-----------
COMMUNICATIONS - 0.1%
Dobson Communication Corp.,
12.250% PIK 161 35,394
-----------
POLLUTION CONTROL - 0.1%
EnviroSource, Inc.,
7.250% 2,000 92,593
-----------
TELECOMMUNICATIONS - 0.0%
XO Communications, Inc.:
13.500% PIK (c) 789 1
14.000% PIK (c) 28,520 285
-----------
286
-----------
TOTAL PREFERRED STOCKS
(cost of $4,694,840) 1,408,506
-----------
COMMON STOCKS - 0.5% (F)
-----------------------------------------------------------
MINING & ENERGY - 0.4%
OIL & GAS EXTRACTION - 0.4%
Pioneer Natural Resources Co. 8,153 202,765
-----------
-----------------------------------------------------------
TRANSPORTATION, COMMUNICATIONS, ELECTRIC,
GAS & SANITARY SERVICES - 0.1%
POLLUTION CONTROL - 0.0%
EnviroSource, Inc. 8,000 1,840
Fairlane Management Corp. (g) 8,000 --
-----------
1,840
-----------
RADIOTELEPHONE COMMUNICATIONS - 0.1%
AirGate PCS, Inc. 1 0
Nextel Communications, Inc., Class A 6,196 69,891
-----------
69,891
-----------
TOTAL COMMON STOCKS
(cost of $359,856) 274,496
-----------
See notes to investment portfolio.
8
INVESTMENT PORTFOLIO (CONTINUED)
October 31, 2002
WARRANTS - 0.0% (F) UNITS VALUE
-----------------------------------------------------------
TRANSPORTATION, COMMUNICATIONS, ELECTRIC,
GAS & SANITARY SERVICES - 0.0%
CABLE - 0.0%
Cable Satisfaction International, Inc.,
Expires 03/01/05 970 $ 485
-----------
COMMUNICATIONS - 0.0%
UbiquiTel Operating Co.,
Expires 04/15/10 (a) 525 5
XM Satellite Radio Holdings, Inc.,
Expires 03/15/10 (a) 600 450
-----------
455
-----------
TELECOMMUNICATIONS - 0.0%
Carrier 1 International SA,
Expires 02/19/09 (a) 347 3
Horizon PCS, Inc.,
Expires 10/01/10 (a) 665 7
Jazztel PLC,
Expires 07/15/10 (a) 350 0
MetroNet Communications Corp.,
Expires 08/15/07 (a) 250 16,902
Ono Finance PLC,
Expires 05/31/09 (a) 750 1
-----------
16,913
-----------
MOTOR FREIGHT & WAREHOUSING - 0.0%
QDI, LLC,
Expires 01/15/07 (a) 2,041 0
-----------
TOTAL WARRANTS
(cost of $94,214) 17,853
-----------
SHORT-TERM OBLIGATION - 2.5% PAR
-----------------------------------------------------------
Federal Home Loan Bank,
1.690% 11/01/02 (h)
(cost of $1,464,000) $1,464,000 1,464,000
-----------
TOTAL INVESTMENTS - 140.2%
(cost of $104,494,214) (i) 81,502,931
-----------
OTHER ASSETS & LIABILITIES, NET - (40.2)% (23,368,681)
-----------------------------------------------------------
Net Assets - 100.0% $58,134,250
-----------
NOTES TO INVESTMENT PORTFOLIO:
--------------------------------------------------------------------------------
(a) This security is exempt from registration under Rule 144A of the Securities
Act of 1933 and may be resold in transactions exempt from registration,
normally to qualified institutional buyers. At October 31, 2002, the value
of these securities amounted to $7,600,618 or 13.1% of net assets.
(b) Zero coupon bond.
(c) As of October 31, 2002, the Fund held securities of certain issuers that
have filed for bankruptcy protection under Chapter 11.
(d) This issuer is in default of certain debt covenants. Income is not being
accrued.
(e) Stepped coupon bond. Currently accruing at zero. Shown parenthetically is
the next interest rate to be paid and the date the Fund will begin accruing
this rate.
(f) Non-income producing.
(g) Represents fair value as determined in good faith under the direction of
the Board of Trustees.
(h) Rate represents yield at date of purchase.
(i) Cost for generally accepted accounting principles is $104,494,214. Cost for
federal income tax purposes is $104,191,282. The difference between cost
for generally accepted accounting principles and cost on a tax basis is
related to timing differences and amortization/accretion tax elections on
fixed-income securities. Realized losses have been deferred for tax
purposes and cost adjusted accordingly.
ACRONYM NAME
-----------------------------------------------------
PIK Payment-In-Kind
See notes to financial statements.
9
STATEMENT OF ASSETS AND LIABILITIES
October 31, 2002
ASSETS:
Investments, at cost $104,494,214
-------------
Investments, at value $ 81,502,931
Cash 51,578
Receivable for:
Investments sold 317,375
Interest 2,401,873
Deferred Trustees' compensation plan 4,928
-------------
Total Assets 84,278,685
-------------
LIABILITIES:
Payable for:
Interest 558,484
Investments purchased 433,625
Distributions 562,205
Management fee 32,400
Pricing and bookkeeping fees 1,522
Trustees' fee 41
Deferred Trustees' fee 4,928
Other liabilities 51,230
Notes payable - short-term 14,800,000
Notes payable - long-term 9,700,000
-------------
Total Liabilities 26,144,435
-------------
NET ASSETS $ 58,134,250
-------------
COMPOSITION OF NET ASSETS:
Paid-in capital $143,310,995
Overdistributed net investment income (401,061)
Accumulated net realized loss (61,784,401)
Net unrealized depreciation on investments (22,991,283)
-------------
NET ASSETS $ 58,134,250
-------------
Shares outstanding 20,822,420
-------------
Net asset value per share $ 2.79
-------------
STATEMENT OF OPERATIONS
For the Year Ended October 31, 2002
INVESTMENT INCOME:
Interest $ 10,137,773
Dividends 481,486
-------------
Total Investment Income
(net of foreign taxes withheld of $1,651) 10,619,259
-------------
EXPENSES:
Management fee 645,271
Pricing and bookkeeping fees 44,825
Trustees' fee 8,747
Custody fee 8,277
Other expenses 157,379
-------------
Total Operating Expenses 864,499
Custody earnings credit (1,123)
-------------
Net Operating Expenses 863,376
Interest expense 1,889,585
-------------
Net Expenses 2,752,961
-------------
Net Investment Income 7,866,298
-------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS AND FOREIGN CURRENCY
Net realized loss on:
Investments (23,338,320)
Foreign currency transactions (75,278)
-------------
Net realized loss (23,413,598)
-------------
Net change in unrealized appreciation/
depreciation on:
Investments 8,409,133
Foreign currency translations 28,117
-------------
Net change in unrealized
appreciation/depreciation 8,437,250
-------------
Net Loss (14,976,348)
-------------
Net Decrease in Net Assets from Operations $ (7,110,050)
-------------
See notes to financial statements.
10
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED OCTOBER 31,
----------------------------------
INCREASE (DECREASE) IN NET ASSETS: 2002 2001
-------------------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Net investment income $ 7,866,298 $ 10,377,445
Net realized loss on investments and foreign currency transactions (23,413,598) (22,676,787)
Net change in unrealized appreciation/depreciation on investments
and foreign currency translations 8,437,250 (3,228,586)
------------ ------------
Net Decrease from Operations (7,110,050) (15,527,928)
------------ ------------
DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (7,465,282) (11,322,543)
Return of capital (297,562) (394,928)
------------ ------------
Total Distributions Declared to Shareholders (7,762,844) (11,717,471)
------------ ------------
SHARE TRANSACTIONS:
Distributions reinvested 653,667 1,265,931
------------ ------------
Total Decrease in Net Assets (14,219,227) (25,979,468)
NET ASSETS:
Beginning of period 72,353,477 98,332,945
------------ ------------
End of period (including overdistributed net investment income
of $(401,061) and $(1,027,990), respectively) $ 58,134,250 $ 72,353,477
============ ============
CHANGES IN SHARES:
Issued for distributions reinvested 184,393 272,635
============ ============
See notes to financial statements.
11
STATEMENT OF CASH FLOWS
For the Year Ended October 31, 2002
INCREASE (DECREASE) IN CASH:
---------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net investment income $ 7,866,298
Adjustments to reconcile net investment income
to net cash provided by operating activities:
Purchase of investment securities (49,945,586)
Proceeds from disposition of investment securities 53,785,870
Sale of short-term investments, net 2,279,042
Net realized gain due to foreign currency transactions 779
Decrease in interest and dividend receivable 391,272
Decrease in other assets 15,179
Net realized loss from forward currency contracts (76,057)
Decrease in receivable for investments sold 847,178
Decrease in payable for investments purchased (676,874)
Decrease in accrued expenses and other liabilities (44,912)
Net amortization/accretion of income (1,264,612)
-----------
Net cash provided by operating activities 13,177,577
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in notes payable (6,000,000)
Decrease in interest payable (105,665)
Distributions paid in cash (7,290,795)
-----------
Net cash used by financing activities (13,396,460)
-----------
Net decrease in cash (218,883)
CASH:
Beginning of period 270,461
-----------
End of period $ 51,578
===========
Supplemental disclosure of cash flow information:
Non-cash financing activities not included in this statement consist of
reinvestment of distributions of $653,667.
See notes to financial statements.
12
NOTES TO FINANCIAL STATEMENTS
October 31, 2002
NOTE 1. ACCOUNTING POLICIES
ORGANIZATION:
Colonial Intermediate High Income Fund (the "Fund") is a Massachusetts business
trust registered under the Investment Company Act of 1940, as amended, as a
diversified, closed-end management investment company. The Fund's investment
goal is to seek high current income and total return by investing primarily in
lower-rated corporate debt securities. The Fund is authorized to issue an
unlimited number of shares.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates. The following is a summary of
significant accounting policies consistently followed by the Fund in the
preparation of its financial statements.
SECURITY VALUATION AND TRANSACTIONS:
Debt securities generally are valued by a pricing service based upon market
transactions for normal, institutional-size trading units of similar securities.
When management deems it appropriate, an over-the-counter or exchange bid
quotation is used.
Equity securities generally are valued at the last sale price or, in the case of
unlisted or listed securities for which there were no sales during the day, at
the current quoted bid price.
Forward currency contracts are valued based on the weighted value of
exchange-traded contracts with similar durations.
Short-term obligations with a maturity of 60 days or less are valued at
amortized cost.
Investments for which market quotations are not readily available, or quotations
which management believes are not appropriate, are valued at fair value under
procedures approved by the Board of Trustees.
Security transactions are accounted for on the date the securities are
purchased, sold or mature.
Cost is determined and gains (losses) are based upon the specific identification
method for both financial statement and federal income tax purposes.
The Fund may trade securities on other than normal settlement terms. This may
increase the risk if the other party to the transaction fails to deliver and
causes the Fund to subsequently invest at less advantageous prices.
STATEMENT OF CASH FLOWS:
Information on financial transactions which have been settled through the
receipt or disbursement of cash is presented in the Statement of Cash Flows. The
cash amount shown in the Statement of Cash Flows is the amount included in the
Fund's Statement of Assets and Liabilities and represents cash on hand at its
custodian bank account and does not include any short-term investments at
October 31, 2002.
FEDERAL INCOME TAXES:
Consistent with the Fund's policy to qualify as a regulated investment company
and to distribute all of its taxable income, no federal income tax has been
accrued.
INTEREST INCOME, DEBT DISCOUNT AND PREMIUM:
Interest income is recorded on the accrual basis.
The value of additional securities received as an interest payment is recorded
as income and as the cost basis of such securities. Effective November 1, 2001,
the Fund adopted the provisions of the AICPA Audit and Accounting Guide for
Investment Companies and began amortizing and accreting premium and discount on
all debt securities. The cumulative effect of this accounting change did not
impact total net assets of the Fund, but resulted in reclassifications as
follows, based on securities held by the Fund on November 1, 2001:
NET UNREALIZED
COST DEPRECIATION
----------------- -----------------------
$371,801 $(371,801)
The effect of this change, for the year ended October 31, 2002, was as follows:
NET INVESTMENT NET REALIZED NET UNREALIZED
INCOME LOSS DEPRECIATION
----------------- ----------------- -----------------
$319,580 $(323,835) $4,255
The Statement of Changes in Net Assets and Financial Highlights for prior
periods have not been restated to reflect this change.
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions to shareholders are recorded on the ex-date.
FOREIGN CURRENCY TRANSACTIONS:
Net realized and unrealized gains (losses) on foreign currency transactions
include gains (losses) arising from the fluctuation in exchange rates between
trade and settlement dates on securities transactions, gains (losses) arising
from the disposition of foreign currency and currency gains (losses) between the
accrual and payment dates on dividends and interest income and foreign
withholding taxes.
The Fund does not distinguish that portion of gains (losses) on investments
which is due to changes in foreign exchange rates from that which is due to
changes in market prices of the investments. Such fluctuations are included with
the net realized and unrealized gains (losses) from investments.
FORWARD CURRENCY CONTRACTS:
The Fund may enter into forward currency contracts to purchase or sell foreign
currencies at predetermined exchange rates in connection with the settlement of
purchases and sales
13
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
October 31, 2002
of securities. The Fund may also enter into forward currency contracts to hedge
certain other foreign currency denominated assets. The contracts are used to
minimize the exposure to foreign exchange rate fluctuations during the period
between trade and settlement date of the contracts. All contracts are
marked-to-market daily, resulting in unrealized gains (losses) which become
realized at the time the forward currency contracts are closed or mature.
Realized and unrealized gains (losses) arising from such transactions are
included in net realized and unrealized gains (losses) on foreign currency
transactions. Forward currency contracts do not eliminate fluctuations in the
prices of the Fund's portfolio securities. While the maximum potential loss from
such contracts is the aggregate face value in U.S. dollars at the time the
contract was opened, exposure is typically limited to the change in value of the
contract (in U.S. dollars) over the period it remains open. Risks may also arise
if counterparties fail to perform their obligations under the contracts.
OTHER:
Corporate actions and dividend income are recorded on the ex-date (except for
certain foreign securities which are recorded as soon after ex-date as the Fund
becomes aware of such), net of non-reclaimable tax withholdings. Where a high
level of uncertainty as to collection exists, income on securities is recorded
net of all tax withholdings with any rebates recorded when received.
The Fund's custodian takes possession through the federal book-entry system of
securities collateralizing repurchase agreements. Collateral is marked-to-market
daily to ensure that the market value of the underlying assets remains
sufficient to protect the Fund. The Fund may experience costs and delays in
liquidating the collateral if the issuer defaults or enters bankruptcy.
NOTE 2. FEDERAL TAX INFORMATION
Income and capital gain distributions are determined in accordance with income
tax regulations, which may differ from generally accepted accounting principles.
These differences are primarily due to differing treatments for deferral of
losses from wash sales, discount accretion/premium amortization on debt
securities, current year distribution payable, capital loss carryforwards,
non-deductible expenses and defaulted bonds. Reclassifications are made to the
Fund's capital accounts to reflect income and gains available for distribution
(or available capital loss carryforwards) under income tax regulations.
For the year ended October 31, 2002, permanent items identified and reclassified
among the components of net assets are as follows:
OVERDISTRIBUTED ACCUMULATED
NET INVESTMENT NET REALIZED PAID-IN
INCOME LOSS CAPITAL
----------------- ----------------- -----------------
$(145,888) $145,888 $--
Net investment income, net realized gains (losses) and net assets were not
affected by this reclassification. The tax character of distributions paid
during the year was as follows:
TAX
ORDINARY INCOME RETURN OF CAPITAL
----------------- -----------------
$7,465,282 $297,562
As of October 31, 2002, the components of distributable earnings on a tax basis
were as follows:
UNREALIZED
DEPRECIATION*
-----------------
$(22,688,351)
*The difference between book-basis and tax-basis unrealized depreciation is
attributable primarily to the tax deferral of losses on wash sales.
The following capital loss carryforwards are 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 CAPITAL LOSS
EXPIRATION CARRYFORWARD
----------------- -----------------------
2003 $ 2,102,577
2007 3,282,077
2008 10,437,671
2009 22,694,029
2010 23,203,433
-------------
$61,719,787
-------------
3. FEES AND COMPENSATION PAID TO AFFILIATES
MANAGEMENT FEE:
Colonial Management Associates, Inc. (the "Advisor") is the investment advisor
of the Fund and furnishes accounting and other services and office facilities
for a fee to be paid monthly at the annual rate of 0.65% of the average weekly
net assets of the Fund.
In addition, the Fund shall pay the Advisor monthly a fee equal to 20% of the
Fund's monthly "leverage income" (as that term is defined in the management
contract); provided, however, if the Fund's monthly leverage income is less than
zero then the Advisor shall pay the Fund 20% of the Fund's monthly leverage
income. For the year ended October 31, 2002, the fee paid to the Advisor under
this agreement amounted to $195,862, which represents 0.28% annually of the
Fund's average daily net assets.
14
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
October 31, 2002
PRICING AND BOOKKEEPING FEES:
The Advisor is responsible for providing pricing and bookkeeping services to the
Fund under a Pricing and Bookkeeping Agreement. Under a separate agreement (the
"Outsourcing Agreement"), the Advisor has delegated those functions to State
Street Bank and Trust Company ("State Street"). The Advisor pays fees to State
Street under the Outsourcing Agreement.
Under its pricing and bookkeeping agreement with the Fund, the Advisor receives
from the Fund an annual flat fee of $10,000, paid monthly, and in any month that
the Fund's average net assets are more than $50 million, a monthly fee equal to
the average net assets of the Fund for that month multiplied by a fee rate that
is calculated by taking into account the fees payable to State Street under the
Outsourcing Agreement. For the year ended October 31, 2002, the net asset based
fee rate was 0.036%. The Fund also pays out-of-pocket costs for pricing
services.
OTHER:
The Fund pays no compensation to its officers, all of whom are employees of the
Advisor or its affiliates. The Fund's Independent Trustees may participate in a
deferred compensation plan which may be terminated at any time. Obligations of
the plan will be paid solely out of the Fund's assets.
The Fund has an agreement with its custodian bank under which $1,123 of custody
fees were reduced by balance credits for the year ended October 31, 2002. The
Fund could have invested a portion of the assets utilized in connection with the
expense offset arrangement in an income-producing asset if it had not entered
into such an agreement.
NOTE 4. PORTFOLIO INFORMATION
INVESTMENT ACTIVITY:
For the year ended October 31, 2002, purchases and sales of investments, other
than short-term obligations, were $49,945,586 and $53,785,870, respectively.
Unrealized appreciation (depreciation) at October 31, 2002, based on cost of
investments for federal income tax purposes, was:
Gross unrealized appreciation $ 1,721,556
Gross unrealized depreciation (24,409,907)
------------
Net unrealized depreciation $(22,688,351)
------------
OTHER:
There are certain additional risks involved when investing in foreign securities
that are not inherent with investments in domestic securities. These risks may
involve foreign currency exchange rate fluctuations, adverse political and
economic developments and the possible prevention of currency exchange or other
foreign governmental laws or restrictions.
The Fund may focus its investments in certain industries, subjecting it to
greater risk than a fund that is more diversified.
NOTE 5. LOAN AGREEMENT
At October 31, 2002, the Fund had two term loans and a revolver loan outstanding
with Bank of America NA, totaling $24,500,000. These loans are comprised of a
$13,700,000 term loan which bears interest at 7.74% per annum, due June 12,
2003, a $1,100,000 term loan which bears interest at 4.75% per annum, due June
12, 2003 and a $9,700,000 revolver loan which bears interest at 4.37% per annum,
due June 13, 2004. The average daily loan balance was $28,763,014 at a weighted
average interest rate of 6.57%. The Fund is subject to certain covenants
including, but not limited to, requirements with respect to asset coverage,
portfolio diversification and liquidity.
15
FINANCIAL HIGHLIGHTS
Selected data for a share outstanding throughout each period is as follows:
YEAR ENDED OCTOBER 31,
-------------------------------------------------------------------
2002 2001 2000 1999 1998
----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 3.51 $ 4.83 $ 5.97 $ 6.20 $ 7.27
------------ ---------- ----------- ----------- -----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.38(a)(b) 0.51(a) 0.67 0.70 0.70
Net realized and unrealized loss on investments
and foreign currency (0.73)(b) (1.26) (1.10) (0.23) (1.08)
------------ ----------- ----------- ----------- -----------
Total from Investment Operations (0.35) (0.75) (0.43) 0.47 (0.38)
------------ ----------- ----------- ----------- -----------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.36) (0.55) (0.69) (0.70) (0.69)
In excess of net investment income -- -- (0.02) -- --
Return of capital (0.01) (0.02) -- -- --
------------ ---------- ----------- ----------- -----------
Total Distributions Declared to Shareholders (0.37) (0.57) (0.71) (0.70) (0.69)
============ =========== =========== =========== ===========
NET ASSET VALUE, END OF PERIOD $ 2.79 $ 3.51 $ 4.83 $ 5.97 $ 6.20
============ =========== =========== =========== ===========
Market price per share $ 2.79 $ 3.49 $ 4.63 $ 5.63 $ 6.81
============ =========== =========== =========== ===========
Total return-- based on market value (c) (10.43)% (14.26)% (6.12)% (7.89)% (0.74)%
============ =========== =========== =========== ===========
RATIOS TO AVERAGE NET ASSETS:
Operating expenses (d) 1.25% 1.31% 0.92% 0.89% 0.88%
Interest and amortization of deferred
debt issuance expenses 2.73% 2.98% 2.79% 2.48% 2.11%
Total expenses (d) 3.98% 4.29% 3.71% 3.37% 2.99%
Net investment income (d) 11.38%(b) 11.96% 11.88% 10.82% 9.70%
Portfolio turnover rate 54% 52% 42% 44% 69%
Net assets, end of period (000's) $ 58,134 $ 72,353 $ 98,333 $ 121,018 $ 124,480
(a) Per share data was calculated using average shares outstanding during the
period.
(b) Effective November 1, 2001, the Fund adopted the provisions of the AICPA
Audit and Accounting Guide for Investment Companies and began amortizing
and accreting premium and discount on all debt securities. The effect of
this change for the year ended October 31, 2002, was to increase net
investment income per share by $0.02, increase net realized and unrealized
loss per share by $0.02 and increase ratio of net investment income to
average net assets from 10.92% to 11.38%. Per share data and ratios for
periods prior to October 31, 2002 have not been restated to reflect this
change in presentation.
(c) Total return at market value assuming all distributions reinvested at
prices calculated in accordance with the Dividend Reinvestment Plan.
(d) The benefits derived from custody credits and directed brokerage
arrangements, if applicable, had no impact.
16
FINANCIAL HIGHLIGHTS (CONTINUED)
Selected data for a share outstanding throughout each period is as follows:
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 6.89 $ 6.62 $ 6.28 $ 6.92 $ 6.43
------------ ---------- ----------- ----------- ------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.70 0.70 0.70 0.69 0.71
Net realized and unrealized gain (loss) on investments
and foreign currency 0.38 0.26 0.34 (0.58) 0.50
------------ ---------- ----------- ----------- ------------
Total from Investment Operations 1.08 0.96 1.04 0.11 1.21
------------ ---------- ----------- ----------- ------------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.70) (0.69) (0.70) (0.75) (0.72)
------------ ---------- ----------- ----------- ------------
NET ASSET VALUE, END OF PERIOD $ 7.27 $ 6.89 $ 6.62 $ 6.28 $ 6.92
============ ========== =========== =========== ============
Market price per share $ 7.56 $ 7.13 $ 6.88 $ 5.75 $ 6.63
============ ========== =========== =========== ============
Total return-- based on market value (a) 16.97% 14.62% 33.00% (2.80)% 17.89%
============ ========== =========== =========== ============
RATIOS TO AVERAGE NET ASSETS:
Operating expenses (b) 0.89% 0.98% 0.95% 0.97% 1.00%
Interest and amortization of deferred
debt issuance expenses 1.96% 2.07% 1.94% 1.91% 2.66%
Total expenses (b) 2.85% 3.05% 2.89% 2.88% 3.66%
Net investment income (b) 9.63% 10.11% 10.76% 10.40% 10.62%
Portfolio turnover rate 92% 92% 92% 160% 135%
Net assets, end of period (000's) $ 107,774 $ 99,925 $ 93,984 $ 87,519 $ 95,164
(a) Total return at market value assuming all distributions reinvested at
prices calculated in accordance with the Dividend Reinvestment Plan.
(b) The benefits derived from custody credits and directed brokerage
arrangements, if applicable, had no impact, except for the year ended 1997
which had a 0.01% impact.
17
FINANCIAL HIGHLIGHTS (CONTINUED)
LOAN AGREEMENT ASSET COVERAGE REQUIREMENTS
TOTAL AMOUNT ASSET COVERAGE PER $1,000
OCTOBER 31, OUTSTANDING OF INDEBTEDNESS
--------- ----------- ------------
2002 $24,500,000 $3,373
2001 30,500,000 3,372
2000 47,300,000 3,079
1999 47,300,000 3,558
1998 47,300,000 3,632
1997 27,400,000 4,933
1996 27,400,000 4,647
1995 27,400,000 4,430
1994 27,400,000 4,194
1993 27,400,000 4,473
18
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES AND THE SHAREHOLDERS OF
COLONIAL INTERMEDIATE HIGH INCOME FUND
In our opinion, the accompanying statement of assets and liabilities, including
the investment portfolio, and the related statements of operations, changes in
net assets and cash flows and the financial highlights present fairly, in all
material respects, the financial position of Colonial Intermediate High Income
Fund (the "Fund") at October 31, 2002, and the results of its operations, the
changes in its net assets, its cash flows and its financial highlights for the
periods indicated, in conformity with accounting principles generally accepted
in the United States of America. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of portfolio positions
at October 31, 2002 by correspondence with the custodian and brokers, provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 23, 2002
19
UNAUDITED INFORMATION
RESULTS OF ANNUAL MEETING OF SHAREHOLDERS
On May 22, 2002, the Annual Meeting of Shareholders of the Fund was held to
conduct a vote for or against the approval of the following Item listed on the
Fund's Proxy Statement for said Meeting. On March 1, 2002, the record date for
the Meeting, the Fund had 20,723,717 shares outstanding. The votes cast were as
follows:
PROPOSAL 1.
ELECTION OF TRUSTEES FOR WITHHELD
------------------------ ----------- ----------
Richard W. Lowry 18,050,382 482,151
William E. Mayer 18,010,777 521,756
Charles R. Nelson 18,053,408 479,125
Mr. Lowry, Mr. Mayer and Mr. Nelson were elected as Trustees of the Fund. Each
will serve for three years or until a successor is elected.
The Board of Trustees is divided into the following three classes, each with a
term expiring in the indicated year:
2003 2004 2005
----------- ----------- -----------
Mr. Hacker Mr. Macera Mr. Lowry
Ms. Kelly Mr. Stitzel Mr. Mayer
Mr. Neuhauser Mr. Theobald Mr. Nelson
Mr. Palombo Ms. Verville
20
DIVIDEND REINVESTMENT PLAN
The Fund generally distributes net investment income monthly and capital gains
annually. Under the Fund's Dividend Reinvestment Plan (the "Plan") all
distributions will be reinvested automatically in additional shares of the Fund,
unless the shareholder elects to receive cash or the shares are held in broker
or nominee name and a reinvestment service is not provided by the broker or
nominee. All cash distributions will be mailed by check directly to the record
holder by the dividend paying agent.
If the market price of the shares on the distribution payment date is equal to
or greater than the net asset value, Plan participants will be issued shares at
the higher of net asset value or 95% of the market price. The aggregate market
value of the shares may constitute income to shareholders for federal income tax
purposes. However, if the market price of the shares is less than the net asset
value, shares will be bought as soon as practicable (but no more than 30 days
after the distribution, except as may be required to comply with federal
securities laws) in the open market for the accounts of Plan participants. If,
during this purchase period, the market price surpasses the net asset value, the
average per share price paid may exceed the asset value of the shares, resulting
in the acquisition of fewer shares than if the distribution had been in
newly-issued shares.
All Plan accounts receive written confirmations of all transactions. Shares
purchased under the Plan are held in uncertificated form. Each shareholder's
proxy includes shares purchased pursuant to the Plan. The automatic reinvestment
of distributions does not relieve participants of any income tax payable on the
distributions.
Fees and expenses of the Plan other than brokerage charges will be paid by the
Fund. No brokerage charges are incurred on shares issued directly by the Fund.
Participants will bear a pro-rata share of brokerage charges incurred on open
market purchases.
A Plan participant may terminate his or her participation by written notice to
the Plan agent. The Plan may be amended or terminated on 90 days written notice
to the Plan participants. All correspondence concerning the Plan should be
directed to PFPC Inc., the Plan agent, by mail at P.O. Box 43027, Providence, RI
02940-3027 or by phone at 1-800-331-1710.
21
TRUSTEES
The Trustees serve terms of indefinite duration. The names, addresses and ages
of the Trustees and officers of Colonial Intermediate High Income Fund, the year
each was first elected or appointed to office, their principal business
occupations during at least the last five years, the number of portfolios
overseen by each Trustee, and other directorships they hold are shown below.
Year first Number of
elected or portfolios in fund Other
Position with appointed Principal occupation(s) complex overseen directorships
Name, address and age Liberty Funds to office during past five years by trustee held
------------------------------------------------------------------------------------------------------------------------------------
DISINTERESTED TRUSTEES
Douglas A. Hacker (age 46) Trustee 2000 President of UAL Loyalty Services and Executive 103 None
c/o Liberty Funds Group LLC Vice President of United Airlines (airline) since
One Financial Center September 2001 (formerly Executive Vice
Boston, MA 02111 President from July 1999 to September 2001);
Chief Financial Officer of United Airlines since
July 1999; Senior Vice President and Chief
Financial Officer of UAL, Inc. prior thereto
Janet Langford Kelly (age 44) Trustee 2000 Executive Vice President-Corporate Development 103 None
c/o Liberty Funds Group LLC and Administration, General Counsel and
One Financial Center Secretary, Kellogg Company (food manufacturer),
Boston, MA 02111 since September 1999; Senior Vice President,
Secretary and General Counsel, Sara Lee
Corporation (branded, packaged, consumer-
products manufacturer) prior thereto
Richard W. Lowry (age 66) Trustee 1995 Private Investor since 1987 (formerly 105*** None
c/o Liberty Funds Group LLC Chairman and Chief Executive Officer, U.S.
One Financial Center Plywood Corporation (building products
Boston, MA 02111 manufacturer))
Salvatore Macera (age 71) Trustee 1998 Private Investor since 1981 (formerly Executive 103 None
c/o Liberty Funds Group LLC Vice President and Director of Itek Corporation
One Financial Center (electronics) from 1975 to 1981)
Boston, MA 02111
Charles R. Nelson (age 60) Trustee 2000 Professor of Economics, University of Washington, 118* None
c/o Liberty Funds Group LLC since January 1976; Ford and Louisa Van Voorhis
One Financial Center Professor of Political Economy, University of
Boston, MA 02111 Washington, since September 1993; Director,
Institute for Economic Research, University of
Washington, since September 2001; Adjunct
Professor of Statistics, University of Washington,
since September 1980, Associate Editor, Journal
of Money Credit and Banking, since September
1993; Trustee, Columbia Funds since July 2002;
consultant on economic and statistical matters.
John J. Neuhauser (age 59) Trustee 1985 Academic Vice President and Dean of Faculties 105*** Saucony, Inc.
c/o Liberty Funds Group LLC since August 1999, Boston College (formerly (athletic footwear)
One Financial Center Dean, Boston College School of Management and SkillSoft Corp.
Boston, MA 02111 from September 1977 to September 1999) (e-learning)
Thomas E. Stitzel (age 66) Trustee 1998 Business Consultant since 1999 (formerly 103 None
c/o Liberty Funds Group LLC Professor of Finance from 1975 to 1999 and Dean
One Financial Center from 1977 to 1991, College of Business, Boise State
Boston, MA 02111 University); Chartered Financial Analyst
Thomas C. Theobald (age 65) Trustee 2000 Managing Director, William Blair Capital Partners 103 Xerox Corporation
c/o Liberty Funds Group LLC (private equity investing) since 1994 (formerly (business products and
One Financial Center Chief Executive Officer and Chairman of the services), Anixter
Boston, MA 02111 Board of Directors, Continental Bank International
Corporation) (network support
equipment distributor),
Jones Lang LaSalle
(real estate management
services) and MONY Group
(life insurance)
22
TRUSTEES (CONTINUED)
Year first Number of
elected or portfolios in fund Other
Position with appointed Principal occupation(s) complex overseen directorships
Name, address and age Liberty Funds to office during past five years by trustee held
------------------------------------------------------------------------------------------------------------------------------------
DISINTERESTED TRUSTEES
Anne-Lee Verville (age 57) Trustee 1998 Author and speaker on educational systems needs 103 Chairman of the Board of
c/o Liberty Funds Group LLC (formerly General Manager, Global Education Directors, Enesco Group,
One Financial Center Industry from 1994 to 1997, and President, Inc. (designer, importer
Boston, MA 02111 Applications Solutions Division from 1991 to and distributor of giftware
1994, IBM Corporation (global education and and collectibles)
global applications))
INTERESTED TRUSTEES
William E. Mayer** (age 62) Trustee 1994 Managing Partner, Park Avenue Equity Partners 105*** Lee Enterprises (print and
c/o Liberty Funds Group LLC (private equity fund) since February 1999 online media), WR Hambrecht
One Financial Center (formerly Founding Partner, Development Capital + Co. (financial service
Boston, MA 02111 LLC LLC from November 1996 to February 1999; provider), First Health
Dean and Professor, College of Business and (health care) and Systech
Management, University of Maryland from Retail Systems (retail
October 1992 to November 1996) industry technology provider)
Joseph R. Palombo** (age 49) Trustee 2000 Chief Operating Officer of Columbia 103 None
One Financial Center and Management Group, Inc. (Columbia Management
Boston, MA 02111 Chairman Group) since November 2001; formerly Chief
of the Operations Officer of Mutual Funds, Liberty
Board Financial Companies, Inc. from August 2000 to
November 2001; Executive Vice President of Stein
Roe & Franham, Incorporated (Stein Roe)
since April 1999; Executive Vice President
and Director of Colonial Management Associates,
Inc. since April 1999; Executive Vice President
and Chief Administrative Officer of Liberty Funds
Group LLC (LFG) since April 1999; Director of Stein
Roe since September 2000; Trustee and Chairman
of the Board of Stein Roe Mutual Funds since
October 2000; Manager of Stein Roe Floating Rate
Limited Liability Company since October 2000; Vice
President of Galaxy Funds since September 2002;
(formerly Vice President of Liberty Funds from
April 1999 to August 2000; Chief Operating Officer
and Chief Compliance Officer, Putnam Mutual
Funds from December 1993 to March 1999)
* In addition to serving as a disinterested trustee of Liberty Funds, Mr.
Nelson serves as a disinterested director of Columbia Funds, currently
consisting of 15 funds, which are advised by an affiliate of the Advisor.
** Mr. Mayer is an "interested person" (as defined in the Investment Company Act
of 1940 ("1940 Act")) by reason of his affiliation with WR Hambrecht + Co., a
registered broker-dealer. Mr. Palombo is an interested person as an employee
of an affiliate of the Advisor.
***In addition to serving as a trustee of Liberty Funds, Mr. Lowry, Mr.
Neuhauser and Mr. Mayer each serve as a director/trustee of Liberty All-Star
Funds, currently consisting of 2 funds, which are advised by an affiliate of
the Advisor.
23
OFFICERS
Position with Year first
Colonial elected or
Intermediate appointed
Name, address and age High Income Fund to office Principal occupation(s) during past five years
---------------------------------------------------------------------------------------------------------------------------------
OFFICERS
Keith T. Banks (age 46) President 2001 President of Liberty Funds since November 2001; President, Chief Investment
Columbia Management Officer and Chief Executive Officer of Columbia Management Group or its
Group, Inc. 590 Madison predecessor since August 2000; President, Chief Executive Officer and Chief
Avenue, 36th Floor Investment Officer of Fleet Investment Advisor Inc. since 2000 (formerly
Mail Stop NY EH 30636A Managing Director and Head of U.S. Equity, J.P. Morgan Investment Management
New York, NY 10022 from November 1996 to August 2000); President of the Galaxy Funds since
September 2002
Vicki L. Benjamin (age 41) Chief 2001 Controller of the Liberty Funds, Stein Roe Funds and Liberty All-Star Funds
One Financial Center Accounting since May 2002; Chief Accounting Officer of the Liberty Funds, Stein Roe Funds
Boston, MA 02111 Officer and and Liberty All-Star Funds since June 2001; Controller and Chief Accounting
Controller Officer of Galaxy Funds since September 2002; Vice President of LFG since April
2001 (formerly Vice President, Corporate Audit, State Street Bank and Trust
Company from May 1998 to April 2001; Audit Manager from July 1994 to June 1997;
Senior Audit Manager from July 1997 to May 1998, Coopers & Lybrand, LLP)
J. Kevin Connaughton (age 38) Treasurer 2000 Treasurer of the Liberty Funds and Liberty All-Star Funds since December 2000
One Financial Center (formerly Controller of the Liberty Funds and Liberty All-Star Funds from
Boston, MA 02111 February 1998 to October 2000); Treasurer of Stein Roe Funds since February 2001
(formerly Controller from May 2000 to February 2001); Treasurer of Galaxy Funds
since September 2002; Senior Vice President of LFG since January 2001 (formerly
Vice President from April 2000 to January 2001; Vice President of Colonial
Management Associates, Inc. from February 1998 to October 2000; Senior Tax
Manager; Coopers & Lybrand, LLP from April 1996 to January 1998)
Jean S. Loewenberg (age 57) Secretary 2002 Secretary of Liberty Funds, Stein Roe Funds and Liberty All-Star Funds since
One Financial Center February 2002; General Counsel of Columbia Management Group since December 2001;
Boston, MA 02111 Senior Vice President since November 1996, Assistant General Counsel and Senior
Vice President of Fleet National Bank since September 2002 (formerly Senior
Vice President and Group Senior Counsel of Fleet National Bank from November
1994 to September 2002); Assistant Secretary of Galaxy Funds since September
2002
24
Transfer Agent
--------------------------------------------------------------------------------
IMPORTANT INFORMATION ABOUT THIS REPORT
The Transfer Agent for Colonial Intermediate High Income Fund is:
PFPC,
P.O. Box 8030
Boston, MA 02266-8030
1-800-331-1710
The fund mails one shareholder report to each shareholder address. Shareholders
can order additional reports by calling 800-345-6611. In addition,
representatives at that number can provide shareholders information about the
fund.
Financial advisors who want additional information about the fund may speak to a
representative at 800-426-3750.
--------------------------------------------------------------------------------
ANNUAL REPORT
Colonial Intermediate High Income Fund
COLONIAL INTERMEDIATE HIGH INCOME FUND ANNUAL REPORT
110-02/661L-1002 (12/02) 02/2752