-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HEuzyeB92eUMKqjvkHwaK1cJpOXiNoj1Fn9PzNveZgy/Nt6gFDntUwCg7xO7++/y vgtxsdAok3Yhse/hTB73Sw== 0000891804-05-002344.txt : 20050811 0000891804-05-002344.hdr.sgml : 20050811 20050811160925 ACCESSION NUMBER: 0000891804-05-002344 CONFORMED SUBMISSION TYPE: N-CSRS PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20050531 FILED AS OF DATE: 20050811 DATE AS OF CHANGE: 20050811 EFFECTIVENESS DATE: 20050811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COLONIAL INTERMEDIATE HIGH INCOME FUND CENTRAL INDEX KEY: 0000833021 IRS NUMBER: 000000000 FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: N-CSRS SEC ACT: 1940 Act SEC FILE NUMBER: 811-05567 FILM NUMBER: 051017272 BUSINESS ADDRESS: STREET 1: ONE FINANCIAL CNTR CITY: BOSTON STATE: MA ZIP: 02111 BUSINESS PHONE: 6174263750 N-CSRS 1 file001.txt COLONIAL INTERMEDIATE HIGH INCOME FUND UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number: 811-5567 -------- Colonial Intermediate High Income Fund -------------------------------------------------------------------- (Exact name of registrant as specified in charter) One Financial Center, Boston, Massachusetts 02111 -------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Vincent Pietropaolo, Esq. Columbia Management Group, Inc. One Financial Center Boston, MA 02111 -------------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: 1-617-772-3698 -------------- Date of fiscal year end: 11/30/05 ------------------ Date of reporting period: 05/31/05 ------------------ Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles. A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget ("OMB") control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. Section 3507. ITEM 1. REPORTS TO STOCKHOLDERS. COLONIAL INTERMEDIATE HIGH INCOME FUND SEMIANNUAL REPORT May 31, 2005 [cover photo of newspaper and calculator] NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE PRESIDENT'S MESSAGE Dear Shareholder: In 2004, Colonial Funds became part of Columbia Management, the asset management division of Bank of America, one of the largest, most respected financial institutions in the United States. As a direct result of this merger, a number of changes are in the works that we believe offer significant potential benefits for our shareholders. First, some funds may be merged in order to eliminate redundancies, others may be liquidated and fund management teams will be aligned to maximize performance potential. You will receive more detailed information about these changes if your fund is affected and you may be asked to vote on certain fund changes. In this matter, your timely response will enable us to implement the changes in 2005. As a result of these changes, we believe we will offer shareholders an even stronger lineup of investment options. What will not change as we enter this next phase of consolidation is our commitment to the highest standards of performance and our dedication to superior service. Change for the good has another name: it's called improvement. It helps move us forward, and we believe that it represents progress for all our shareholders in their quest for long-term financial success. In the pages that follow, you'll find a detailed report from the fund's managers on key factors that influenced your fund's performance. We hope that you will read the manager reports carefully and discuss any questions you might have with your financial advisor. As always, we thank you for choosing Colonial Funds. We appreciate your continued confidence. And, we look forward to helping you keep your long-term financial goals on target in the years to come. Sincerely, /s/ Christopher L. Wilson Christopher L. Wilson President, Columbia Funds Christopher L. Wilson is Head of Mutual Funds for Columbia Management, President of Columbia Funds, President & CEO of Nations Funds and President of Galaxy Funds, responsible for the day-to-day delivery of mutual fund services to the firm's investors. With the exception of distribution, Chris oversees all aspects of the mutual fund services operation, including treasury, investment accounting and shareholder and broker services. Chris joined Bank of America in August 2004. The views expressed in the President's Message and Portfolio Managers' Report reflect the current views of the respective parties. These views are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict so actual outcomes and results may differ significantly from the views expressed. These views are subject to change at any time based upon economic, market or other conditions and the respective parties disclaim any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for a Colonial fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any particular Colonial fund. References to specific company securities should not be construed as a recommendation or investment advice. PORTFOLIO MANAGERS' REPORT For the six-month period ended May 31, 2005, Colonial Intermediate High Income Fund returned 0.25%, based on its market price. The fund returned negative 2.01% based on investment at net asset value. The average return of the Lipper High Current Yield Funds (Leveraged) Category was negative 0.46%.1 We believe that the fund's shortfall relative to its peer group can be attributed to its emphasis on low quality bonds, which led the high-yield marketplace in 2004 but gave up ground during this reporting period. THE HIGH-YIELD RALLY PAUSED After more than two years of strong performance, high-yield bonds gave back some of their gains during the period. Within the fixed income universe, securities ranked below investment grade have been the primary beneficiaries of a growing economy and an accompanying decline in corporate default rates. These factors made investors more willing to purchase lower quality bonds in order to achieve yields that were unavailable in the Treasury market. Within the high-yield category, the lowest quality securities were the strongest performers as the sector rallied, a trend that greatly benefited the fund with its emphasis on the low end of the quality spectrum. However, the landscape began to change in March. Early in the month, the yield advantage of lower quality bonds over investment-grade securities narrowed to historical lows. The sector was subsequently hurt by the deteriorating credit quality at Ford (which was not in the portfolio) and General Motors (GM) (0.2% of total investments), which created concerns that leveraged hedge funds and high-grade managers might be forced to sell high-yield positions and resulted in lower prices for high-yield bonds.2 By the end of the period, lesser quality securities lagged the market. TELECOM LED THE MARKET Bonds of wireless telecom providers were especially strong over the past fiscal year, driven by strong subscriber growth and steady revenue per user. However, the most important catalyst to the sector's strong market performance was the wave of consolidation that swept through the industry. The groundbreaking merger between Cingular and AT&T Wireless closed at the beginning of the fund's fiscal year. Late in 2004, - -------------- 1 Lipper Inc., a widely respected data provider in the industry, calculates an average total return (assuming reinvestment of distributions) for mutual funds with investment objectives similar to those of the fund. Lipper makes no adjustment for the effect of sales loads. 2 Holdings are disclosed as of May 31, 2005, and are subject to change. (sidebar) PRICE PER SHARE AS OF 05/31/05 ($) Net asset value 3.63 - ------------------------------ Market price 3.36 - ------------------------------ 6-MONTH (CUMULATIVE) TOTAL RETURN AS OF 05/31/05 (%) Net asset value -2.01 - ------------------------------ Market price 0.25 - ------------------------------ Lipper High Current Yield Funds (Leveraged) Category average -0.46 - ------------------------------ All results shown assume reinvestment of distributions. DISTRIBUTIONS DECLARED PER SHARE 12/01/04-05/31/05 ($) 0.17 - ------------------------------ TOP 5 SECTORS AS OF 05/31/05 (%) Telecommunication services 11.9 - ------------------------------ Media 10.0 - ------------------------------ Lodging 5.8 - ------------------------------ Electric 5.5 - ------------------------------ Chemicals 4.2 - ------------------------------ Sector breakdowns are calculated as a percentage of total investments. TOP 10 CORPORATE ISSUERS AS OF 05/31/05 (%) Qwest 2.4 - ------------------------------- El Paso Corp. 1.7 - ------------------------------- Charter Communications 1.3 - ------------------------------- MDP Acquisitions 1.2 - ------------------------------- D.R. Horton 1.1 - ------------------------------- Dex Media 1.0 - ------------------------------- Calpine 1.0 - ------------------------------- Spanish Broadcasting System 1.0 - ------------------------------- Allied Waste North America 0.9 - ------------------------------- Hollywood Park 0.9 - ------------------------------- Corporate issuers are calculated as a percentage of total investments. Because the fund is actively managed, there can be no guarantee that the fund will continue to hold securities of these issuers in these sectors in the future. 1 PORTFOLIO MANAGERS' REPORT (CONTINUED) Nextel and Sprint announced that they would merge, and ALLTEL announced that it would purchase Western Wireless in early 2005. The fund registered a solid gain when it sold its Western Wireless bonds after the takeover announcement. Positions in Nextel bonds (0.7% of total investments) and common stock, as well as the bonds of several companies affiliated with Sprint also aided performance. Although the fund emerged relatively unscathed by the weakness in the automotive sector, it was hurt by its holdings in the airline and paper and packaging industries. We sold the fund's Delta Airlines holdings but retained the fund's position in Northwest Airlines (0.4% of total investments), whose financial condition has since weakened considerably amid higher oil prices and a protracted wage-and-benefit struggle with its labor unions. In the paper and packaging industry the inability to pass on higher costs hurt results, and fund holdings such as Abitibi-Consolidated and Tembec Industries were poor performers (0.2% and 0.2% of total investments, respectively). A FAVORABLE BUT GUARDED OUTLOOK FOR HIGH YIELD We believe that solid economic growth will continue to create a favorable environment for the high-yield market, although growth is likely to be slower than it was in 2004. So far, the Federal Reserve has balanced economic growth and inflation through a series of short-term interest-rate hikes, which commenced in June 2004. As long as inflation is kept in check and short-term rates do not increase faster than expected, we are optimistic about the prospects for the high-yield market. /s/ Gregg R. Smalley /s/ Kevin L. Cronk /s/ Thomas A. LaPointe Gregg R. Smalley Kevin L. Cronk Thomas A. LaPointe Gregg R. Smalley, CFA, has managed Colonial Intermediate High Income Fund since June 2000 and has been with the advisor or its predecessors or affiliate organizations since August 1997. Kevin L. Cronk, CFA, has co-managed Colonial Intermediate High Income Fund since February 2003 and has been with the advisor or its predecessors or affiliate organizations since August 1999. Thomas A. LaPointe, CFA, has co-managed Colonial Intermediate High Income Fund since February 2003 and has been with the advisor or its predecessors or affiliate organizations since February 1999. 2 PORTFOLIO MANAGERS' REPORT (CONTINUED) Performance data quoted represents past performance and current performance may be lower or higher. Past performance is no guarantee of future results. Investing in fixed-income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments and yield and share price fluctuations due to changes in interest rates. When interest rates go up, bond prices typically drop, and vice versa. Investing in high-yield or "junk bonds" offers the potential for higher income than investments in investment-grade bonds but they also have a higher degree of risk. Changes in economic conditions or other circumstances may adversely affect a high-yield bond issuer's ability to make timely principal and interest payments. 3 INVESTMENT PORTFOLIO May 31, 2005 (Unaudited) CORPORATE FIXED-INCOME BONDS & NOTES - 124.7% PAR ($) VALUE ($) - ----------------------------------------------------------- BASIC MATERIALS - 11.5% CHEMICALS - 5.7% AGRICULTURAL CHEMICALS - 2.0% IMC Global, Inc. 10.875% 08/01/13 310,000 362,700 Terra Capital, Inc. 12.875% 10/15/08 475,000 561,687 UAP Holding Corp. (a) 07/15/12 (10.750% 01/15/08) 295,000 236,000 United Agri Products 8.250% 12/15/11 321,000 325,815 ----------- 1,486,202 ----------- CHEMICALS-DIVERSIFIED - 3.0% BCP Crystal US Holdings Corp. 9.625% 06/15/14 150,000 168,000 EquiStar Chemicals LP 10.625% 05/01/11 575,000 636,813 Huntsman International LLC 7.375% 01/01/15 (b) 260,000 255,450 Huntsman LLC 12.000% 07/15/12 (b) 310,000 356,500 Innophos Investments Holdings, Inc., PIK 10.771% 02/15/15 (b)(c) 195,456 173,954 Lyondell Chemical Co. 9.625% 05/01/07 240,000 254,400 10.875% 05/01/09 5,000 5,150 NOVA Chemicals Corp. 6.500% 01/15/12 170,000 165,750 Westlake Chemical Corp. 8.750% 07/15/11 257,000 278,845 ----------- 2,294,862 ----------- CHEMICALS-SPECIALTY - 0.7% Rhodia SA 8.875% 06/01/11 560,000 533,400 ----------- 533,400 ----------- Chemicals Total 4,314,464 ----------- FOREST PRODUCTS & PAPER - 4.1% FORESTRY - 0.6% Millar Western Forest Products Ltd. 7.750% 11/15/13 225,000 205,875 Tembec Industries, Inc. 8.500% 02/01/11 320,000 248,000 ----------- 453,875 ----------- PAPER & RELATED PRODUCTS - 3.5% Abitibi-Consolidated, Inc. 8.375% 04/01/15 260,000 255,450 Boise Cascade LLC 6.016% 10/15/12 (b)(c) 175,000 171,500 7.125% 10/15/14 (b) 190,000 180,025 PAR ($) VALUE ($) - ----------------------------------------------------------- Buckeye Technologies, Inc. 8.500% 10/01/13 60,000 61,800 9.250% 09/15/08 188,000 188,000 Caraustar Industries, Inc. 9.875% 04/01/11 235,000 228,537 Fraser Papers, Inc. 8.750% 03/15/15 (b) 315,000 285,469 Georgia-Pacific Corp. 8.000% 01/15/24 200,000 229,000 Neenah Paper, Inc. 7.375% 11/15/14 (b) 130,000 122,850 Newark Group, Inc. 9.750% 03/15/14 440,000 382,800 NewPage Corp. 10.000% 05/01/12 (b) 180,000 176,400 12.000% 05/01/13 (b) 225,000 219,938 Norske Skog Canada Ltd. 8.625% 06/15/11 190,000 191,900 ----------- 2,693,669 ----------- Forest Products & Paper Total 3,147,544 ----------- IRON/STEEL - 1.0% METAL-IRON - 0.5% Wise Metals Group LLC 10.250% 05/15/12 415,000 344,450 ----------- 344,450 ----------- STEEL-PRODUCERS - 0.2% Steel Dynamics, Inc. 9.500% 03/15/09 160,000 170,400 ----------- 170,400 ----------- STEEL-SPECIALTY - 0.3% UCAR Finance, Inc. 10.250% 02/15/12 205,000 213,713 ----------- 213,713 ----------- Iron/Steel Total 728,563 ----------- METALS & MINING - 0.7% METAL-ALUMINUM - 0.6% Kaiser Aluminum & Chemical Corp. 10.875% 10/15/06 (d) 505,000 441,875 ----------- 441,875 ----------- MINING SERVICES - 0.1% HudBay Mining & Smelting Co., Ltd. 9.625% 01/15/12 (b) 105,000 101,850 ----------- 101,850 ----------- Metals & Mining Total 543,725 ----------- BASIC MATERIALS TOTAL 8,734,296 ----------- See Accompanying Notes to Financial Statements. 4 INVESTMENT PORTFOLIO (CONTINUED) May 31, 2005 (Unaudited) CORPORATE FIXED-INCOME BONDS & NOTES (CONTINUED) PAR ($) VALUE ($) - ----------------------------------------------------------- COMMUNICATIONS - 25.6% MEDIA - 11.6% BROADCAST SERVICES/PROGRAMS - 0.6% Fisher Communications, Inc. 8.625% 09/15/14 190,000 201,875 XM Satellite Radio Holdings, Inc. 8.710% 05/01/09 (c) 250,000 252,500 ----------- 454,375 ----------- CABLE TV - 5.3% Atlantic Broadband Finance LLC 9.375% 01/15/14 (b) 390,000 366,600 Cablevision Systems Corp. 8.000% 04/15/12 (b) 130,000 135,688 Charter Communications Holdings LLC 9.920% 04/01/11 1,560,000 1,138,800 10.250% 09/15/10 190,000 192,375 CSC Holdings, Inc. 6.750% 04/15/12 (b) 185,000 187,312 7.625% 04/01/11 200,000 212,000 DirecTV Holdings LLC 8.375% 03/15/13 225,000 249,187 EchoStar DBS Corp. 6.375% 10/01/11 400,000 402,000 Insight Midwest LP 9.750% 10/01/09 195,000 203,775 Northland Cable Television, Inc. 10.250% 11/15/07 415,000 408,775 Pegasus Satellite Communications, Inc. 11.250% 01/15/10 (b)(d) 435,000 250,125 Telenet Group Holding NV (a) 06/15/14 (11.500% 12/15/08) (b) 400,000 294,000 ----------- 4,040,637 ----------- MULTIMEDIA - 2.0% Advanstar Communications, Inc. (a) 10/15/11 (15.000% 10/15/05) 310,000 300,700 12.000% 02/15/11 345,000 363,113 Haights Cross Communications, Inc. (a) 08/15/11 (12.500% 02/15/09) 315,000 192,150 Haights Cross Operating Co. 11.750% 08/15/11 195,000 211,575 11.750% 08/15/11 (b) 135,000 146,475 Quebecor Media, Inc. 11.125% 07/15/11 290,000 321,175 ----------- 1,535,188 ----------- PUBLISHING-NEWSPAPERS - 0.4% Hollinger, Inc. 11.875% 03/01/11 (b)(e) 122,000 125,660 12.875% 03/01/11 (b) 177,000 194,700 ----------- 320,360 ----------- PAR ($) VALUE ($) - ----------------------------------------------------------- PUBLISHING-PERIODICALS - 2.1% CBD Media Holdings LLC & Finance, Inc. 9.250% 07/15/12 235,000 229,125 Dex Media East LLC 12.125% 11/15/12 367,000 439,482 Dex Media West LLC 9.875% 08/15/13 374,000 428,230 Dex Media, Inc. (a) 11/15/13 (9.000% 11/15/08) 250,000 199,375 WDAC Subsidiary Corp. 8.375% 12/01/14 (b) 290,000 271,150 ----------- 1,567,362 ----------- TELEVISION - 1.2% Paxson Communications Corp. (a) 01/15/09 (12.250% 01/15/06) 375,000 346,875 10.750% 07/15/08 320,000 312,000 Sinclair Broadcast Group, Inc. 8.750% 12/15/11 250,000 265,000 ----------- 923,875 ----------- Media Total 8,841,797 ----------- TELECOMMUNICATION SERVICES - 14.0% CELLULAR TELECOMMUNICATIONS - 5.3% American Cellular Corp. 10.000% 08/01/11 425,000 414,375 Dobson Cellular Systems, Inc. 8.375% 11/01/11 (b) 95,000 96,425 Dobson Communications Corp. 8.875% 10/01/13 565,000 459,062 Horizon PCS, Inc. 11.375% 07/15/12 (b) 190,000 208,525 iPCS Escrow Co. 11.500% 05/01/12 170,000 187,850 Nextel Communications, Inc. 7.375% 08/01/15 315,000 340,988 Nextel Partners, Inc. 8.125% 07/01/11 390,000 424,125 Rogers Cantel, Inc. 9.750% 06/01/16 385,000 462,000 Rogers Wireless, Inc. 8.000% 12/15/12 225,000 240,750 Rural Cellular Corp. 8.250% 03/15/12 320,000 325,200 UbiquiTel Operating Co. 9.875% 03/01/11 335,000 361,800 US Unwired, Inc. 10.000% 06/15/12 500,000 547,500 ----------- 4,068,600 ----------- See Accompanying Notes to Financial Statements. 5 INVESTMENT PORTFOLIO (CONTINUED) May 31, 2005 (Unaudited) CORPORATE FIXED-INCOME BONDS & NOTES (CONTINUED) PAR ($) VALUE ($) - ----------------------------------------------------------- COMMUNICATIONS - (CONTINUED) TELECOMMUNICATION SERVICES - (CONTINUED) SATELLITE TELECOMMUNICATIONS - 1.7% Inmarsat Finance II PLC (a) 11/15/12 (10.375% 11/15/08) 425,000 312,375 Intelsat Bermuda Ltd. 8.250% 01/15/13 (b) 455,000 461,825 New Skies Satellites NV 9.125% 11/01/12 (b) 210,000 207,900 PanAmSat Corp. 9.000% 08/15/14 111,000 120,713 Zeus Special Subsidiary Ltd. (a) 02/01/15 (9.250% 02/01/10) (b) 330,000 207,900 ----------- 1,310,713 ----------- TELECOMMUNICATION EQUIPMENT - 0.4% Lucent Technologies, Inc. 6.450% 03/15/29 335,000 289,775 ----------- 289,775 ----------- TELECOMMUNICATION SERVICES - 1.3% Axtel SA de CV 11.000% 12/15/13 430,000 459,025 Time Warner Telecom, Inc. 9.750% 07/15/08 160,000 160,000 10.125% 02/01/11 425,000 412,250 ----------- 1,031,275 ----------- TELEPHONE-INTEGRATED - 4.3% Cincinnati Bell, Inc. 8.375% 01/15/14 545,000 535,462 Qwest Capital Funding, Inc. 7.250% 02/15/11 935,000 864,875 7.750% 02/15/31 435,000 355,612 Qwest Services Corp. 13.500% 12/15/10 (b) 1,125,000 1,276,875 US LEC Corp. 11.890% 10/01/09 (c) 215,000 221,988 ----------- 3,254,812 ----------- WIRELESS EQUIPMENT - 1.0% American Towers, Inc. 7.250% 12/01/11 335,000 350,912 SBA Telecommunications, Inc. (a) 12/15/11 (9.750% 12/15/07) 230,000 201,250 SpectraSite, Inc. 8.250% 05/15/10 175,000 185,063 ----------- 737,225 ----------- Telecommunication Services Total 10,692,400 ----------- COMMUNICATIONS TOTAL 19,534,197 ----------- PAR ($) VALUE ($) - ----------------------------------------------------------- CONSUMER CYCLICAL - 27.6% AIRLINES - 1.2% AIRLINES - 1.2% Continental Airlines, Inc. 7.568% 12/01/06 570,000 473,100 Northwest Airlines, Inc. 9.875% 03/15/07 735,000 459,375 ----------- 932,475 ----------- Airlines Total 932,475 ----------- APPAREL - 1.9% APPAREL MANUFACTURERS - 1.9% Broder Brothers Co. 11.250% 10/15/10 190,000 196,650 11.250% 10/15/10 (b) 135,000 139,725 Levi Strauss & Co. 9.750% 01/15/15 (b) 770,000 748,825 Phillips-Van Heusen Corp. 7.250% 02/15/11 300,000 306,750 8.125% 05/01/13 60,000 63,000 ----------- 1,454,950 ----------- Apparel Total 1,454,950 ----------- AUTO MANUFACTURERS - 0.6% AUTO-CARS/LIGHT TRUCKS - 0.2% General Motors Corp. 8.375% 07/15/33 200,000 154,000 ----------- 154,000 ----------- AUTO-MEDIUM & HEAVY DUTY TRUCKS - 0.4% Navistar International Corp. 7.500% 06/15/11 320,000 322,400 ----------- 322,400 ----------- Auto Manufacturers Total 476,400 ----------- AUTO PARTS & EQUIPMENT - 2.4% AUTO/TRUCK PARTS & EQUIPMENT-ORIGINAL - 1.2% Cooper-Standard Automotive, Inc. 8.375% 12/15/14 540,000 448,200 Delco Remy International, Inc. 9.375% 04/15/12 330,000 250,800 Dura Operating Corp. 8.625% 04/15/12 240,000 217,200 ----------- 916,200 ----------- AUTO/TRUCK PARTS & EQUIPMENT-REPLACEMENT - 0.3% Rexnord Corp. 10.125% 12/15/12 200,000 210,500 ----------- 210,500 ----------- RUBBER-TIRES - 0.9% Goodyear Tire & Rubber Co. 7.857% 08/15/11 505,000 483,538 12.250% 03/01/11 150,000 166,500 ----------- 650,038 ----------- Auto Parts & Equipment Total 1,776,738 ----------- See Accompanying Notes to Financial Statements. 6 INVESTMENT PORTFOLIO (CONTINUED) May 31, 2005 (Unaudited) CORPORATE FIXED-INCOME BONDS & NOTES (CONTINUED) PAR ($) VALUE ($) - ----------------------------------------------------------- CONSUMER CYCLICAL (CONTINUED) DISTRIBUTION/WHOLESALE - 0.2% DISTRIBUTION/WHOLESALE - 0.2% Buhrmann US, Inc. 7.875% 03/01/15 (b) 180,000 172,800 ----------- 172,800 ----------- Distribution/Wholesale Total 172,800 ----------- ENTERTAINMENT - 4.0% GAMBLING (NON-HOTEL) - 0.6% Global Cash Access LLC 8.750% 03/15/12 390,000 419,250 ----------- 419,250 ----------- MUSIC - 1.3% Steinway Musical Instruments, Inc. 8.750% 04/15/11 265,000 275,600 Warner Music Group 7.375% 04/15/14 380,000 378,100 WMG Holdings Corp., PIK 9.760% 12/15/14 (b)(c) 320,000 316,519 ----------- 970,219 ----------- RESORTS/THEME PARKS - 0.8% Six Flags, Inc. 9.625% 06/01/14 710,000 614,150 ----------- 614,150 ----------- THEATERS - 1.3% AMC Entertainment, Inc. 9.875% 02/01/12 620,000 616,919 LCE Acquisition Corp. 9.000% 08/01/14 (b) 385,000 373,450 ----------- 990,369 ----------- Entertainment Total 2,993,988 ----------- HOME BUILDERS - 2.6% BUILDING-RESIDENTIAL/COMMERCIAL - 2.6% D.R. Horton, Inc. 9.750% 09/15/10 955,000 1,122,125 K. Hovnanian Enterprises, Inc. 8.875% 04/01/12 170,000 181,050 10.500% 10/01/07 340,000 374,000 Standard Pacific Corp. 9.250% 04/15/12 275,000 302,500 ----------- 1,979,675 ----------- Home Builders Total 1,979,675 ----------- HOME FURNISHINGS - 0.9% APPLIANCES - 0.4% ALH Finance LLC 8.500% 01/15/13 345,000 312,225 ----------- 312,225 ----------- PAR ($) VALUE ($) - ----------------------------------------------------------- HOME FURNISHINGS - 0.5% WII Components, Inc. 10.000% 02/15/12 370,000 360,750 ----------- 360,750 ----------- Home Furnishings Total 672,975 ----------- LEISURE TIME - 1.5% LEISURE & RECREATIONAL PRODUCTS - 0.1% K2, Inc. 7.375% 07/01/14 115,000 119,025 ----------- 119,025 ----------- RECREATIONAL CENTERS - 1.4% AMF Bowling Worldwide, Inc. 10.000% 03/01/10 370,000 370,000 Equinox Holdings, Inc. 9.000% 12/15/09 405,000 415,125 Town Sports International, Inc. (a) 02/01/14 (11.000% 02/01/09) 435,000 250,125 ----------- 1,035,250 ----------- Leisure Time Total 1,154,275 ----------- LODGING - 7.9% CASINO HOTELS - 7.9% Caesars Entertainment, Inc. 9.375% 02/15/07 435,000 466,537 Circus & Eldorado/Silver Legacy Capital Corp. 10.125% 03/01/12 355,000 371,863 Hard Rock Hotel, Inc. 8.875% 06/01/13 440,000 468,600 Hollywood Casino Shreveport 13.000% 08/01/06 (f) 950,000 774,250 Inn of the Mountain Gods Resort & Casino 12.000% 11/15/10 325,000 375,375 MGM Mirage 6.750% 09/01/12 415,000 425,375 Mohegan Tribal Gaming Authority 6.125% 02/15/13 (b) 210,000 211,050 Penn National Gaming, Inc. 6.750% 03/01/15 (b) 550,000 552,750 Pinnacle Entertainment, Inc. 8.250% 03/15/12 155,000 155,775 8.750% 10/01/13 790,000 817,650 River Rock Entertainment 9.750% 11/01/11 250,000 270,000 Seneca Gaming Corp. 7.250% 05/01/12 285,000 288,206 Station Casinos, Inc. 6.875% 03/01/16 95,000 97,375 Virgin River Casino Corp. (a) 01/15/13 (12.750% 01/15/09) (b) 240,000 153,600 9.000% 01/15/12 (b) 133,000 136,990 See Accompanying Notes to Financial Statements. 7 INVESTMENT PORTFOLIO (CONTINUED) May 31, 2005 (Unaudited) CORPORATE FIXED-INCOME BONDS & NOTES (CONTINUED) PAR ($) VALUE ($) - ----------------------------------------------------------- CONSUMER CYCLICAL (CONTINUED) LODGING (CONTINUED) CASINO HOTELS (CONTINUED) Wynn Las Vegas LLC 6.625% 12/01/14 (b) 450,000 432,000 ----------- 5,997,396 ----------- Lodging Total 5,997,396 ----------- RETAIL - 3.7% RETAIL-AUTOMOBILES - 0.4% Asbury Automotive Group, Inc. 8.000% 03/15/14 320,000 305,600 ----------- 305,600 ----------- RETAIL-DRUG STORES - 0.8% Jean Coutu Group, Inc. (PJC) 8.500% 08/01/14 240,000 233,400 Rite Aid Corp. 7.500% 01/15/15 (b) 115,000 106,663 9.250% 06/01/13 255,000 241,612 ----------- 581,675 ----------- RETAIL-HOME FURNISHINGS - 0.5% Tempur-Pedic, Inc. 10.250% 08/15/10 322,000 354,200 ----------- 354,200 ----------- RETAIL-JEWELRY - 0.3% Finlay Fine Jewelry Corp. 8.375% 06/01/12 300,000 256,500 ----------- 256,500 ----------- RETAIL-MAJOR DEPARTMENT STORES - 0.5% Saks, Inc. 7.000% 12/01/13 423,000 385,459 ----------- 385,459 ----------- RETAIL-PROPANE DISTRIBUTORS - 0.6% Ferrellgas Partners LP 8.750% 06/15/12 275,000 270,875 Suburban Propane Partners LP 6.875% 12/15/13 (b) 175,000 164,500 ----------- 435,375 ----------- RETAIL-RESTAURANTS - 0.3% Landry's Restaurants, Inc. 7.500% 12/15/14 (b) 295,000 275,087 ----------- 275,087 ----------- RETAIL-VIDEO RENTAL - 0.3% Movie Gallery, Inc. 11.000% 05/01/12 (b) 240,000 247,200 ----------- 247,200 ----------- Retail Total 2,841,096 ----------- PAR ($) VALUE ($) - ----------------------------------------------------------- TEXTILES - 0.7% TEXTILE-PRODUCTS - 0.7% Collins & Aikman Floorcoverings, Inc. 9.750% 02/15/10 265,000 278,912 INVISTA 9.250% 05/01/12 (b) 235,000 255,563 ----------- 534,475 ----------- Textiles Total 534,475 ----------- CONSUMER CYCLICAL TOTAL 20,987,243 ----------- - ----------------------------------------------------------- CONSUMER NON-CYCLICAL - 17.6% AGRICULTURE - 0.3% TOBACCO - 0.3% Alliance One International, Inc. 11.000% 05/15/12 (b) 245,000 249,288 ----------- 249,288 ----------- Agriculture Total 249,288 ----------- BEVERAGES - 0.3% BEVERAGES-WINE/SPIRITS - 0.3% Constellation Brands, Inc. 8.125% 01/15/12 245,000 256,025 ----------- 256,025 ----------- Beverages Total 256,025 ----------- BIOTECHNOLOGY - 0.5% MEDICAL-BIOMEDICAL/GENE - 0.5% Bio-Rad Laboratories, Inc. 7.500% 08/15/13 340,000 357,000 ----------- 357,000 ----------- Biotechnology Total 357,000 ----------- COMMERCIAL SERVICES - 4.9% COMMERCIAL SERVICES - 0.9% Iron Mountain, Inc. 7.750% 01/15/15 215,000 211,775 Language Line Holdings, Inc. 11.125% 06/15/12 480,000 475,200 ----------- 686,975 ----------- COMMERCIAL SERVICES-FINANCE - 0.7% Dollar Financial Group, Inc. 9.750% 11/15/11 490,000 510,825 ----------- 510,825 ----------- FUNERAL SERVICES & RELATED ITEMS - 0.5% Service Corp. International 7.700% 04/15/09 405,000 429,300 ----------- 429,300 ----------- PRINTING-COMMERCIAL - 0.8% Sheridan Group 10.250% 08/15/11 250,000 257,500 Vertis, Inc. 13.500% 12/07/09 (b) 515,000 386,250 ----------- 643,750 ----------- See Accompanying Notes to Financial Statements. 8 INVESTMENT PORTFOLIO (CONTINUED) May 31, 2005 (Unaudited) CORPORATE FIXED-INCOME BONDS & NOTES (CONTINUED) PAR ($) VALUE ($) - ----------------------------------------------------------- CONSUMER NON-CYCLICAL (CONTINUED) COMMERCIAL SERVICES (CONTINUED) PRIVATE CORRECTIONS - 1.0% Corrections Corp. of America 6.250% 03/15/13 (b) 360,000 348,300 GEO Group, Inc. 8.250% 07/15/13 405,000 389,812 ----------- 738,112 ----------- RENTAL AUTO/EQUIPMENT - 1.0% NationsRent, Inc. 9.500% 10/15/10 275,000 291,500 9.500% 05/01/15 (b) 250,000 246,250 Williams Scotsman, Inc. 9.875% 06/01/07 230,000 225,400 ----------- 763,150 ----------- Commercial Services Total 3,772,112 ----------- COSMETICS/PERSONAL CARE - 1.4% COSMETICS & TOILETRIES - 1.4% DEL Laboratories, Inc. 8.000% 02/01/12 (b) 405,000 344,250 Elizabeth Arden, Inc. 7.750% 01/15/14 245,000 248,675 Revlon Consumer Products Corp. 8.625% 02/01/08 260,000 240,500 9.500% 04/01/11 (b) 265,000 243,800 ----------- 1,077,225 ----------- Cosmetics/Personal Care Total 1,077,225 ----------- FOOD - 2.5% FOOD-CONFECTIONERY - 0.6% Merisant Co. 9.500% 07/15/13 (b) 245,000 180,075 Tabletop Holdings, Inc. (a) 05/15/14 (12.250% 11/15/08) (b) 755,000 271,800 ----------- 451,875 ----------- FOOD-MISCELLANEOUS/DIVERSIFIED - 1.2% Dole Food Co., Inc. 8.625% 05/01/09 317,000 334,435 Pinnacle Foods Holding Corp. 8.250% 12/01/13 470,000 399,500 Reddy Ice Holdings, Inc. (a) 11/01/12 (10.500% 11/01/08) (b) 230,000 157,550 ----------- 891,485 ----------- FOOD-RETAIL - 0.7% Stater Brothers Holdings, Inc. 8.125% 06/15/12 555,000 538,350 ----------- 538,350 ----------- Food Total 1,881,710 ----------- PAR ($) VALUE ($) - ----------------------------------------------------------- HEALTHCARE SERVICES - 4.8% DIALYSIS CENTERS - 0.3% DaVita, Inc. 7.250% 03/15/15 (b) 270,000 271,350 ----------- 271,350 ----------- MEDICAL-HMO - 0.5% Coventry Health Care, Inc. 8.125% 02/15/12 340,000 364,650 ----------- 364,650 ----------- MEDICAL-HOSPITALS - 1.1% Tenet Healthcare Corp. 9.875% 07/01/14 790,000 845,300 ----------- 845,300 ----------- MEDICAL-OUTPATIENT/HOME MEDICAL - 0.3% Select Medical Corp. 7.625% 02/01/15 (b) 210,000 206,325 ----------- 206,325 ----------- MRI/MEDICAL DIAGNOSTIC IMAGING - 1.8% InSight Health Services Corp. 9.875% 11/01/11 520,000 444,600 MedQuest, Inc. 11.875% 08/15/12 450,000 450,000 MQ Associates, Inc. (a) 08/15/12 (12.250% 08/15/08) 805,000 458,850 ----------- 1,353,450 ----------- PHYSICIAN PRACTICE MANAGEMENT - 0.8% US Oncology Holdings, Inc. 8.620% 03/15/15 (b)(c) 200,000 190,000 US Oncology, Inc. 9.000% 08/15/12 390,000 413,400 ----------- 603,400 ----------- Healthcare Services Total 3,644,475 ----------- HOUSEHOLD PRODUCTS/WARES - 1.6% CONSUMER PRODUCTS-MISCELLANEOUS - 1.6% Amscan Holdings, Inc. 8.750% 05/01/14 525,000 488,250 Jostens IH Corp. 7.625% 10/01/12 280,000 270,200 Playtex Products, Inc. 9.375% 06/01/11 430,000 451,500 ----------- 1,209,950 ----------- Household Products/Wares Total 1,209,950 ----------- PHARMACEUTICALS - 1.3% MEDICAL-DRUGS - 0.8% Elan Finance PLC 7.750% 11/15/11 (b) 495,000 425,700 See Accompanying Notes to Financial Statements. 9 INVESTMENT PORTFOLIO (CONTINUED) May 31, 2005 (Unaudited) CORPORATE FIXED-INCOME BONDS & NOTES (CONTINUED) PAR ($) VALUE ($) - ----------------------------------------------------------- CONSUMER NON-CYCLICAL (CONTINUED) PHARMACEUTICALS (CONTINUED) MEDICAL-DRUGS (CONTINUED) Warner Chilcott Corp. 8.750% 02/01/15 (b) 215,000 202,100 ----------- 627,800 ----------- MEDICAL-WHOLESALE DRUG DISTRIBUTION - 0.5% Nycomed A/S, PIK 11.750% 09/15/13 (b) EUR 305,000 337,579 ----------- 337,579 ----------- Pharmaceuticals Total 965,379 ----------- CONSUMER NON-CYCLICAL TOTAL 13,413,164 ----------- - ----------------------------------------------------------- ENERGY - 8.2% OIL & GAS - 4.0% OIL & GAS DRILLING - 0.8% Ocean Rig Norway AS 10.250% 06/01/08 USD 325,000 328,250 Pride International, Inc. 7.375% 07/15/14 220,000 238,150 ----------- 566,400 ----------- OIL COMPANIES-EXPLORATION & PRODUCTION - 2.9% Chesapeake Energy Corp. 6.375% 06/15/15 (b) 90,000 90,450 7.500% 06/15/14 230,000 247,250 Compton Petroleum Corp. 9.900% 05/15/09 475,000 507,062 Delta Petroleum Corp. 7.000% 04/01/15 (b) 200,000 185,500 Energy Partners Ltd. 8.750% 08/01/10 205,000 212,175 Magnum Hunter Resources, Inc. 9.600% 03/15/12 283,000 314,130 Petroquest Energy, Inc. 10.375% 05/15/12 (b) 225,000 220,500 Whiting Petroleum Corp. 7.250% 05/01/12 455,000 453,863 ----------- 2,230,930 ----------- OIL REFINING & MARKETING - 0.3% Premcor Refining Group, Inc. 7.500% 06/15/15 235,000 254,975 ----------- 254,975 ----------- Oil & Gas Total 3,052,305 ----------- OIL & GAS SERVICES - 0.4% OIL-FIELD SERVICES - 0.4% Newpark Resources, Inc. 8.625% 12/15/07 270,000 268,650 ----------- 268,650 ----------- Oil & Gas Services Total 268,650 ----------- PAR ($) VALUE ($) - ----------------------------------------------------------- PIPELINES - 3.8% PIPELINES - 3.8% Coastal Corp. 7.625% 09/01/08 215,000 212,313 7.750% 06/15/10 605,000 601,975 Dynegy Holdings, Inc. 6.875% 04/01/11 300,000 285,000 9.875% 07/15/10 (b) 360,000 389,700 Northwest Pipeline Corp. 8.125% 03/01/10 130,000 141,050 Sonat, Inc. 7.625% 07/15/11 645,000 635,325 Southern Natural Gas Co. 8.875% 03/15/10 250,000 271,562 Williams Companies, Inc. 8.125% 03/15/12 310,000 351,075 ----------- 2,888,000 ----------- Pipelines Total 2,888,000 ----------- ENERGY TOTAL 6,208,955 ----------- - ----------------------------------------------------------- FINANCIALS - 5.0% DIVERSIFIED FINANCIAL SERVICES - 4.2% FINANCE-AUTO LOANS - 0.1% General Motors Acceptance Corp. 6.875% 09/15/11 90,000 79,002 ----------- 79,002 ----------- FINANCE-INVESTMENT BANKER/BROKER - 1.5% E*Trade Financial Corp. 8.000% 06/15/11 275,000 287,375 LaBranche & Co., Inc. 11.000% 05/15/12 775,000 837,000 ----------- 1,124,375 ----------- SPECIAL PURPOSE ENTITY - 2.6% Dow Jones CDX High Yield Index 8.250% 06/29/10 (b) 2,000,000 1,985,000 ----------- 1,985,000 ----------- Diversified Financial Services Total 3,188,377 ----------- REAL ESTATE INVESTMENT TRUSTS - 0.4% REITS-HOTELS - 0.1% La Quinta Properties, Inc. 7.000% 08/15/12 100,000 103,250 ----------- 103,250 ----------- REITS-MORTGAGE - 0.3% Thornburg Mortgage, Inc. 8.000% 05/15/13 225,000 225,000 ----------- 225,000 ----------- Real Estate Investment Trusts Total 328,250 ----------- See Accompanying Notes to Financial Statements. 10 INVESTMENT PORTFOLIO (CONTINUED) May 31, 2005 (Unaudited) CORPORATE FIXED-INCOME BONDS & NOTES (CONTINUED) PAR ($) VALUE ($) - ----------------------------------------------------------- FINANCIALS (CONTINUED) SAVINGS & LOANS - 0.4% SAVINGS & LOANS/THRIFTS-WESTERN US - 0.4% Western Financial Bank 9.625% 05/15/12 255,000 274,125 ----------- 274,125 ----------- Savings & Loans Total 274,125 ----------- FINANCIALS TOTAL 3,790,752 ----------- - ----------------------------------------------------------- INDUSTRIALS - 21.7% AEROSPACE & DEFENSE - 2.1% AEROSPACE/DEFENSE-EQUIPMENT - 2.1% Argo-Tech Corp. 9.250% 06/01/11 285,000 305,663 BE Aerospace, Inc. 8.875% 05/01/11 375,000 382,500 Sequa Corp. 8.875% 04/01/08 185,000 196,100 9.000% 08/01/09 160,000 171,200 Standard Aero Holdings, Inc. 8.250% 09/01/14 (b) 265,000 272,950 TransDigm, Inc. 8.375% 07/15/11 250,000 260,000 ----------- 1,588,413 ----------- Aerospace & Defense Total 1,588,413 ----------- BUILDING MATERIALS - 1.7% BUILDING & CONSTRUCTION PRODUCTS-MISCELLANEOUS - 0.5% Associated Materials, Inc. (a) 03/01/14 (11.250% 03/01/09) 290,000 172,550 Nortek, Inc. 8.500% 09/01/14 200,000 179,000 ----------- 351,550 ----------- BUILDING PRODUCTS-CEMENT/AGGREGATION - 0.8% RMCC Acquisition Co. 9.500% 11/01/12 (b) 370,000 358,900 U.S. Concrete, Inc. 8.375% 04/01/14 310,000 286,750 ----------- 645,650 ----------- BUILDING PRODUCTS-DOORS & WINDOWS - 0.4% ACIH, Inc. (a) 12/15/12 (11.500% 12/15/07) (b) 425,000 267,750 ----------- 267,750 ----------- Building Materials Total 1,264,950 ----------- ELECTRICAL COMPONENTS & EQUIPMENT - 0.5% WIRE & CABLE PRODUCTS - 0.5% Coleman Cable, Inc. 9.875% 10/01/12 (b) 430,000 397,750 ----------- 397,750 ----------- Electrical Components & Equipment Total 397,750 ----------- PAR ($) VALUE ($) - ----------------------------------------------------------- ELECTRONICS - 0.6% ELECTRONIC COMPONENTS-MISCELLANEOUS - 0.6% Flextronics International Ltd. 6.250% 11/15/14 135,000 135,000 Sanmina-SCI Corp. 6.750% 03/01/13 (b) 355,000 335,475 ----------- 470,475 ----------- Electronics Total 470,475 ----------- ENGINEERING & CONSTRUCTION - 0.6% BUILDING & CONSTRUCTION-MISCELLANEOUS - 0.6% J. Ray McDermott SA 11.000% 12/15/13 (b) 445,000 489,500 ----------- 489,500 ----------- Engineering & Construction Total 489,500 ----------- ENVIRONMENTAL CONTROL - 2.2% NON-HAZARDOUS WASTE DISPOSAL - 2.0% Allied Waste North America, Inc. 7.250% 03/15/15 (b) 225,000 212,625 7.875% 04/15/13 495,000 497,475 8.500% 12/01/08 255,000 263,925 Waste Services, Inc. 9.500% 04/15/14 (b) 560,000 551,600 ----------- 1,525,625 ----------- RECYCLING - 0.2% IMCO Recycling Escrow, Inc. 9.000% 11/15/14 (b) 120,000 123,900 ----------- 123,900 ----------- Environmental Control Total 1,649,525 ----------- HAND/MACHINE TOOLS - 0.2% MACHINE TOOLS & RELATED PRODUCTS - 0.2% Newcor, Inc. 6.000% 01/31/13 (7.500% 01/31/08) (g)(h) 215,562 131,493 ----------- 131,493 ----------- Hand/Machine Tools Total 131,493 ----------- MACHINERY-DIVERSIFIED - 0.5% MACHINERY-GENERAL INDUSTRY - 0.5% Douglas Dynamics LLC 7.750% 01/15/12 (b) 370,000 357,050 ----------- 357,050 ----------- Machinery-Diversified Total 357,050 ----------- METAL FABRICATE/HARDWARE - 2.0% METAL PROCESSORS & FABRICATION - 1.3% Altra Industrial Motion, Inc. 9.000% 12/01/11 (b) 250,000 240,000 See Accompanying Notes to Financial Statements. 11 INVESTMENT PORTFOLIO (CONTINUED) May 31, 2005 (Unaudited) CORPORATE FIXED-INCOME BONDS & NOTES (CONTINUED) PAR ($) VALUE ($) - ----------------------------------------------------------- INDUSTRIALS (CONTINUED) METAL FABRICATE/HARDWARE (CONTINUED) METAL PROCESSORS & FABRICATION (CONTINUED) Mueller Holdings, Inc. (a) 04/15/14 (14.750% 04/15/09) 295,000 210,925 10.000% 05/01/12 225,000 236,250 TriMas Corp. 9.875% 06/15/12 445,000 358,225 ----------- 1,045,400 ----------- METAL PRODUCTS-FASTENERS - 0.7% FastenTech, Inc. 11.500% 05/01/11 490,000 516,950 ----------- 516,950 ----------- Metal Fabricate/Hardware Total 1,562,350 ----------- MISCELLANEOUS MANUFACTURING - 2.5% DIVERSIFIED MANUFACTURING OPERATORS - 1.8% Bombardier, Inc. 6.300% 05/01/14 (b) 575,000 506,000 J.B. Poindexter & Co. 8.750% 03/15/14 350,000 330,750 Koppers Industries, Inc. 9.875% 10/15/13 310,000 330,150 Trinity Industries, Inc. 6.500% 03/15/14 165,000 159,225 ----------- 1,326,125 ----------- FILTRATION/SEPARATE PRODUCTS - 0.3% Polypore International, Inc. (a) 10/01/12 (10.500% 10/01/08) (b) 485,000 243,712 ----------- 243,712 ----------- MISCELLANEOUS MANUFACTURING - 0.4% Samsonite Corp. 8.875% 06/01/11 295,000 308,275 ----------- 308,275 ----------- Miscellaneous Manufacturing Total 1,878,112 ----------- PACKAGING & CONTAINERS - 4.1% CONTAINERS-METAL/GLASS - 1.9% Crown European Holdings SA 10.875% 03/01/13 480,000 553,200 Owens-Brockway Glass Container 6.750% 12/01/14 200,000 202,000 8.250% 05/15/13 600,000 648,000 Owens-Illinois, Inc. 7.500% 05/15/10 75,000 79,125 ----------- 1,482,325 ----------- CONTAINERS-PAPER/PLASTIC - 2.2% Consolidated Container Co. LLC (a) 06/15/09 (10.750% 06/15/07) 280,000 215,600 PAR ($) VALUE ($) - ----------------------------------------------------------- Jefferson Smurfit Corp. 8.250% 10/01/12 450,000 445,500 PIK, 11.500% 10/01/15 (b) EUR 448,573 425,205 MDP Acquisitions PLC 9.625% 10/01/12 USD 365,000 363,175 Portola Packaging, Inc. 8.250% 02/01/12 295,000 184,375 Tekni-Plex, Inc. 8.750% 11/15/13 (b) 45,000 39,150 ----------- 1,673,005 ----------- Packaging & Containers Total 3,155,330 ----------- TRANSPORTATION - 4.7% TRANSPORTATION-MARINE - 2.1% Ship Finance International Ltd. 8.500% 12/15/13 795,000 761,212 Stena AB 7.500% 11/01/13 500,000 481,250 9.625% 12/01/12 355,000 380,738 ----------- 1,623,200 ----------- TRANSPORTATION-RAILROAD - 0.7% TFM SA de CV 9.375% 05/01/12 (b) 375,000 388,125 12.500% 06/15/12 100,000 116,000 ----------- 504,125 ----------- TRANSPORTATION-SERVICES - 1.4% CHC Helicopter Corp. 7.375% 05/01/14 275,000 265,375 7.375% 05/01/14 (b) 250,000 241,250 Petroleum Helicopters, Inc. 9.375% 05/01/09 530,000 548,550 ----------- 1,055,175 ----------- TRANSPORTATION-TRUCK - 0.5% Allied Holdings, Inc. 8.625% 10/01/07 145,000 53,650 QDI LLC 9.000% 11/15/10 400,000 364,000 ----------- 417,650 ----------- Transportation Total 3,600,150 ----------- INDUSTRIALS TOTAL 16,545,098 ----------- - ----------------------------------------------------------- TECHNOLOGY - 0.4% SEMICONDUCTORS - 0.4% ELECTRONIC COMPONENTS-SEMICONDUCTORS - 0.4% Amkor Technology, Inc. 9.250% 02/15/08 370,000 325,600 ----------- 325,600 ----------- Semiconductors Total 325,600 ----------- TECHNOLOGY TOTAL 325,600 ----------- See Accompanying Notes to Financial Statements. 12 INVESTMENT PORTFOLIO (CONTINUED) May 31, 2005 (Unaudited) CORPORATE FIXED-INCOME BONDS & NOTES (CONTINUED) PAR ($) VALUE ($) - ----------------------------------------------------------- UTILITIES - 7.1% ELECTRIC - 7.1% ELECTRIC-GENERATION - 1.9% AES Corp. 9.000% 05/15/15 (b) 110,000 122,925 9.500% 06/01/09 455,000 505,050 Edison Mission Energy 9.875% 04/15/11 480,000 556,800 Texas Genco LLC 6.875% 12/15/14 (b) 245,000 252,043 ----------- 1,436,818 ----------- ELECTRIC-INTEGRATED - 1.8% CMS Energy Corp. 8.900% 07/15/08 385,000 411,950 Nevada Power Co. 9.000% 08/15/13 185,000 207,200 10.875% 10/15/09 340,000 379,100 PSE&G Energy Holdings LLC 8.625% 02/15/08 395,000 416,725 ----------- 1,414,975 ----------- INDEPENDENT POWER PRODUCER - 3.4% Caithness Coso Funding Corp. 9.050% 12/15/09 440,156 470,967 Calpine Corp. 8.500% 07/15/10 (b) 365,000 266,450 Calpine Generating Co. LLC 11.500% 04/01/11 255,000 219,300 12.390% 04/01/11 (c) 610,000 536,800 MSW Energy Holdings LLC 7.375% 09/01/10 170,000 171,275 8.500% 09/01/10 375,000 388,125 Orion Power Holdings, Inc. 12.000% 05/01/10 425,000 508,938 ----------- 2,561,855 ----------- Electric Total 5,413,648 ----------- UTILITIES TOTAL 5,413,648 ----------- TOTAL CORPORATE FIXED-INCOME BONDS & NOTES (cost of $97,590,472) 94,952,953 ----------- PREFERRED STOCKS - 2.6% SHARES - ----------------------------------------------------------- COMMUNICATIONS - 1.8% MEDIA - 1.8% PUBLISHING-PERIODICALS - 0.0% PriMedia, Inc. 8.625% 04/01/10 30 2,933 ----------- 2,933 ----------- RADIO - 1.3% Spanish Broadcasting System, Inc., PIK 10.750% 949 1,020,175 ----------- 1,020,175 ----------- SHARES VALUE ($) - ----------------------------------------------------------- TELEVISION - 0.5% Paxson Communications Corp., PIK 14.250% 11/15/06 51 336,801 ----------- 336,801 ----------- Media Total 1,359,909 ----------- COMMUNICATIONS TOTAL 1,359,909 ----------- - ----------------------------------------------------------- FINANCIALS - 0.8% REAL ESTATE INVESTMENT TRUSTS - 0.8% REITS-DIVERSIFIED - 0.8% iStar Financial, Inc. 7.800% 13,000 329,875 7.875% 11,007 282,742 ----------- 612,617 ----------- Real Estate Investment Trusts Total 612,617 ----------- FINANCIALS TOTAL 612,617 ----------- TOTAL PREFERRED STOCKS (cost of $1,914,050) 1,972,526 ----------- COMMON STOCKS - 1.7% - ----------------------------------------------------------- CONSUMER DISCRETIONARY - 0.1% HOTELS, RESTAURANTS & LEISURE - 0.1% Alliance Gaming Corp. (i) 5,500 71,445 Trump Entertainment Resorts, Inc. (i) 1,000 13,000 ----------- Hotels, Restaurants & Leisure Total 84,445 ----------- CONSUMER DISCRETIONARY TOTAL 84,445 ----------- - ----------------------------------------------------------- ENERGY - 0.1% ENERGY EQUIPMENT & SERVICES - 0.1% Hornbeck Offshore Services, Inc. (i) 2,800 69,020 ----------- Energy Equipment & Services Total 69,020 ----------- ENERGY TOTAL 69,020 ----------- - ----------------------------------------------------------- INDUSTRIALS - 0.1% COMMERCIAL SERVICES & SUPPLIES - 0.1% Allied Waste Industries, Inc. (i) 7,250 55,897 Fairlane Management Corp. (g)(i)(j) 8,000 -- ----------- Commercial Services & Supplies Total 55,897 ----------- INDUSTRIALS TOTAL 55,897 ----------- - ----------------------------------------------------------- MATERIALS - 0.1% CHEMICALS - 0.1% Lyondell Chemical Co. 5,000 118,700 ----------- Chemicals Total 118,700 ----------- MATERIALS TOTAL 118,700 ----------- - ----------------------------------------------------------- TELECOMMUNICATION SERVICES - 1.2% DIVERSIFIED TELECOMMUNICATION SERVICES - 0.5% NTL, Inc. (i) 5,942 381,952 ----------- Diversified Telecommunication Services Total 381,952 ----------- See Accompanying Notes to Financial Statements. 13 INVESTMENT PORTFOLIO (CONTINUED) May 31, 2005 (Unaudited) COMMON STOCKS (CONTINUED) SHARES VALUE ($) - ----------------------------------------------------------- TELECOMMUNICATION SERVICES (CONTINUED) WIRELESS TELECOMMUNICATION SERVICES - 0.7% Alamosa Holdings, Inc. (i) 11,653 143,915 Nextel Communications, Inc., Class A (i) 6,196 186,995 SBA Communications Corp., Class A (i) 16,090 179,886 ----------- Wireless Telecommunication Services Total 510,796 ----------- TELECOMMUNICATION SERVICES TOTAL 892,748 ----------- - ----------------------------------------------------------- UTILITIES - 0.1% MULTI-UTILITIES & UNREGULATED POWER - 0.1% Dynegy Holdings, Inc., Class A (i) 23,000 106,950 ----------- Multi-Utilities & Unregulated Power Total 106,950 ----------- UTILITIES TOTAL 106,950 ----------- TOTAL COMMON STOCKS (cost of $1,662,531) 1,327,760 ----------- CONVERTIBLE BONDS - 1.1% PAR ($) - ----------------------------------------------------------- COMMUNICATIONS - 0.8% TELECOMMUNICATION SERVICES - 0.8% TELECOMMUNICATION EQUIPMENT - 0.8% Nortel Networks Corp. 4.250% 09/01/08 645,000 592,433 ----------- 592,433 ----------- Telecommunication Services Total 592,433 ----------- COMMUNICATIONS TOTAL 592,433 ----------- - ----------------------------------------------------------- UTILITIES - 0.3% ELECTRIC - 0.3% INDEPENDENT POWER PRODUCER - 0.3% Mirant Corp. 2.500% 06/15/21 (d) 280,000 221,197 ----------- 221,197 ----------- Electric Total 221,197 ----------- UTILITIES TOTAL 221,197 ----------- TOTAL CONVERTIBLE BONDS (cost of $775,438) 813,630 ----------- MUNICIPAL BOND (TAXABLE) - 0.8% - ----------------------------------------------------------- CA Cabazon Band Mission Indians 13.000% 10/01/11 (e) 575,000 597,695 ----------- CALIFORNIA TOTAL 597,695 ----------- TOTAL MUNICIPAL BOND (TAXABLE) (cost of $575,000) 597,695 ----------- WARRANTS - 0.1% UNITS VALUE ($) - ----------------------------------------------------------- COMMUNICATIONS - 0.0% MEDIA - 0.0% BROADCAST SERVICES/PROGRAMS - 0.0% XM Satellite Radio Holdings, Inc. Expires 03/15/10 (b)(i) 600 37,800 ----------- 37,800 ----------- Media Total 37,800 ----------- TELECOMMUNICATION SERVICES - 0.0% CELLULAR TELECOMMUNICATIONS - 0.0% UbiquiTel, Inc. Expires 04/15/10 (b)(i) 525 5 ----------- 5 ----------- TELECOMMUNICATION SERVICES - 0.0% Jazztel PLC Expires 07/15/10 (b)(g)(i)(j) 350 -- ----------- -- ----------- Telecommunication Services Total 5 ----------- COMMUNICATIONS TOTAL 37,805 ----------- - ----------------------------------------------------------- INDUSTRIALS - 0.1% METAL FABRICATE/HARDWARE - 0.1% METAL PROCESSORS & FABRICATION - 0.1% Mueller Holdings, Inc. Expires 04/15/14 (b)(i) 375 43,125 ----------- 43,125 ----------- Metal Fabricate/Hardware Total 43,125 ----------- TRANSPORTATION - 0.0% TRANSPORTATION-TRUCKS - 0.0% QDI LLC Expires 01/15/07 (b)(g)(i) 2,041 6,001 ----------- 6,001 ----------- Transportation Total 6,001 ----------- INDUSTRIALS TOTAL 49,126 ----------- TOTAL WARRANTS (cost of $97,124) 86,931 ----------- See Accompanying Notes to Financial Statements. 14 INVESTMENT PORTFOLIO (CONTINUED) May 31, 2005 (Unaudited) SHORT-TERM OBLIGATION - 3.9% PAR ($) VALUE ($) - ----------------------------------------------------------- U.S. GOVERNMENT AGENCY - 3.9% Federal Home Loan Bank 2.980% 06/01/05(k) 2,960,000 2,960,000 ----------- TOTAL SHORT-TERM OBLIGATION (cost of $2,960,000) 2,960,000 ----------- TOTAL INVESTMENTS - 134.9% (cost of $105,574,615)(l) 102,711,495 ----------- OTHER ASSETS & LIABILITIES, NET - (34.9)% (26,565,441) - ----------------------------------------------------------- NET ASSETS - 100.0% 76,146,054 =========== NOTES TO INVESTMENT PORTFOLIO: - -------------------------------------------------------------------------------- (a) Step bond. This security is currently not paying coupon. Shown parenthetically is the next interest rate to be paid and the date the Fund will begin accruing at this rate. (b) Security exempt from registration pursuant to Rule 144A under the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At May 31, 2005, these securities amounted to $23,907,510, which represents 31.4% of net assets. (c) The interest rate shown on floating rate or variable rate securities reflects the rate at May 31, 2005. (d) The issuer has filed for bankruptcy protection under Chapter 11, and is in default of certain debt covenants. Income is not being accrued. At May 31, 2005, the value of these securities amounted to $913,197, which represents 1.2% of net assets. (e) Illiquid security. (f) The issuer is in default of certain debt covenants. Income is not being accrued. At May 31, 2005, the value of this security represents 1.0% of net assets. (g) Represents fair value as determined in good faith under procedures approved by the Board of Trustees. (h) Step bond. Shown parenthetically is the next interest rate to be paid. (i) Non-income producing security. (j) Security has no value. (k) The rate shown represents the annualized yield at the date of purchase. (l) Cost for federal income tax purposes is $105,597,849. At May 31, 2005, the Fund had entered into the following forward currency exchange contracts: FORWARD CURRENCY AGGREGATE SETTLEMENT UNREALIZED CONTRACTS TO BUY VALUE FACE VALUE DATE DEPRECIATION - ------------------------------------------------------------ EUR $174,795 $179,010 06/01/2005 $(4,215) EUR 98,536 103,445 06/20/2005 (4,909) ------- $(9,124) ------- FORWARD CURRENCY AGGREGATES SETTLEMENT UNREALIZED CONTRACTS TO SELL VALUE FACE VALUE DATE APPRECIATION - ------------------------------------------------------------ EUR $174,795 $183,311 06/01/2005 $ 8,516 EUR 634,326 660,745 06/20/2005 26,419 EUR 117,011 120,530 06/20/2005 3,519 EUR 103,579 106,070 07/27/2005 2,491 ------- $40,945 ------- At May 31, 2005, the composition of the Fund by revenue source is as follows: % OF HOLDINGS BY REVENUE SOURCE NET ASSETS - ---------------------------------------------------------- Corporate Fixed-Income Bonds & Notes 124.7% Preferred Stocks 2.6 Common Stocks 1.7 Convertible Bonds 1.1 Municipal Bond (Taxable) 0.8 Warrants 0.1 Short-Term Obligation 3.9 Other Assets & Liabilities, Net (34.9) ------ 100.0% ------ ACRONYM NAME - --------------------------------------------------------- EUR Euro PIK Payment-In-Kind REIT Real Estate Investment Trust USD United States Dollar See Accompanying Notes to Financial Statements. 15 STATEMENT OF ASSETS AND LIABILITIES May 31, 2005 (Unaudited) ASSETS: Investments, at cost $105,574,615 ------------ Investments, at value $102,711,495 Net unrealized appreciation on foreign forward currency contracts 40,945 Receivable for: Investments sold 870,179 Interest 2,240,320 Dividends 12,880 Reimbursement due from Investment Advisor 805 Deferred Trustees' compensation plan 9,681 ------------ Total Assets 105,886,305 ------------ LIABILITIES: Payable to custodian bank 191,086 Net unrealized depreciation on foreign forward currency contracts 9,124 Payable for: Interest 52,121 Investments purchased 260,195 Distributions 546,091 Investment advisory fee 53,519 Transfer agent fee 16,490 Pricing and bookkeeping fees 9,233 Custody fee 2,346 Deferred Trustees' fees 9,681 Notes payable - short-term 14,800,000 Notes payable - long-term 13,700,000 Other liabilities 90,365 ------------ Total Liabilities 29,740,251 ------------ NET ASSETS $ 76,146,054 ============ COMPOSITION OF NET ASSETS: Paid-in capital $141,303,724 Undistributed net investment income 487,624 Accumulated net realized loss (62,813,569) Net unrealized appreciation (depreciation) on: Investments (2,863,120) Foreign currency translations 31,395 ------------ NET ASSETS $ 76,146,054 ============ Shares outstanding 21,003,496 ------------ Net asset value per share $ 3.63 ============ STATEMENT OF OPERATIONS For the Six Months Ended May 31, 2005 (Unaudited) INVESTMENT INCOME: Interest $ 4,536,839 Dividends 112,828 ------------ Total Investment Income 4,649,667 ------------ EXPENSES: Investment advisory fee 407,967 Transfer agent fee 24,022 Pricing and bookkeeping fees 34,434 Trustees' fees 4,392 Custody fee 9,658 Other expenses 69,665 ------------ Total Operating Expenses 550,138 Interest expense 485,670 ------------ Total Expenses 1,035,808 Custody earnings credit (1,023) ------------ Net Expenses 1,034,785 ------------ Net Investment Income 3,614,882 ------------ NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY: Net realized gain (loss) on: Investments 346,121 Foreign currency transactions 16,761 Net realized loss on disposal of investments purchased/sold in error (See Note 7) -- ------------ Net realized gain 362,882 ------------ Net change in unrealized appreciation (depreciation) on: Investments (5,605,511) Foreign currency translations 31,395 ------------ Net change in unrealized appreciation (depreciation) (5,574,116) ------------ Net Loss (5,211,234) ------------ Net Decrease in Net Assets from Operations $ (1,596,352) ------------ See Accompanying Notes to Financial Statements. 16
STATEMENTS OF CHANGES IN NET ASSETS (UNAUDITED) SIX MONTHS YEAR ENDED ENDED MAY 31, NOVEMBER 30, INCREASE (DECREASE) IN NET ASSETS: 2005 2004 - --------------------------------------------------------------------------------------------------------------------------------- OPERATIONS: Net investment income $ 3,614,882 $ 7,163,795 Net realized gain on investments and foreign currency transactions 362,882 2,728,923 Net change in unrealized appreciation (depreciation) on investments and foreign currency translations (5,574,116) 2,684,740 ----------- ----------- Net Increase (Decrease) from Operations (1,596,352) 12,577,458 ----------- ----------- DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (3,486,580) (6,362,697) ----------- ----------- SHARE TRANSACTIONS: Distributions reinvested -- 62,227 ----------- ----------- Total Increase (Decrease) in Net Assets (5,082,932) 6,276,988 NET ASSETS: Beginning of period 81,228,986 74,951,998 ----------- ----------- End of period $76,146,054 $81,228,986 ----------- ----------- Undistributed net investment income at end of period $ 487,624 $ 359,322 =========== =========== CHANGES IN SHARES: Issued for distributions reinvested -- 16,818 =========== =========== See Accompanying Notes to Financial Statements.
17 STATEMENT OF CASH FLOWS For the Six Months Ended May 31, 2005 (Unaudited) INCREASE (DECREASE) IN CASH - -------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net investment income $ 3,614,882 Adjustments to reconcile net investment income to net cash provided by operating activities: Purchase of investment securities (32,210,088) Proceeds from disposition of investment securities 33,646,561 Proceeds from disposition of short-term investments, net 424,000 Net realized gain from foreign currency transactions 16,761 Increase in dividend and interest receivable (60,929) Increase in other assets (2,094) Increase in receivable for investments sold (198,932) Decrease in payable for investments purchased (688,744) Decrease in accrued expenses and other liabilities (37,817) Net amortization/accretion of income (346,567) ------------ Net cash provided by operating activities 4,157,033 CASH FLOWS FROM FINANCING ACTIVITIES: Decrease in notes payable (1,000,000) Increase in interest payable 2,398 Distributions paid in cash (3,444,573) ------------ Net cash used by financing activities (4,442,175) ------------ Net decrease in cash (285,142) CASH: Beginning of period 94,056 ------------ End of period $ (191,086) ============ See Accompanying Notes to Financial Statements. 18 NOTES TO FINANCIAL STATEMENTS May 31, 2005 (Unaudited) NOTE 1. 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. INVESTMENT GOAL The Fund seeks high current income and total return by investing primarily in high yield fixed income securities in lower-rated categories. FUND SHARES The Fund may issue an unlimited number of shares. NOTE 2. SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the 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 Debt securities generally are valued by pricing services approved by the Fund's Board of Trustees, based upon market transactions for normal, institutional-size trading units of similar securities. The services may use various pricing techniques which take into account appropriate factors such as yield, quality, coupon rate, maturity, type of issue, trading characteristics and other data, as well as broker quotes. Debt securities for which quotations are readily available are valued at an over-the-counter or exchange bid quotation. Certain debt securities, which tend to be more thinly traded and of lesser quality, are priced based on fundamental analysis of the financial condition of the issuer and the estimated value of any collateral. Valuations developed through pricing techniques may vary from the actual amounts realized upon sale of the securities, and the potential variation may be greater for those securities valued using fundamental analysis. Equity securities are valued at the last sale price on the principal exchange on which they trade, except for securities traded on the NASDAQ, which are valued at the NASDAQ official close price. Unlisted securities or listed securities for which there were no sales during the day are valued at the closing bid price on such exchanges or over-the-counter markets. Short-term debt obligations maturing within 60 days are valued at amortized cost, which approximates market value. Forward currency exchange contracts are valued at the prevailing forward exchange rate of the underlying currencies. Foreign securities are generally valued at the last sale price on the foreign exchange or market on which they trade. If any foreign share prices are not readily available as a result of limited share activity, the securities are valued at the last sale price of the local shares in the principal market in which such securities are normally traded. Generally, trading in foreign securities is substantially completed each day at various times prior to the close of the New York Stock Exchange ("NYSE"). The values of such securities used in computing the net asset value of the Fund's shares are determined as of such times. Foreign currency exchange rates are generally determined at 2:00 p.m. Eastern (U.S.) time. Events affecting the values of such foreign securities and such exchange rates may occur between the times at which they are determined and the close of the customary trading session of the NYSE, which would not be reflected in the computation of the Fund's net asset value. If events materially affecting the values of such foreign securities occur and it is determined that market quotations are not reliable, then these foreign securities will be valued at their fair value using procedures approved by the Board of Trustees. Investments for which market quotations are not readily available, or have quotations which management believes are not appropriate, are valued at fair value under procedures approved by the Board of Trustees. SECURITY TRANSACTIONS Security transactions are accounted for on the trade date. Cost is determined and gains (losses) are based upon the specific identification method for both financial statement and federal income tax purposes. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS Forward foreign currency exchange contracts are agreements to exchange one currency for another at a future date at a specified price. These contracts are used to minimize the exposure to foreign exchange rate fluctuations during the period between trade and settlement date of the contracts. The Fund may utilize forward foreign currency exchange contracts in connection with the settlement of purchases and sales of securities. The Fund may also enter into these contracts to hedge certain other foreign currency denominated assets. Contracts to buy generally are used to acquire exposure to foreign currencies, while contracts to sell are used to hedge the Fund's investments against currency fluctuations. Forward currency contracts are valued daily at the current exchange rate of the underlying currency, resulting in unrealized gains (losses) which become realized at the time the foreign 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 19 NOTES TO FINANCIAL STATEMENTS (CONTINUED) May 31, 2005 (Unaudited) transactions. The use of forward currency contracts does 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. The Fund could also be exposed to risk if the counterparties of the contracts are unable to fulfill the terms of the contracts. DELAYED DELIVERY SECURITIES The Fund may trade securities on other than normal settlement terms, including securities purchased or sold on a "when-issued" basis. 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. The Fund identifies cash or liquid portfolio securities in an amount equal to the delayed delivery commitment. INCOME RECOGNITION Interest income is recorded on the accrual basis. Premium and discount are amortized and accreted, respectively, on all debt securities. 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. The value of additional securities received as an income payment is recorded as income and as the cost basis of such securities. FOREIGN CURRENCY TRANSACTIONS The values of all assets and liabilities quoted in foreign currencies are translated into U.S. dollars at that day's exchange rates. 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, interest income and foreign withholding taxes. For financial statement purposes, 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) on investments. FEDERAL INCOME TAX STATUS The Fund intends to qualify each year as a "regulated investment company" under Subchapter M of the Internal Revenue Code, as amended, and will distribute substantially all of its taxable income, if any, for its tax year, and as such will not be subject to federal income taxes. In addition, the Fund intends to distribute in each calendar year substantially all of its net investment income, capital gains and certain other amounts, if any, such that the Fund should not be subject to federal excise tax. Therefore, no federal income or excise tax provision is recorded. DISTRIBUTIONS TO SHAREHOLDERS Distributions to shareholders are recorded on ex-date. Net realized capital gains, if any, are distributed at least annually. 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 within the Fund's Statement of Assets and Liabilities and includes cash on hand at its custodian bank and does not include any short-term investments. NOTE 3. FEDERAL TAX INFORMATION The tax character of distributions paid during the year ended November 30, 2004 was as follows: NOVEMBER 30, 2004 ---------- Distributions paid from: Ordinary Income $6,362,697 Long-Term Capital Gains -- Unrealized appreciation and depreciation at May 31, 2005, based on cost of investments for federal income tax purposes, excluding any unrealized appreciation and depreciation from changes in the value of other assets and liabilities resulting from changes in exchange rates, was: Unrealized appreciation $ 3,303,794 Unrealized depreciation (6,190,148) ----------- Net unrealized depreciation $(2,886,354) =========== The following capital loss carryforwards, determined as of November 30, 2004, 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 CAPITAL LOSS EXPIRATION CARRYFORWARD ----------------- ----------------------- 2006 $ 410,216 2007 10,437,671 2008 22,694,029 2009 23,203,433 2010 6,431,055 ----------- $63,176,404 =========== 20 NOTES TO FINANCIAL STATEMENTS (CONTINUED) May 31, 2005 (Unaudited) NOTE 4. FEES AND COMPENSATION PAID TO AFFILIATES INVESTMENT ADVISORY FEE Columbia Management Advisors, Inc. ("Columbia"), an indirect wholly owned subsidiary of Bank of America Corporation ("BOA"), is the investment advisor to the Fund and provides administrative and other services to the Fund. Columbia receives a monthly investment advisory fee at the annual rate of 0.65% of the Fund's average weekly net assets. In addition, the Fund shall pay Columbia a monthly fee of 20% of the Fund's monthly "leverage income" (as that term is defined in the management contract). In the event that the Fund's monthly leverage income is less than zero, then Columbia shall pay the Fund 20% of the Fund's monthly leverage income. For the six months ended May 31, 2005, the Fund paid fees of $149,909 to Columbia under this agreement, which represents 0.38% annually of the Fund's average daily net assets. This amount is included in "Investment advisory fee" on the Statement of Operations. PRICING AND BOOKKEEPING FEES Columbia is responsible for providing pricing and bookkeeping services to the Fund under a pricing and bookkeeping agreement. Under a separate agreement (the "Outsourcing Agreement"), Columbia has delegated those functions to State Street Corporation ("State Street"). As a result, Columbia pays the total fees received to State Street under the Outsourcing Agreement. Under its pricing and bookkeeping agreement with the Fund, Columbia receives from the Fund an annual flat fee of $10,000 paid monthly, and in any month that the Fund's average weekly net assets exceed $50 million, an additional monthly fee. The additional fee rate is calculated by taking into account the fees payable to State Street under the Outsourcing Agreement. This rate is applied to the average weekly net assets of the Fund for that month. The Fund also pays additional fees for pricing services based on the number of securities held by the Fund. For the six months ended May 31, 2005, the Fund's annualized effective pricing and bookkeeping fee rate, inclusive of out-of-pocket expenses, was 0.086%. CUSTODY CREDITS The Fund has an agreement with its custodian bank under which custody fees may be reduced by balance credits. These credits are recorded as a reduction of total expenses on the Statement of Operations. 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. FEES PAID TO OFFICERS AND TRUSTEES With the exception of one officer, all officers of the Fund are employees of Columbia or its affiliates and receive no compensation from the Fund. The Board of Trustees appointed a Chief Compliance Officer to the Fund in accordance with federal securities regulations. The Fund, along with other affiliated funds, will pay its pro-rata share of the expenses associated with the Office of the Chief Compliance Officer. The Fund's fee for the Office of the Chief Compliance Officer will not exceed $15,000 per year. The Fund's 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. OTHER Columbia provides certain services to the Fund related to Sarbanes-Oxley compliance. For the six months ended May 31, 2005, the Fund paid $791 to Columbia for such services. This amount is included in "Other expenses" on the Statement of Operations. NOTE 5. PORTFOLIO INFORMATION For the six months ended May 31, 2005, the cost of purchases and proceeds from sales of securities, excluding short-term obligations, were $32,210,088 and $33,646,561, respectively. NOTE 6. LOAN AGREEMENT At May 31, 2005, the Fund had term loans and a revolving loan outstanding with State Street, totaling $28,500,000. The term loans are comprised of a $13,700,000 loan which bears interest at 3.12% per annum, due August 26, 2005 and a $2,000,000 loan which bears interest at 3.13% per annum, due August 26, 2005. The revolving loan is a $12,800,000 floating rate loan, maturing on August 23, 2005. At May 31, 2005, the average daily loan balance was $29,329,670 at a weighted average interest rate of 3.32%. The Fund is subject to certain covenants including, but not limited to, requirements with respect to asset coverage, portfolio diversification and liquidity. NOTE 7. TRADING LOSS During the six months ended May 31, 2005, the Fund entered into a foreign forward currency exchange contract which resulted in a trading error. This position was subsequently closed at a loss of $805 and the Fund is in the process of being reimbursed by Columbia. NOTE 8. DISCLOSURE OF SIGNIFICANT RISKS AND CONTINGENCIES FOREIGN SECURITIES 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. In addition, the liquidity of foreign securities may be more limited than that of domestic securities. 21 NOTES TO FINANCIAL STATEMENTS (CONTINUED) May 31, 2005 (Unaudited) HIGH-YIELD SECURITIES Investing in high-yield securities may involve greater credit risk and considerations not typically associated with investing in U.S. Government bonds and other higher quality fixed income securities. These securities are non-investment grade securities, often referred to as "junk bonds." Economic downturns may disrupt the high yield market and impair the ability of issuers to repay principal and interest. Also, an increase in interest rates would likely have an adverse impact on the value of such obligations. Moreover, high-yield securities may be less liquid to the extent that there is no established secondary market. LEGAL PROCEEDINGS On February 9, 2005, Columbia and Columbia Funds Distributor, Inc. (collectively, the "Columbia Group") entered into an Assurance of Discontinuance with the New York Attorney General ("NYAG") (the "NYAG Settlement") and consented to the entry of a cease-and-desist order by the Securities and Exchange Commission ("SEC") (the "SEC Order"). The SEC Order and the NYAG Settlement are referred to collectively as the "Settlements". The Settlements contain substantially the same terms and conditions as outlined in the agreements in principle which Columbia Group entered into with the SEC and NYAG in March 2004. Under the terms of the SEC Order, the Columbia Group has agreed among other things, to: pay $70 million in disgorgement and $70 million in civil money penalties; cease and desist from violations of the antifraud provisions and certain other provisions of the federal securities laws; maintain certain compliance and ethics oversight structures; retain an independent consultant to review the Columbia Group's applicable supervisory, compliance, control and other policies and procedures; and retain an independent distribution consultant (see below). The Columbia Funds have also undertaken to implement certain governance measures designed to maintain the independence of their boards of trustees. The NYAG Settlement also, among other things, requires Columbia and its affiliates, Banc of America Capital Management, LLC and BACAP Distributors, LLC to reduce certain Columbia Funds, Nations Funds and other mutual funds management fees collectively by $32 million per year for five years, for a projected total of $160 million in management fee reductions. Pursuant to the procedures set forth in the SEC order, the $140 million in settlement amounts described above will be distributed in accordance with a distribution plan to be developed by an independent distribution consultant, who is acceptable to the SEC staff and the Columbia Funds' independent trustees. The distribution plan must be based on a methodology developed in consultation with the Columbia Group and the Fund's independent trustees and not unacceptable to the staff of the SEC. At this time, the distribution plan is still under development. As such, any gain to the fund or its shareholders can not currently be determined. As a result of these matters or any adverse publicity or other developments resulting from them, the market price of fund shares could decline. A copy of the SEC Order is available on the SEC website at http://www.sec.gov. A copy of the NYAG Settlement is available as part of the Bank of America Corporation Form 8-K filing on February 10, 2005. In connection with events described in detail above, various parties have filed suit against certain funds, the Trustees of the Columbia Funds, FleetBoston Financial Corporation and its affiliated entities and/or Bank of America Corporation and its affiliated entities. More than 300 cases including those filed against entities unaffiliated with the funds, their Boards, FleetBoston Financial Corporation and its affiliated entities and/or Bank of America Corporation and its affiliated entities have been transferred to the Federal District Court in Maryland and consolidated in a multi-district proceeding (the "MDL"). The derivative cases purportedly brought on behalf of the Columbia Funds in the MDL have been consolidated under the lead case. The fund derivative plaintiffs allege that the funds were harmed by market timing and late trading activity and seek, among other things, removal of the trustees of the Columbia Funds, removal of the Columbia Group, disgorgement of all management fees and monetary damages. On March 21, 2005 purported class action plaintiffs filed suit in Massachusetts state court alleging that the conduct, including market timing, entitles Class B shareholders in certain Columbia funds to an exemption from contingent deferred sales charges upon early redemption (the "CDSC Lawsuit"). The CDSC Lawsuit has been removed to federal court in Massachusetts and the federal Judicial Panel has conditionally ordered its transfer to the MDL. The MDL is ongoing. Accordingly, an estimate of the financial impact of this litigation on any fund, if any, can not currently be made. On January 11, 2005, a putative class action lawsuit was filed in federal district court in Massachusetts against, among others, the Trustees of the Columbia Funds and Columbia. The lawsuit alleges that defendants violated common law duties to fund shareholders as well as sections of the Investment Company Act of 1940, by failing to ensure that the Fund and other affiliated funds participated in securities class action settlements for which the funds were eligible. Specifically, plaintiffs allege that defendants failed to submit proof of claims in connection with settlements of securities class action lawsuits filed against companies in which the funds held positions. In 2004, certain Columbia funds, advisers and affiliated entities were named as defendants in certain purported shareholder class and derivative actions making claims, including claims under the Investment Company and the Investment Advisers Acts of 22 NOTES TO FINANCIAL STATEMENTS (CONTINUED) May 31, 2005 (Unaudited) 1940 and state law. The suits allege, inter alia, that the fees and expenses paid by the funds are excessive and that the advisers and their affiliates inappropriately used fund assets to distribute the funds and for other improper purpose. On March 2, 2005, the actions were consolidated in the Massachusetts federal court as In re Columbia Entities Litigation. The plaintiffs filed a consolidated amended complaint on June 9, 2005. The Fund and the other defendants to these actions, including Columbia and various of its affiliates, certain other mutual funds advised by Columbia and its affiliates, and various directors of such funds, have denied these allegations and are contesting the plaintiffs' claims. These proceedings are ongoing, however, based on currently available information, Columbia believes that these lawsuits are without merit, that the likelihood they will have a material adverse impact on any fund is remote, and that the lawsuits are not likely to materially affect its ability to provide investment management services to its clients, including the Fund. 23 FINANCIAL HIGHLIGHTS Selected data for a share outstanding throughout each period is as follows:
(UNAUDITED) SIX MONTHS ONE MONTH ENDED YEAR ENDED ENDED YEAR ENDED OCTOBER 31, MAY 31, NOVEMBER 30, NOVEMBER 30, ---------------------------------- 2005 2004 2003 (a) 2003 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 3.87 $ 3.57 $ 3.51 $ 2.79 $ 3.51 $ 4.83 ------------ ----------- ----------- ----------- ----------- ----------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (b) 0.17 0.34 0.02 0.29 0.38(c) 0.51 Net realized and unrealized gain (loss) on investments and foreign currency (0.24) 0.26 0.07 0.75 (0.73)(c) (1.26) ------------ ----------- ----------- ----------- ----------- ----------- Total from Investment Operations (0.07) 0.60 0.09 1.04 (0.35) (0.75) ------------ ----------- ----------- ----------- ----------- ----------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.17) (0.30) (0.03) (0.30) (0.36) (0.55) Return of capital -- -- -- (0.02) (0.01) (0.02) ------------ ----------- ----------- ----------- ----------- ----------- Total Distributions Declared to Shareholders (0.17) (0.30) (0.03) (0.32) (0.37) (0.57) ------------ ----------- ----------- ----------- ----------- ----------- NET ASSET VALUE, END OF PERIOD $ 3.63 $ 3.87 $ 3.57 $ 3.51 $ 2.79 $ 3.51 ------------ ----------- ----------- ----------- ----------- ----------- Market price per share $ 3.36 $ 3.51 $ 3.50 $ 3.65 $ 2.79 $ 3.49 ------------ ----------- ----------- ----------- ----------- ----------- Total return--based on market value (d) 0.25%(e)(f) 9.24% (3.40)%(e) 44.56% (10.43)% (14.26)% ------------ ----------- ----------- ----------- ----------- ----------- RATIOS TO AVERAGE NET ASSETS/ SUPPLEMENTAL DATA: Operating expenses (g) 1.38%(h) 1.48% 1.63%(h) 1.35% 1.25% 1.31% Interest and amortization of deferred debt issuance expenses 1.22%(h) 1.18% 1.38%(h) 2.00% 2.73% 2.98% Total expenses (g) 2.60%(h) 2.66% 3.01%(h) 3.35% 3.98% 4.29% Net investment income (g) 9.07%(h) 9.25% 7.82%(h) 9.18% 11.38%(c) 11.96% Portfolio turnover rate 31%(e) 80% 7%(e) 64% 54% 52% Net assets, end of period (000's) $ 76,146 $ 81,229 $ 74,952 $ 73,623 $ 58,134 $ 72,353
(a) The Fund changed its fiscal year end from October 31 to November 30. (b) Per share data was calculated using average shares outstanding during the period. (c) Effective November 1, 2001, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium and accreting discount on all debt securities. The effect of this change for the year ended October 31, 2002 was to increase the net investment income per share by $0.02, increase the net realized and unrealized loss per share by $0.02 and increase the 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. (d) Total return at market value assuming all distributions reinvested at prices calculated in accordance with the Dividend Reinvestment Plan. (e) Not annualized. (f) Total return includes a voluntary reimbursement by the Investment Advisor for a realized investment loss. This reimbursement had an impact of less than 0.01% on the Fund's total return. (g) The benefits derived from custody credits and directed brokerage arrangements, if applicable, had an impact of less than 0.01%. (h) Annualized. 24 FINANCIAL HIGHLIGHTS (CONTINUED) Selected data for a share outstanding throughout each period is as follows:
YEAR ENDED OCTOBER 31, - ------------------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 1995 ------------ ----------- ----------- ----------- ----------- ----------- NET ASSET VALUE, BEGINNING OF PERIOD $ 5.97 $ 6.20 $ 7.27 $ 6.89 $ 6.62 $ 6.28 ------------ ----------- ----------- ----------- ----------- ----------- INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.67 0.70 0.70 0.70 0.70 0.70 Net realized and unrealized gain (loss) on investments and foreign currency (1.10) (0.23) (1.08) 0.38 0.26 0.34 ------------ ----------- ----------- ----------- ----------- ----------- Total from Investment Operations (0.43) 0.47 (0.38) 1.08 0.96 1.04 ------------ ----------- ----------- ----------- ----------- ----------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.69) (0.70) (0.69) (0.70) (0.69) (0.70) In excess of net investment income (0.02) -- -- -- -- -- ------------ ----------- ----------- ----------- ----------- ----------- Total Distributions Declared to Shareholders (0.71) (0.70) (0.69) (0.70) (0.69) (0.70) ------------ ----------- ----------- ----------- ----------- ----------- NET ASSET VALUE, END OF PERIOD $ 4.83 $ 5.97 $ 6.20 $ 7.27 $ 6.89 $ 6.62 ------------ ----------- ----------- ----------- ----------- ----------- Market price per share $ 4.63 $ 5.63 $ 6.81 $ 7.56 $ 7.13 $ 6.88 ------------ ----------- ----------- ----------- ----------- ----------- Total return--based on market value (a) (6.12)% (7.89)% (0.74)% 16.97% 14.62% 33.00% ------------ ----------- ----------- ----------- ----------- ----------- RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA: Operating expenses (b) 0.92% 0.89% 0.88% 0.89% 0.98% 0.95% Interest and amortization of deferred debt issuance expenses 2.79% 2.48% 2.11% 1.96% 2.07% 1.94% Total expenses (b) 3.71% 3.37% 2.99% 2.85% 3.05% 2.89% Net investment income (b) 11.88% 10.82% 9.70% 9.63% 10.11% 10.76% Portfolio turnover rate 42% 44% 69% 92% 92% 92% Net assets, end of period (000's) $ 98,333 $ 121,018 $ 124,480 $ 107,774 $ 99,925 $ 93,984
(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 an impact of less than 0.01%, except for the year ended October 31, 1997 which had a 0.01% impact. 25 FINANCIAL HIGHLIGHTS (CONTINUED) LOAN AGREEMENT ASSET COVERAGE REQUIREMENTS ASSET COVERAGE TOTAL AMOUNT PER $1,000 OF DATE OUTSTANDING INDEBTEDNESS --------- ----------- ------------ 05/31/05* $28,500,000 $3,672 11/30/04 29,500,000 3,754 11/30/03 28,500,000 3,630 10/31/03 28,500,000 3,583 10/31/02 24,500,000 3,373 10/31/01 30,500,000 3,372 10/31/00 47,300,000 3,079 10/31/99 47,300,000 3,558 10/31/98 47,300,000 3,632 10/31/97 27,400,000 4,933 10/31/96 27,400,000 4,647 10/31/95 27,400,000 4,430 * Unaudited 26 SHAREHOLDER MEETING RESULTS RESULTS OF THE ANNUAL MEETING OF SHAREHOLDERS On May 25, 2005, 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 10, 2005, the record date for the Meeting, the Fund had 21,003,496 shares outstanding. The votes cast were as follows: PROPOSAL 1. ELECTION FOR TRUSTEES: FOR WITHHELD - --------------------------------------------------------------------------- Richard W. Lowry 16,831,194 251,261 William E. Mayer 16,822,113 260,342 Charles R. Nelson 16,813,848 268,607 Richard L. Woolworth 16,831,694 250,761 27 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 1-800-730-6001. 28 BOARD CONSIDERATION AND APPROVAL OF INVESTMENT ADVISORY AGREEMENT Section 15(c) of the Investment Company Act of 1940 (the "1940 Act") requires that the Board of Trustees/Directors (the "Board") of the Columbia Funds (the "Funds"), including a majority of the Trustees and Directors (collectively, the "Trustees") who are not "interested persons" of the Trusts, as defined in the 1940 Act (the "Independent Trustees"), annually review and approve the terms of the Funds' investment advisory agreements. At a meeting held on October 13, 2004, the Board reviewed and approved the management contracts ("Advisory Agreement") with Columbia Management Advisors, Inc. ("CMA") for the Fund. At meetings held on September 23, 2004 and October 12, 2004, the Advisory Fees and Expenses Committee (the "Committee") of the Board considered the factors described below relating to the selection of CMA and the approval of the Advisory Agreement. At a meeting held on October 13, 2004, the Board, including the Independent Trustees (who were advised by their independent legal counsel), considered these factors and reached the conclusions described below. NATURE, EXTENT AND QUALITY OF SERVICES The Board considered information regarding the nature, extent and quality of services that CMA provides to the Fund under the Advisory Agreement. CMA provided the most recent investment adviser registration form ("Form ADV") and code of ethics for CMA to the Board. The Board reviewed information on the status of Securities and Exchange Commission ("SEC") and New York Attorney General ("NYAG") proceedings against CMA and certain of its affiliates, including the agreement in principle entered into with the SEC and the NYAG on March 15, 2004 to settle civil complaints filed by the SEC and the NYAG relating to trading activity in mutual fund shares.1 The Board evaluated the ability of CMA, including its resources, reputation and other attributes, to attract and retain highly qualified research, advisory and supervisory investment professionals. The Board considered information regarding CMA's compensation program for its personnel involved in the management of the Fund. Based on these considerations and other factors, including those referenced below, the Board concluded that they were generally satisfied with the nature, extent and quality of the investment advisory services provided to the Fund by CMA. FUND PERFORMANCE AND EXPENSES CMA provided the Board with relative performance and expense information for the Fund in a report prepared by Lipper Inc. ("Lipper") an independent provider of investment company data. The Board considered the total return performance information, which included the ranking of the Fund within a performance universe made up of funds with the same Lipper investment classification and objective (the "Performance Universe") by total return for one-year, three-year, five-year, ten-year or life of fund periods, as applicable. They also considered the Fund's performance in comparison to the performance results of a group (the "Performance Peer Group") of funds selected by Lipper based on similarities in fund type (e.g. open-end), investment classification and objective, asset size, load type and 12b-1/service fees and other expense features, and to the performance results of the Fund's benchmark index. The Board reviewed a description of Lipper's methodology for selecting the mutual funds in the Fund's Performance Peer Group and Performance Universe. The Board considered statistical information regarding the Fund's total expenses and certain components thereof, including management fees (both actual management fees based on expenses for advisory and administrative fees including any reductions for fee waivers and expense reimbursements as well as contractual management fees that are computed for a hypothetical level of assets), actual non-management expenses, and fee waivers/caps and expense reimbursements. They also considered comparisons of these expenses to the expense information for funds within a group (the "Expense Peer Group") selected by Lipper based on similarities in fund type (e.g. open-end), investment classification and objective, asset size, load type and 12b-1/service fees and other expense features (but which, unlike the Performance Peer Group,may include funds with several different investment classifications and objectives) and an expense universe ("Expense Universe") selected by Lipper based on the criteria for determining the Expense Peer Group other than asset size. The expense information in the Lipper report took into account all existing fee waivers and expense reimbursements as well as all voluntary advisory fee reductions applicable to certain Funds that were being proposed by management in order to reduce the aggregate advisory fees received from mutual funds advised by CMA and Banc of America Capital Management, LLC ("BACAP") by $32 million per year for five years as contemplated by the agreement in principle with the NYAG. The Committee also considered the projected impact on expenses of these Funds resulting from the overall cost reductions that management anticipated would result from the proposed shift to a common group of service providers for transfer agency, fund accounting and custody services for mutual funds advised by Bank of America affiliates. The Board also considered information in the Lipper report that ranked each Fund based on (i) each Fund's one-year performance and actual management fees, (ii) each Fund's one-year performance and total expenses and (iii) each Fund's 3-year performance and total expenses. Based on these comparisons and expense and performance rankings of the Fund in the Lipper Report, CMA determined an overall score for the Fund. The Committee and the Board also considered projected savings to the Fund that would result from certain modifications in soft dollar arrangements. The Committee also considered more detailed information relating to certain Funds, including the Fund, that were highlighted for additional review based upon the fact that they - -------------- 1 On February 9, 2005, CMA and its affiliate, Columbia Funds Distributor, Inc., entered into settlement agreements with the SEC and the NYAG that contain substantially the terms outlined in the agreements in principle. 29 BOARD CONSIDERATION AND APPROVAL OF INVESTMENT ADVISORY AGREEMENT (CONTINUED) ranked poorly in terms of overall expense or management fees, maintained poor performance or demonstrated a combination of below average to poor performance while maintaining below average or poor expense rankings. At its September 23, 2004 meeting, the Committee discussed these Funds with management and in executive session. The Committee requested additional information from management regarding the cause(s) of the below-average relative performance of these Funds, any remedial actions management recommended to improve performance and the general standards for review of portfolio manager performance. At its October 12, 2004 meeting, the Committee considered additional information provided by management regarding these Funds. The Fund was identified for further review based on poor relative one- and three-year relative performance against total expenses (based on net asset value). Management noted that the Fund's performance had been negatively impacted by the fact that interest rates payable under a loan facility for the Fund were higher than current market interest rates. Management further noted that the loan facility had been replaced in August 2004 with a new loan facility with lower interest rates. Management also noted the Fund's other expenses included in the total expense ratio were expected to improve due to projected lower fund accounting expenses. The Board also considered management's proposal to merge or liquidate some of these Funds. Based on these considerations and other factors, the Board concluded that the overall performance and expense results supported by the approval of the Advisory Agreements for each Fund. INVESTMENT ADVISORY FEE RATES The Board reviewed and considered the proposed contractual investment advisory fee rates (the "Advisory Agreement Rates") payable by the Funds to CMA for investment advisory services. In addition, the Board reviewed and considered the existing and proposed fee waiver and reimbursement arrangements applicable to the Advisory Agreement Rates and considered the Advisory Agreement Rates after taking the fee waivers and reimbursements into account (the "Net Advisory Rates"). At previous meetings, the Committee had separately considered management's proposal to reduce annual investment advisory fees for certain Funds under the NYAG agreement in principle and the impact of these reductions on each affected Fund. Additionally, the Board considered information comparing the Advisory Agreement Rates and Net Advisory Rates (both on a stand-alone basis and on a combined basis with the Funds' administration fee rates) with those of the other funds in the Expense Peer Group. The Board concluded that the Advisory Agreement Rates and Net Advisory Rates represented reasonable compensation to CMA, in light of the nature, extent and quality of the services provided to the Funds, the fees paid and expenses borne by comparable funds and the costs that CMA incurs in providing these services to the Funds. PROFITABILITY The Board considered a detailed profitability analysis of CMA based on 2003 financial statements, adjusted to take into account advisory fee reductions implemented in November 2003 and proposed reductions under the NYAG proposed settlement. The Board concluded that, in light of the costs of providing investment management and other services to the Funds, the profits and other ancillary benefits that CMA and its affiliates received for providing these services to the Funds were not unreasonable. ECONOMIES OF SCALE In evaluating potential economies of scale, the Board considered CMA's proposal to implement a standardized breakpoint schedule for combined advisory and administrative fees for the majority of the funds of the same general asset type within the Columbia Funds complex (other than index and closed-end funds). The Board noted that the standardization of the breakpoints would not result in a fee increase for any Fund. The Board concluded that any actual or potential economies of scale are, or will be, shared fairly with Fund shareholders, including most particularly through Advisory Agreement Rate breakpoints at current and reasonably foreseeable asset levels. INFORMATION ABOUT SERVICES TO OTHER CLIENTS In evaluating the proposed fee reductions under the NYAG agreement in principle, the Board considered information regarding the advisory fee rates charged by BACAP for the Nations Funds. Members of the Committee and the Board had also separately reviewed advisory fee rates for variable insurance product funds advised by CMA. This information assisted the Board in assessing the reasonableness of fees paid under the Advisory Agreements in light of the nature, extent and quality of services provided under those agreements. OTHER BENEFITS TO CMA The Board considered information regarding potential "fall-out" or ancillary benefits received by CMA and its affiliates as a result of their relationship with the Funds. These benefits could include benefits directly attributable to the relationship of CMA with the Funds (such as soft dollar credits) and benefits potentially derived from an increase in the business of CMA as a result of their relationship with the Funds (such as the ability to market to shareholders other financial products offered by CMA and its affiliates). OTHER FACTORS AND BROADER REVIEW The Board reviews detailed materials provided by CMA annually as part of the approval process under Section 15(c) of the 1940 Act. The Board also regularly reviews and assesses the quality of the services that the Funds receive throughout the year. In this regard, the Board reviews information provided by CMA at their regular meetings, including, among other things, a detailed portfolio review, and detailed fund performance reports. In addition, the Board interviews the heads of each investment area at each regular meeting of the Board and selected portfolio managers of the Funds at various times throughout the year. After considering the above-described factors and based on the deliberations and their evaluation of the information provided to them, the Board concluded that re-approval of the Advisory Agreements for each of the Funds was in the best interest of the Funds and their shareholders. Accordingly, the Board unanimously approved the Advisory Agreements. 30 This page intentionally left blank. This page intentionally left blank. TRANSFER AGENT - -------------------------------------------------------------------------------- IMPORTANT INFORMATION ABOUT THIS REPORT The Transfer Agent for Colonial Intermediate High Income Fund is: PFPC, Inc. P.O. Box 8030 Boston, MA 02266-8030 The fund mails one shareholder report to each shareholder address. Shareholders can order additional reports by calling 800-730-6001. 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. A description of the fund's proxy voting policies and procedures is available (i) at www.columbiamanagement.com; (ii) on the Securities and Exchange Commission's website at www.sec.gov, and (iii) without charge, upon request, by calling 800-730-6001. Information regarding how the fund voted proxies relating to portfolio securities during the 12-month period ended June 30, 2004 is available from the SEC's website. Information regarding how the fund voted proxies relating to portfolio securities is also available at www.columbiamanagement.com. The 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. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be reviewed and copied at the SEC's Public Reference Room in Washington, DC. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. Annual Certifications -- As required, on June 13, 2005, the fund submitted to the New York Stock Exchange ("NYSE") the annual certification of the fund's Chief Executive Officer certifying that he is not aware of any violation of the NYSE's Corporate Governance listing standards. The fund also has included the certifications of the fund's Chief Executive Officer and Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002 as exhibits to the fund's Form N-CSR filed with the Securities and Exchange Commission for the annual period. This report has been prepared for shareholders of Colonial Intermediate High Income Fund. COLONIAL INTERMEDIATE HIGH INCOME FUND SEMIANNUAL REPORT SHC-44/87167-0605 (07/05) 05/6518 ITEM 2. CODE OF ETHICS. Not applicable at this time. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. Not applicable at this time. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Not applicable at this time. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable. ITEM 6. SCHEDULE OF INVESTMENTS The registrant's "Schedule I - Investments in securities of unaffiliated issuers" (as set forth in 17 CFR 210.12-12) is included in Item 1 of this Form N-CSR. ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS.
Registrant Purchases of Equity Securities* (a) (b) (c) (d) Total Number of Maximum Number of Shares Purchased as Shares that May Yet Period Total Number Average Price Part of Publicly Be Purchased Under of Shares Purchased Paid Per Share Announced Plans or Programs the Plans or Programs - ------------------------------------------------------------------------------------------------------------------------------- 12/01/04 through 12/31/04 14,687 $3.59 14,687 N/A 01/01/05 through 01/31/05 20,530 $3.77 20,530 N/A 02/01/05 through 02/28/05 14,844 $3.73 14,844 N/A 03/01/05 through 03/31/05 15,361 $3.59 15,361 N/A 04/01/05 through 04/30/05 15,680 $3.54 15,680 N/A 05/01/05 through 05/31/05 16,807 $3.36 16,807 N/A - ------------------------------------------------------------------------------------------------------------------------------- Total 97,909 $3.60 97,909 N/A - -------------------------------------------------------------------------------------------------------------------------------
* Includes shares purchased by the Dividend Reinvestment Agent pursuant to the Registrant's Dividend Reinvestment Plan. ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have not been any material changes to the procedures by which shareholders may recommend nominees to the registrant's board of directors, since those procedures were last disclosed in response to the requirements of Item 7(d)(2)(ii)(G) of Schedule 14A or this Item. ITEM 11. CONTROLS AND PROCEDURES. (a) The registrant's principal executive officer and principal financial officers, based on their evaluation of the registrant's disclosure controls and procedures as of a date within 90 days of the filing of this report, have concluded that such controls and procedures are adequately designed to ensure that information required to be disclosed by the registrant in Form N-CSR is accumulated and communicated to the registrant's management, including the principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. (b) There were no changes in the registrant's internal control over financial reporting that occurred during the registrant's second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. ITEM 12. EXHIBITS. (a)(1) Code of ethics required to be disclosed under Item 2 of Form N-CSR: Not applicable at this time. (a)(2) Certifications pursuant to Rule 30a-2(a) under the Investment Company Act of 1940 (17 CFR 270.30a-2(a)) attached hereto as Exhibit 99.CERT. (a)(3) Not applicable. (b) Certification pursuant to Rule 30a-2(b) under the Investment Company Act of 1940 (17 CFR 270.30a-2(b)) attached hereto as Exhibit 99.906CERT. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (registrant) Colonial Intermediate High Income Fund ------------------------------------------------------------------- By (Signature and Title) /S/ Christopher L. Wilson -------------------------------------------------------- Christopher L. Wilson, President Date July 28, 2005 ---------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By (Signature and Title) /S/ Christopher L. Wilson -------------------------------------------------------- Christopher L. Wilson, President Date July 28, 2005 ---------------------------------------------------------------------------- By (Signature and Title) /S/ J. Kevin Connaughton -------------------------------------------------------- J. Kevin Connaughton, Treasurer Date July 28, 2005 ---------------------------------------------------------------------------- EX-99.CERT 2 file002.txt CERTIFICATIONS I, Christopher L. Wilson, certify that: 1. I have reviewed this report on Form N-CSR of Colonial Intermediate High Income Fund; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: July 28, 2005 /S/ Christopher L. Wilson -------------------------------- Christopher L. Wilson, President I, J. Kevin Connaughton, certify that: 1. I have reviewed this report on Form N-CSR of Colonial Intermediate High Income Fund; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: July 28, 2005 /S/ J. Kevin Connaughton ------------------------------- J. Kevin Connaughton, Treasurer EX-99.906CERT 3 file003.txt CERTIFICATIONS CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Certified Shareholder Report of Colonial Intermediate High Income Fund (the "Trust") on Form N-CSR for the period ending May 31, 2005, as filed with the Securities and Exchange Commission on the date hereof ("the Report"), the undersigned hereby certifies that, to his knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Trust. Date: July 28, 2005 /S/ Christopher L. Wilson -------------------------------- Christopher L. Wilson, President Date: July 28, 2005 /S/ J. Kevin Connaughton -------------------------------- J. Kevin Connaughton, Treasurer A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission (the "Commission") or its staff upon request. This certification is being furnished to the Commission solely pursuant to 18 U.S.C. ss.1350 and is not being filed as part of the Form N-CSR with the Commission. -----END PRIVACY-ENHANCED MESSAGE-----