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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 811-4537
---------------------------------------------
Liberty All Star Growth Fund, Inc.
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(Exact name of registrant as specified in charter)
One Financial Center, Boston, Massachusetts 02111
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(Address of principal executive offices) (Zip code)
Russell L. Kane, Esq.
Columbia Management Group, Inc.
One Financial Center
Boston, MA 02111
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(Name and address of agent for service)
Registrant's telephone number, including area code: 1-617-426-3363
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Date of fiscal year end: December 31, 2003
--------------------------
Date of reporting period: June 30, 2003
-------------------------
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. Report to Stockholders
[GRAPHIC]
SECOND QUARTER REPORT - JUNE 30, 2003
Q2
[ALL STAR(TM) GROWTH FUND LOGO]
LIBERTY ALL - STAR GROWTH FUND
LIBERTY ALL-STAR GROWTH FUND, INC.
FUND STATISTICS AND PERFORMANCE 2ND QUARTER 2003 YEAR-TO-DATE
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Period End Net Asset Value (NAV) -- $ 6.02
--------------------------------------------------------------------------------
Period End Market Price -- $ 6.52
--------------------------------------------------------------------------------
Period End Premium -- 8.3%
--------------------------------------------------------------------------------
Distributions $ 0.14 $ 0.27
--------------------------------------------------------------------------------
Market Price Trading Range $5.00 to $6.70 $4.61 to $6.70
--------------------------------------------------------------------------------
Premium/(Discount) Range 8.3% to (4.7)% 8.3% to (7.8)%
--------------------------------------------------------------------------------
Shares Valued at NAV 19.2% 16.1%
--------------------------------------------------------------------------------
Shares Valued at NAV
with Dividends Reinvested 19.1% 16.2%
--------------------------------------------------------------------------------
Shares Valued at Market Price
with Dividends Reinvested 29.5% 35.5%
--------------------------------------------------------------------------------
Lipper Multi-Cap Growth
Mutual Fund Average 17.0% 16.3%
--------------------------------------------------------------------------------
Russell Growth Indices
Largecap 14.3% 13.1%
Midcap 18.8% 18.7%
Smallcap 24.2% 19.3%
--------------------------------------------------------------------------------
Nasdaq Composite Index 21.1% 21.8%
================================================================================
Figures shown for the Fund and the Lipper Multi-Cap Growth Mutual Fund Average
are total returns, which include dividends, after deducting fund expenses.
Figures shown for the unmanaged Russell Indices and the Nasdaq Composite Index
are total returns, including income. Past performance cannot predict future
results.
ON THE COVER
THE ILLUSTRATIONS NEXT TO LADY LIBERTY SYMBOLIZE THE WELL-DEFINED AND
DISCIPLINED INVESTMENT PROCESS PRACTICED BY THE FUND'S ADVISOR, LIBERTY ASSET
MANAGEMENT COMPANY, THAT WAS DESCRIBED IN THE FUND'S 2002 ANNUAL REPORT. FROM
TOP TO BOTTOM: PORTFOLIO REBALANCING, FUND OBJECTIVE, DISTRIBUTION POLICY,
MANAGER MONITORING, FUND STRUCTURE AND MANAGER SELECTION.
PRESIDENT'S LETTER
FELLOW SHAREHOLDERS: JULY 2003
Led by growth stocks, the stock market turned in a strong second quarter. The
broad market, as measured by the S&P 500 Index, gained 15.4 percent. Reflecting
the strength in growth stocks, the Nasdaq Composite advanced an even stronger
21.1 percent and the Lipper Multi-Cap Growth Mutual Fund Average - the Fund's
primary benchmark - posted a 17.0 percent gain. As the table on the facing page
shows, all of the Russell Growth Indices scored solid gains, led by the 24.2
percent rise in the Smallcap index. The Midcap index returned 18.8 percent and
the Largecap index advanced 14.3 percent.
The various indices posted either small gains or losses in the first
quarter. Factoring in those results, through the first six months of 2003, the
Nasdaq Composite was ahead 21.8 percent, while the Lipper Multi-Cap Growth
Mutual Fund Average was up 16.3 percent.
For both the quarter and the half, the Fund's results compare favorably.
For the second quarter, shares valued at net asset value (NAV) gained 19.2
percent. Shares valued at NAV with dividends reinvested gained 19.1 percent,
while shares valued at market price with dividends reinvested advanced 29.5
percent. Respectively, the same figures for the full first half are 16.1
percent, 16.2 percent and 35.5 percent.
The second quarter's rebound actually began in mid-March with the start of
U.S. military operations in Iraq. Over the past half century, stocks have
averaged a gain of about 15 percent in the two months following the outbreak of
military action, and this rally followed that pattern. Looking ahead, there is
more than enough ammunition to keep bulls and bears alike blazing away in
defense of their respective positions. The bulls argue that record low interest
rates, the absence of inflation, lower taxes, improving corporate profits and a
gradual pickup in capital spending bode well for investors. Bears make the
opposite case, basing their argument on rising unemployment, federal budget
deficits, tepid consumer spending, weak economies globally and equities that are
overvalued on an historical basis. Only with time will we see how events play
out, but it should be an interesting second half.
Insofar as the Fund is concerned, we are gratified with the good
performance. More rewarding, however, is the fact that the Fund's investment
managers stuck by their growth disciplines during a long and trying period that
tested investors' resolve. Further, we are pleased that actions in the stock
market are confirming the soundness of the Fund's all-cap growth structure. We
are optimistic about the outlook, but cautiously so. It is unrealistic to expect
more 20 percent-type quarters; we would settle for moderate, but steady gains,
enabling markets to consolidate recent
1
advances. I would urge you to read the interview with largecap growth manager
William Blair & Company beginning on page 8. Portfolio manager John Jostrand
always offers interesting observations on the market.
Turning to Fund news, as authorized by the Board of Directors, an offering
to shareholders of rights to purchase additional shares of the Fund is about to
get underway. The highlights of the offering are that you will be issued
non-transferable rights entitling you to subscribe for one additional share of
the Fund for every eight shares you own, with the right to subscribe for
additional shares not subscribed for by others in the primary subscription. At
its discretion, the Fund may increase the amount of shares offered in an amount
of up to 25 percent of the primary offering amount to cover over-subscription
requests. The Fund is making this offer primarily to encourage long-term
investors to increase their investment in the Fund by giving them the
opportunity to purchase additional shares at a price below market value and
without brokerage commissions. The subscription price will be 95 percent of the
lower of the last reported sales price or net asset value on the business day
following the expiration of the subscription period.
The rights offering is subject to the effectiveness of the Fund's
registration statement as filed with the Securities and Exchange Commission and
will be made only by means of a prospectus. When the registration statement
becomes effective, it is anticipated that the offering will continue for
approximately 30 days after commencing in August.
In closing, we are pleased to be making progress on several fronts, and I
would like to thank shareholders for your continued support of the Fund. Be
assured, we at Liberty Asset Management Company will continue to act with your
best long-term interests first and foremost.
Sincerely,
/s/ William R. Parmentier, Jr.
William R. Parmentier, Jr.
President and Chief Executive Officer
Liberty All-Star Growth Fund, Inc.
2
TABLE OF PER-SHARE VALUES, DISTRIBUTIONS AND REINVESTMENTS
SHARES SHARES
SHARES PURCHASED ACQUIRED SHARES NAV(2) MARKET PRICE TOTAL MARKET
OWNED TO THROUGH THROUGH OWNED PER SHARE TOTAL NAV PER SHARE PRICE OF
BEGINNING PER SHARE REINVESTMENT RIGHTS AT END AT END OF SHARES AT END SHARES
YEAR OF PERIOD DISTRIBUTIONS PROGRAM OFFERING OF PERIOD OF PERIOD OWNED OF PERIOD OWNED
------------------------------------------------------------------------------------------------------------------------------------
1996(1) 1.000 $ 1.02 0.107 - 1.107 $ 11.27 $ 12.48 $ 9.25 $ 10.24
------------------------------------------------------------------------------------------------------------------------------------
1997 1.107 1.24 0.125 - 1.232 12.89 15.88 11.938 14.71
------------------------------------------------------------------------------------------------------------------------------------
1998 1.232 1.35 0.159 0.130(3) 1.521 13.03 19.82 11.438 17.40
------------------------------------------------------------------------------------------------------------------------------------
1999 1.521 1.23 0.188 - 1.709 13.44 22.97 10.813 18.48
------------------------------------------------------------------------------------------------------------------------------------
2000 1.709 1.34 0.214 - 1.923 10.86 20.88 9.438 18.15
------------------------------------------------------------------------------------------------------------------------------------
2001 1.923 0.92 0.235 0.239(3) 2.397 8.31 19.92 8.33 19.97
------------------------------------------------------------------------------------------------------------------------------------
2002 2.397 0.67 0.271 - 2.668 5.44 14.51 5.05 13.47
------------------------------------------------------------------------------------------------------------------------------------
2003
1st Qtr. 2.668 0.13 0.068 - 2.736 5.17 14.15 5.15 14.09
2nd Qtr. 2.736 0.14 0.063 - 2.799 6.02 16.85 6.52 18.25
------------------------------------------------------------------------------------------------------------------------------------
1. Represents the first full year that Liberty Asset Management Company
assumed complete management responsibility for the Fund.
2. Net Asset Value.
3. 1998: Rights offering completed in July 1998. One share offered at $12.41
for every 10 shares owned.
2001: Rights offering completed in September 2001. One share offered at
$6.64 for every 8 shares owned.
3
DISTRIBUTION POLICY/DIVIDEND REINVESTMENT PLAN
DISTRIBUTION POLICY
Liberty All-Star Growth Fund, Inc.'s current policy, in effect since 1997, is to
pay distributions on its shares totaling approximately 10 percent of its net
asset value per year, payable in four quarterly installments of 2.5 percent of
the Fund's net asset value at the close of the New York Stock Exchange on the
Friday prior to each quarterly declaration date. THE FIXED DISTRIBUTIONS ARE NOT
RELATED TO THE AMOUNT OF THE FUND'S NET INVESTMENT INCOME OR NET REALIZED
CAPITAL GAINS OR LOSSES AND MAY BE TAXED AS ORDINARY INCOME UP TO THE AMOUNT OF
THE FUND'S CURRENT AND ACCUMULATED EARNINGS AND PROFITS. If, for any calendar
year, the total distributions made under the 10 percent pay-out policy exceed
the Fund's net investment income and net realized capital gains, the excess will
generally be treated as a non-taxable return of capital, reducing the
shareholder's adjusted basis in his or her shares. If the Fund's net investment
income and net realized capital gains for any year exceed the amount distributed
under the 10 percent pay-out policy, the Fund may, in its discretion, retain and
not distribute net realized capital gains and pay income tax thereon to the
extent of such excess.
DIVIDEND REINVESTMENT PLAN
Each registered shareholder of the Fund will automatically be a participant in
the Fund's Automatic Dividend Reinvestment and Cash Purchase Plan unless the
shareholder specifically elects otherwise by writing to the Plan Agent,
EquiServe Trust Company, N.A., P.O. Box 43010, Providence, RI 02940-3010 or by
calling 1-800-LIB-FUND (1-800-542-3863).
If your shares are held for you by a broker, bank or other nominee, you
should contact the institution holding your shares as to whether or not you wish
to participate in the Plan. Participants in the Plan have their dividends
automatically reinvested in additional shares of the Fund, and are kept apprised
of the status of their account through quarterly statements.
4
INVESTMENT MANAGERS/PORTFOLIO CHARACTERISTICS
THE FUND'S THREE GROWTH INVESTMENT MANAGERS
AND THE MARKET CAPITALIZATION ON WHICH EACH FOCUSES:
[GRAPHIC]
SMALL-CAP GROWTH
M.A. WEATHERBIE & CO., INC.
Companies with enduring competitive advantages and high, sustainable earnings
growth.
MID-CAP GROWTH
TCW INVESTMENT MANAGEMENT COMPANY
Companies with competitive advantages and superior business models that
should result in rapidly growing sales and earnings.
LARGE-CAP GROWTH
WILLIAM BLAIR & COMPANY, L.L.C.
Companies that have demonstrated consistently high rates of growth and
profitability.
MANAGERS' DIFFERING INVESTMENT STYLES ARE
REFLECTED IN PORTFOLIO CHARACTERISTICS
The portfolio characteristics table below is a regular feature of the Fund's
shareholder reports. It serves as a useful tool for understanding the value of
the Fund's multi-managed portfolio. The characteristics are different for each
of the Fund's three investment managers. These differences are a reflection of
the fact that each pursues a different investment style. The shaded column
highlights the characteristics of the Fund as a whole, while the first three
columns show portfolio characteristics for the S&P/BARRA SmallCap, MidCap and
LargeCap Growth indices.
PORTFOLIO CHARACTERISTICS
AS OF JUNE 30, 2003
(UNAUDITED)
MARKET CAPITALIZATION SPECTRUM
[GRAPHIC]
S&P/BARRA GROWTH:
-----------------------------------
SMALL CAP MIDCAP LARGECAP M.A. WILLIAM TOTAL
600 INDEX 400 INDEX 500 INDEX WEATHERBIE TCW BLAIR FUND
Number of Holdings 223 163 160 60 44 33 129*
------------------------------------------------------------------------------------------------------------
Weighted Average
Market Capitalization
(billions) $ 1.1 $ 3.4 $ 112.5 $ 2.2 $ 12.2 $ 64.9 $ 24.6
------------------------------------------------------------------------------------------------------------
Average Five-Year
Earnings Per Share
Growth 13% 18% 19% 22% 38% 18% 25%
------------------------------------------------------------------------------------------------------------
Dividend Yield 0.7% 0.7% 1.5% 0.2% 0.1% 0.7% 0.3%
------------------------------------------------------------------------------------------------------------
Price/Earnings
Ratio 20x 23x 23x 26x 42x 26x 28x
------------------------------------------------------------------------------------------------------------
Price/Book
Value Ratio 3.2x 3.9x 5.6x 4.0x 5.3x 5.9x 4.9x
------------------------------------------------------------------------------------------------------------
*Certain holdings are held by more than one manager.
5
TOP 50 HOLDINGS
RANK AS BANK OF MARKET PERCENT OF
OF 6/30/03 OF 3/31/03 SECURITY NAME VALUE ($000) NET ASSETS
1 1 eBay, Inc. $ 4,084 3.2%
2 2 Bed Bath & Beyond, Inc. 3,524 2.8
3 3 Westwood One, Inc. 3,276 2.6
4 7 Family Dollar Stores, Inc. 2,453 1.9
5 8 EchoStar Communications Corp., Class A 2,420 1.9
6 12 Gilead Sciences, Inc. 2,368 1.9
7 17 Getty Images, Inc. 2,287 1.8
8 15 Pfizer, Inc. 2,258 1.8
9 9 Xilinx, Inc. 2,169 1.7
10 5 Maxim Integrated Products, Inc. 2,147 1.7
11 6 Microsoft Corp. 2,113 1.7
12 21 Genentech, Inc. 2,012 1.6
13 14 Clear Channel Communications, Inc. 1,937 1.5
14 10 National Instruments Corp. 1,927 1.5
15 37 Dollar Tree Stores, Inc. 1,910 1.5
16 26 Expedia, Inc. 1,894 1.5
17 4 Paychex, Inc. 1,803 1.4
18 24 Yahoo!, Inc. 1,776 1.4
19 50 Martek Biosciences Corp. 1,739 1.4
20 New SLM Corp. 1,727 1.4
21 13 Medtronic, Inc. 1,667 1.3
22 39 Education Management Corp. 1,601 1.3
23 16 Cox Communications, Inc., Class A 1,560 1.2
24 New First Data Corp. 1,546 1.2
25 23 Fastenal Co. 1,540 1.2
26 28 Univision Communications, Inc., Class A 1,532 1.2
27 20 Avon Products, Inc. 1,505 1.2
28 36 PolyMedica Corp. 1,459 1.1
29 40 ResMed, Inc. 1,452 1.1
30 46 Amazon.com, Inc. 1,336 1.0
31 25 UnitedHealth Group, Inc. 1,324 1.0
32 22 Walgreen Co. 1,269 1.0
33 30 Outback Steakhouse, Inc. 1,266 1.0
34 43 Cisco Systems, Inc. 1,263 1.0
35 33 Cognex Corp. 1,262 1.0
36 41 Eli Lilly and Co. 1,260 1.0
37 32 Patterson Dental Co. 1,229 1.0
38 18 Zebra Technologies Corp., Class A 1,219 1.0
39 51 Lincare Holdings, Inc. 1,211 1.0
40 31 Amgen, Inc. 1,209 0.9
41 45 International Speedway Corp., Class A 1,189 0.9
42 34 Linear Technology Corp. 1,171 0.9
43 44 Dell Computer Corp. 1,147 0.9
44 New Kohl's Corp. 1,120 0.9
45 19 State Street Corp. 1,115 0.9
46 38 Fannie Mae 1,093 0.9
47 48 PepsiCo, Inc. 1,041 0.8
48 69 The Cheesecake Factory, Inc. 990 0.8
49 53 Financial Federal Corp. 981 0.8
50 121 The Corporate Executive Board Co. 980 0.8
6
MAJOR STOCK CHANGES IN THE SECOND QUARTER
The following are the major ($500,000 or more) stock changes--both purchases and
sales--that were made in the Fund's portfolio during the second quarter of 2003.
SHARES AS
SECURITY NAME PURCHASES (SALES) OF 6/30/03
PURCHASES
The Corporate Executive Board Co. 21,700 24,000
First Data Corp. 37,300 37,300
Harley-Davidson, Inc. 16,900 16,900
Kohl's Corp. 21,800 21,800
SLM Corp. 14,700 44,100*
XL Capital Ltd., Class A 7,000 7,000
SALES
Avid Technology, Inc. (20,860) 14,256
Concord EFS, Inc. (119,250) 0
Cytyc Corp. (95,845) 0
Genentech, Inc. (11,200) 27,900
Investors Financial Services Corp. (22,970) 17,891
Microchip Technology, Inc. (70,810) 19,977
99 Cents Only Stores (21,800) 26,018
Omnicom Group, Inc. (17,360) 0
Paychex, Inc. (47,000) 61,500
State Street Corp. (16,700) 28,300
* Adjusted for stock split.
7
MANAGER INTERVIEW
[PHOTO OF JOHN F. JOSTRAND]
JOHN F. JOSTRAND, CFA
WILLIAM BLAIR & COMPANY, L.L.C.
In a mixed environment, William Blair & Company likes improving corporate
profitability and believes quality companies will be rewarded in the long run
WILLIAM BLAIR IS ONE OF LIBERTY ALL-STAR GROWTH FUND'S THREE INVESTMENT
MANAGERS. CHICAGO-BASED WILLIAM BLAIR IS A GROWTH STYLE MANAGER EMPHASIZING
DISCIPLINED, FUNDAMENTAL RESEARCH TO IDENTIFY QUALITY GROWTH COMPANIES WITH THE
ABILITY TO SUSTAIN THEIR GROWTH OVER A LONG PERIOD OF TIME. AT THE CORE OF THE
FIRM IS A TEAM OF ANALYSTS WHO PERFORM RESEARCH AIMED AT IDENTIFYING COMPANIES
THAT HAVE THE OPPORTUNITY TO GROW IN A SUSTAINABLE MANNER. RECENTLY, WE HAD THE
OPPORTUNITY TO TALK WITH PRINCIPAL AND PORTFOLIO MANAGER JOHN F. JOSTRAND.
The views expressed in this interview represent the portfolio manager's position
at the time of the discussion (July 2003) and are subject to change.
LAMCO: Investors have the same set of facts, but how they are interpreting those
facts is very different insofar as prospects for the economy, corporate profits,
the consumer, geopolitical affairs and, hence, the stock market are concerned.
What is your own interpretation of all these mixed signals?
JOSTRAND: I think that the U.S. economy and the corporate sector within it are
proving to be remarkably durable, given the extensive profit issues. The
consumer has been steady throughout, helped by mortgage refinancing
opportunities. But, I think the recovery is definitely more modest and drawn out
than people are accustomed to. There's a feeling of relief right now, and that
is reflected in the stock market's strong second quarter results. But, at the
same time, there's a little frustration in that the temperature of the recovery
is lukewarm.
LAMCO: One of the nagging worries is over continued increases in unemployment
claims.
JOSTRAND: We treat unemployment claims as a lagging indicator, but I think if
you look at current or leading indicators, those have backed off some since last
year. Even as we get past the issues of the first quarter - primarily war in
Iraq and the SARS outbreak - labor markets are still deteriorating slightly. The
last unemployment report rate showed a jump to 6.4 percent from 6.1 percent,
reflecting further deterioration. Other indicators, such as industrial
production and capacity utilization, have shown little strength.
[SIDENOTE]
"...THE RECOVERY IS DEFINITELY MORE MODEST AND DRAWN OUT THAN PEOPLE ARE
ACCUSTOMED TO...THERE'S A LITTLE FRUSTRATION IN THAT THE TEMPERATURE OF THE
RECOVERY IS LUKEWARM."
8
LAMCO: What do you see that's positive?
JOSTRAND: Improved corporate earnings. The second quarter that ended June 30 and
the third quarter that we're now in will mark the fifth and sixth consecutive
quarters of positive change in corporate profits.
I think one factor that's getting us through and why we at William Blair
ultimately feel good about the stock market going forward is productivity. Since
the peak of the stock market bubble, output has grown an average of 4 percent
annually. But, hours worked are down. So, when you think in terms of real output
per hour - the general definition of productivity - the U.S. has shown good,
solid gains.
Another factor is corporate CEOs beginning to feel as though it's safe to
get back into the water - not in terms of expanding their sales forces or
investing in new plant and equipment, but in terms of merger and acquisition
activity. We've seen Oracle bid for PeopleSoft, EMC make an offer for Legato
Systems, Nike for Converse and so forth. I think that indicates a higher level
of confidence than has prevailed in the recent past.
Still, CEOs are not so ebullient that they're investing in new capacity.
Texas Instruments announced a new plant recently, but by and large activity is
still pretty tepid. We're hopeful that stronger demand will squeeze supply next
year and lead to a pick up in production spending.
LAMCO: Which camp are you in on the inflation-versus-deflation question?
JOSTRAND: We believe it's a case of fairly severe disinflation, but not
deflation. Clearly, there are pockets of absolute price decline and there are
pockets of absolute price increase, such as health care and energy. But, I'm
okay on deflation, mainly because the Federal Reserve has lubed the economy with
a pretty hefty monetary stimulus policy and we're getting a second round of tax
cuts on the fiscal policy side. We might have a little too much debt, something
that is associated with traditional deflationary scenarios. And, there's a
little too much foreign trade acrimony between U.S. and our trading partners.
But, I see the resumption of this M&A activity that I just mentioned as marking
the mid- to late innings of a protracted recovery process. I think the M&A
activity will continue to accelerate the integration/consolidation of the
overcapacity that is contributing to the deflationary mindset. The weaker dollar
will help also because instead of importing deflation, we're going to stabilize
the trade deficit or maybe bring some production back to North America and
address the significant price imbalance between North America and the rest of
the world.
LAMCO: If corporate America decides to bring some manufacturing back onshore,
that would suggest management sees the decline of the dollar as being a fairly
long-run event.
JOSTRAND: It could be a secular decline, but at this point I think it's a
retrenchment back to what I'll call pre-bubble levels. The trade-weighted dollar
is back to 1997-98 levels now, and I think that's okay because it helps address
the differences in production cost differentials that exist around the world.
Currencies should equilibrate; however, they were out of line based on the
significant trade deficit here in the U.S. relative to the rest of the world.
That needs to get back closer
[SIDENOTE]
"THE SECOND QUARTER THAT ENDED JUNE 30 AND THE THIRD QUARTER THAT WE'RE NOW IN
WILL MARK THE FIFTH AND SIXTH CONSECUTIVE QUARTERS OF POSITIVE CHANGE IN
CORPORATE PROFITS."
9
toward zero from where it is, and the 30 percent price decline vis-a-vis the
2000 and '01 trade-weighted dollar levels will help do that.
LAMCO: Where are you in regard to the Federal Reserve and its aggressive
lowering of short-term interest rates? Can the Fed reinflate the economy?
JOSTRAND: We made an early call on the Fed's actions. Nine months ago we were
looking at two quarters of improving earnings and made the judgment that it was
sustainable in the interest rate environment the Fed was creating. The Iraq war
and SARS got in the way, but we've been in the camp of "don't fight the Fed" for
several quarters and we're still there.
LAMCO: The stocks of lower quality companies have done better than higher
quality ones so far this year. To what do you attribute that?
JOSTRAND: When you're coming out of a market decline and you've got strong
monetary stimulus, it's those companies that were closest to the edge of
disaster that are dragged furthest back towards prosperity, especially in the
first phase of recovery. Over the long haul, what matters to us is genuine
competitive advantage. But in the short run, those near-death companies are
seeing a glimmer of hope and their stock prices are reflecting it.
LAMCO: Now they've got to justify their stock price on a more fundamental basis,
don't they?
JOSTRAND: Yes, my cliche response is that K-Mart may have come out of bankruptcy
but there's no way it's going to be threatening Wal-Mart. K-Mart closed 350
stores and will have to close 350 more. So, K-Mart may become solvent and remain
that way for a period of time, at least until Wal-Mart deals another blow.
LAMCO: It's easier to register a hefty percentage gain when one's share price
has been severely battered.
JOSTRAND: That's right. The market is recognizing that and ascribing some hopes
to these companies; some will fail, some will make it. But from this point on, I
think the winners over the next three years will be those companies with the
most durable competitive advantage: good strategy, good execution, good
management, good culture.
LAMCO: Tell us about a couple of stocks that have fared well for William Blair
so far this year.
JOSTRAND: A big winner in our portion of the All-Star Growth Fund portfolio is
Genentech. We've owned Genentech for quite a while and we've stuck with it
through some mediocre quarters. The stock has been in favor or out of favor
depending on short-term news. But, we've believed in the strength of its
pipeline and this past quarter the company had some breakaway news in announcing
novel therapies for treating cancer.
Earlier, Genentech had done breast cancer studies with the class of product
that it announced earlier this year, but it did not meet the prescribed
definition for success. However, the company set a really high bar for
themselves. But, Genentech was conducting multiple studies, and one produced
dramatic results in colorectal cancer patients that were announced prior to the
big annual
[SIDENOTE]
"THE IRAQ WAR AND SARS GOT IN THE WAY, BUT WE'VE BEEN IN THE CAMP OF 'DON'T
FIGHT THE FED' FOR SEVERAL QUARTERS AND WE'RE STILL THERE."
10
meeting of the American Society of Clinical Oncologists. There was breakthrough
data showing this novel therapy starves tumors of their blood supply. Now, the
therapy - called Avastin - has received fast-track designation from the Food and
Drug Administration (FDA), and once approved it could easily generate revenues
exceeding $1 billion annually. The real news and why the stock reacted so well
is that this is not just another me-too product, it's a whole new class in the
treatment of cancer.
Genentech also had some other good news, for example, getting Xolair
approved by the FDA for the treatment of moderate-to-severe persistent asthma.
That should generate revenues in the $300 to $400 million range, but it is more
of a niche product. Once again, the real news was in oncology and it said to us
that Genentech has a highly capable, broad-based research platform that can
sustain new product development beyond just getting lucky with a couple of
therapies, as has been the case with a few other biotechs.
LAMCO: Genentech is one of the "senior citizens" of the biotech world. Do you
think there are any larger implications for the entire industry in its
discoveries ... in other words, that the promise of biotech is really coming to
fruition?
JOSTRAND: Actually, biotech has stolen the march from the traditional big
pharmaceuticals over the last few years. Eli Lilly is the only big company in
that industry that really stands out among the old line pharmaceutical companies
with a good, strong pipeline. Amgen is another very successful biotech company
that we own. It was a winner, too, this past quarter, just not to the extent of
Genentech.
LAMCO: What about one other stock that's done well for the All-Star portfolio?
JOSTRAND: EMC, the big data storage company, was a very good stock for us in the
quarter. We didn't own a big position as we believed there was some risk
involved, but we viewed it as a quality company whose earnings had been under
pressure. Those types of companies can do very well in an improving environment,
and that was the case this past quarter. EMC is a big company with strong market
shares. Frankly, the only reason its earnings were under significant duress was
that it had chosen to sustain R&D spending at very high levels. EMC has also
emerged as a force in the move to consolidate vendors in the technology sector,
and that is reflected in the recent tender offer for Legato Systems. It's a
friendly deal and it was not outside EMC's competency, which we like. EMC also
has a strategy of partnering to develop distribution in areas outside of its
core customer base. An example is a partnership with Dell. This enables EMC to
leverage its R&D spending and manufacturing skills. EMC is a very different
company than Genentech, but it has worked out nicely for us.
LAMCO: John, thank you very much. We look forward to next time.
[SIDENOTE]
"...FROM THIS POINT ON, I THINK THE WINNERS OVER THE NEXT THREE YEARS WILL BE
THOSE COMPANIES WITH THE MOST DURABLE COMPETITIVE ADVANTAGE..."
11
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2003 (UNAUDITED)
COMMON STOCKS (97.9%) SHARES MARKET VALUE
CONSUMER DISCRETIONARY (28.6%)
AUTOMOBILES (0.5%)
Harley-Davidson, Inc. 16,900 $ 673,634
------------
HOTELS, RESTAURANTS & LEISURE (3.5%)
The Cheesecake Factory, Inc. (a) 27,580 989,846
International Speedway Corp., Class A 30,090 1,188,856
Outback Steakhouse, Inc. (a) 32,470 1,266,330
Panera Bread Co., Class A (a) 6,930 277,200
Sonic Corp. (a) 29,600 752,728
------------
4,474,960
------------
INTERNET & CATALOG RETAIL (4.3%)
Amazon.com, Inc. (a) 36,600 1,335,534
eBay, Inc. (a) 39,200 4,083,856
------------
5,419,390
------------
MEDIA (12.3%)
Cablevision Systems Corp., Class A (a) 29,951 621,783
Clear Channel Communications, Inc. (a) 45,700 1,937,223
Cox Communications, Inc., Class A (a) 48,900 1,559,910
Cox Radio, Inc., Class A (a) 31,300 723,343
EchoStar Communications Corp., Class A (a) 69,900 2,419,938
Getty Images, Inc. (a) 55,380 2,287,194
Hispanic Broadcasting Corp. (a) 17,600 447,920
Mediacom Communications Corp. (a) 85,100 839,937
Univision Communications, Inc., Class A (a) 50,400 1,532,160
Westwood One, Inc. (a) 96,560 3,276,281
------------
15,645,689
------------
MULTI-LINE RETAIL (5.0%)
Dollar Tree Stores, Inc. (a) 60,205 1,910,305
Family Dollar Stores, Inc. 64,305 2,453,235
Kohl's Corp. (a) 21,800 1,120,084
99 Cents Only Stores (a) 26,018 892,938
------------
6,376,562
------------
SPECIALTY RETAIL (3.0%)
Bed Bath & Beyond, Inc. (a) 90,800 3,523,948
The Children's Place Retail Stores, Inc. (a) 16,220 322,129
------------
3,846,077
------------
See Notes to Schedule of Investments.
12
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
CONSUMER STAPLES (4.0%)
BEVERAGES (0.8%)
PepsiCo, Inc. 23,400 $ 1,041,300
------------
FOOD & DRUG RETAILING (1.4%)
Rite Aid Corp. (a) 116,540 518,603
Walgreen Co. 42,150 1,268,715
------------
1,787,318
------------
HOUSEHOLD PRODUCTS (0.6%)
The Yankee Candle Co., Inc. (a) 30,508 708,396
------------
PERSONAL PRODUCTS (1.2%)
Avon Products, Inc. 24,200 1,505,240
------------
ENERGY (1.6%)
ENERGY EQUIPMENT & SERVICES (1.1%)
Patterson - UTI Energy, Inc. (a) 21,830 707,292
Pride International, Inc. (a) 36,365 684,389
------------
1,391,681
------------
OIL & GAS (0.5%)
Tidewater, Inc. 21,560 633,216
------------
FINANCIALS (8.2%)
BANKS (0.4%)
Investors Financial Services Corp. 17,891 519,018
------------
DIVERSIFIED FINANCIALS (6.5%)
Affiliated Managers Group, Inc. (a) 8,820 537,579
The Chicago Mercantile Exchange 800 55,704
Fannie Mae 16,200 1,092,528
Financial Federal Corp. (a) 40,202 980,929
Investment Technology Group, Inc. (a) 35,262 655,873
MBNA Corp. 34,175 712,207
SEI Investment Co. 18,300 585,600
SLM Corp. 44,100 1,727,397
State Street Corp. 28,300 1,115,020
T. Rowe Price Group, Inc. 21,900 826,725
------------
8,289,562
------------
See Notes to Schedule of Investments.
13
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
INSURANCE (1.3%)
Brown & Brown, Inc. 13,080 $ 425,100
Cincinnati Financial Corp. 4,600 170,614
Montpelier Re Holdings Ltd. (a) 6,930 218,988
Platinum Underwriters Holdings, Ltd. 9,332 253,270
XL Capital Ltd., Class A 7,000 581,000
------------
1,648,972
------------
HEALTH CARE (18.6%)
BIOTECHNOLOGY (7.6%)
Amgen, Inc. (a) 18,200 1,209,208
Charles River Laboratories International, Inc. (a) 21,972 707,059
Enzon Pharmaceuticals, Inc. (a) 18,760 234,875
Genentech, Inc. (a) 27,900 2,012,148
Gilead Sciences, Inc. (a) 42,600 2,367,708
Martek Biosciences Corp. (a) 40,498 1,738,984
MedImmune, Inc. (a) 22,600 821,962
QLT, Inc. (a) 50,237 637,960
------------
9,729,904
------------
HEALTH CARE EQUIPMENT & SUPPLIES (4.3%)
Alcon, Inc. (a) 17,600 804,320
Medtronic, Inc. 34,750 1,666,958
PolyMedica Corp. (a) 31,858 1,458,778
ResMed, Inc. (a) 37,035 1,451,772
------------
5,381,828
------------
HEALTH CARE PROVIDERS & SERVICES (3.8%)
Express Scripts, Inc., Class A (a) 11,800 806,176
Inveresk Research Group, Inc. (a) 14,400 260,640
Lincare Holdings, Inc. (a) 38,420 1,210,614
Patterson Dental Co. (a) 27,090 1,229,344
UnitedHealth Group, Inc. 26,340 1,323,585
------------
4,830,359
------------
PHARMACEUTICALS (2.9%)
Eli Lilly and Co. 18,275 1,260,427
InterMune, Inc. (a) 10,025 161,503
Pfizer, Inc. 66,130 2,258,340
------------
3,680,270
------------
See Notes to Schedule of Investments.
14
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
INDUSTRIALS (9.7%)
AIR FREIGHT & LOGISTICS (0.5%)
UTI Worldwide, Inc. 22,673 $ 707,171
------------
COMMERCIAL SERVICES & SUPPLIES (7.3%)
CheckFree Corp. (a) 23,100 643,104
Cintas Corp. 24,220 858,357
The Corporate Executive Board Co. (a) 24,000 979,680
Education Management Corp. (a) 30,100 1,600,718
First Data Corp. 37,300 1,545,712
Paychex, Inc. 61,500 1,802,565
Pegasus Solutions, Inc. (a) 15,820 257,075
Polycom, Inc. (a) 23,990 332,501
Robert Half International, Inc. (a) 13,300 251,902
West Corp. (a) 36,726 978,748
------------
9,250,362
------------
MACHINERY (0.7%)
Danaher Corp. 12,600 857,430
------------
TRADING COMPANIES & DISTRIBUTORS (1.2%)
Fastenal Co. 45,380 1,540,197
------------
INFORMATION TECHNOLOGY (26.3%)
COMMUNICATIONS EQUIPMENT (2.7%)
Black Box Corp. 6,010 217,562
Cisco Systems, Inc. (a) 75,700 1,263,433
Juniper Networks, Inc. (a) 73,500 909,195
Nokia Oyj (b) 19,700 323,671
Packeteer, Inc. (a) 43,253 673,449
------------
3,387,310
------------
COMPUTERS & PERIPHERALS (2.1%)
Avid Technology, Inc. (a) 14,256 499,958
Dell Computer Corp. (a) 35,900 1,147,364
EMC Corp. (a) 26,100 273,267
Network Appliance, Inc. (a) 43,400 703,514
------------
2,624,103
------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (1.0%)
Cognex Corp. (a) 56,465 1,261,993
------------
See Notes to Schedule of Investments.
15
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
INTERNET SOFTWARE & SERVICES (4.1%)
BEA Systems, Inc. (a) 89,500 $ 971,970
Expedia, Inc. (a) 24,800 1,894,224
Interwoven, Inc. (a) 85,300 189,366
Raindance Communications, Inc. (a) 43,102 107,324
Retek, Inc. (a) 36,532 233,805
Yahoo!, Inc. (a) 54,200 1,775,592
------------
5,172,281
------------
IT CONSULTING & SERVICES (0.9%)
SRA International, Inc. (a) 7,801 249,632
SunGard Data Systems, Inc. (a) 35,000 906,850
------------
1,156,482
------------
OFFICE ELECTRONICS (0.9%)
Zebra Technologies Corp., Class A (a) 16,215 1,219,206
------------
SEMICONDUCTOR EQUIPMENT & PRODUCTS (8.4%)
Altera Corp. (a) 27,600 452,640
Applied Micro Circuits Corp. (a) 78,200 473,110
Axcelis Technologies, Inc. (a) 36,980 226,318
GlobespanVirata, Inc. (a) 25,300 208,725
Intel Corp. 42,100 875,006
Intersil Corp., Class A (a) 17,856 475,148
Linear Technology Corp. 36,350 1,170,833
Maxim Integrated Products, Inc. (a) 62,800 2,147,132
Microchip Technology, Inc. (a) 19,977 492,034
Novellus Systems, Inc. (a) 15,400 563,963
Pericom Semiconductor Corp. (a) 27,274 253,648
Semtech Corp. (a) 23,880 340,051
Texas Instruments, Inc. 48,000 844,800
Xilinx, Inc. (a) 85,700 2,169,067
------------
10,692,475
------------
SOFTWARE (6.2%)
Agile Software Corp. (a) 77,920 751,928
E.piphany, Inc. (a) 61,120 312,323
Intuit, Inc. (a) 18,800 837,164
Micromuse, Inc. (a) 56,010 447,520
Microsoft Corp. 82,500 2,112,825
See Notes to Schedule of Investments.
16
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
SOFTWARE (CONTINUED)
National Instruments Corp. (a) 51,000 $ 1,926,780
Siebel Systems, Inc. (a) 86,600 826,164
Symantec Corp. (a) 6,200 271,932
WebEx Communications, Inc. (a) 12,530 174,794
webMethods, Inc. (a) 35,900 291,867
------------
7,953,297
------------
TELECOMMUNICATION SERVICES (0.9%)
DIVERSIFIED TELECOMMUNICATION SERVICES (0.2%)
Time Warner Telecom, Inc. (a) 31,000 197,470
------------
WIRELESS TELECOMMUNICATION SERVICES (0.7%)
At Road, Inc. (a) 14,900 162,708
CIENA Corp. (a) 53,700 278,703
Sprint Corp. (PCS Group) (a) 86,500 497,375
------------
938,786
------------
TOTAL COMMON STOCKS (COST OF $117,578,396) 124,541,939
------------
WARRANTS (0.1%) UNITS
INDUSTRIAL (0.1%)
COMMERCIAL SERVICES & SUPPLIES (0.1%)
Expedia, Inc., Expiration Date 02/04/09 (a)
(Cost of $20,691) 2,918 159,148
------------
See Notes to Schedule of Investments.
17
SHORT-TERM INVESTMENT (2.1%) PAR VALUE MARKET VALUE
REPURCHASE AGREEMENT (2.1%)
Repurchase agreement with State Street Bank & Trust Co.,
dated 06/30/03, due 07/01/03 at 1.00% collateralized by
U.S. Treasury Bonds with various maturities to 2030, market
value $2,764,243 (repurchase proceeds $2,703,075)
(Cost of $2,703,000) $ 2,703,000 $ 2,703,000
--------------
TOTAL INVESTMENTS (100.1%) (COST OF $120,302,087) (c) 127,404,087
--------------
OTHER ASSETS AND LIABILITIES, NET (-0.1%) (150,001)
--------------
NET ASSETS (100.0%) $ 127,254,086
--------------
NET ASSET VALUE PER SHARE (21,153,372 SHARES OUTSTANDING) $ 6.02
--------------
NOTES TO SCHEDULE OF INVESTMENTS:
(a) Non-income producing.
(b) Represents an American Depositary Receipt.
(c) Cost for both financial statement and federal income tax purposes is the
same.
Gross unrealized appreciation and depreciation of investments at
June 30, 2003 is as follows:
Gross unrealized appreciation $ 29,695,897
Gross unrealized depreciation (22,593,897)
--------------
Net unrealized appreciation $ 7,102,000
==============
See Notes to Financial Statements.
18
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 2003 (UNAUDITED)
ASSETS:
Investments at market value (identified cost $120,302,087) $ 127,404,087
Receivable for investments sold 286,571
Dividends and interest receivable 19,179
Other assets 9,835
--------------
TOTAL ASSETS 127,719,672
--------------
LIABILITIES:
Payable to custodian bank 20,486
Management, administrative, Directors' and bookkeeping/pricing
fees payable 302,075
Accrued expenses 143,025
--------------
TOTAL LIABILITIES 465,586
--------------
NET ASSETS $ 127,254,086
==============
NET ASSETS REPRESENTED BY:
Paid-in capital (authorized 60,000,000 shares of common stock
at $0.10 Par; 21,153,372 shares outstanding) $ 145,893,346
Accumulated net investment loss (566,271)
Accumulated net realized loss on investments (25,174,989)
Net unrealized appreciation on investments 7,102,000
--------------
TOTAL NET ASSETS APPLICABLE TO OUTSTANDING SHARES
OF COMMON STOCK ($6.02 PER SHARE) $ 127,254,086
==============
See Notes to Financial Statements.
19
STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2003 (UNAUDITED)
INVESTMENT INCOME:
Dividends $ 217,623
Interest 18,621
------------
TOTAL INVESTMENT INCOME (NET OF FOREIGN TAXES
WITHHELD AT SOURCE WHICH AMOUNTED TO $2,071) 236,244
EXPENSES:
Management fee $ 454,142
Administrative fee 113,657
Bookkeeping and pricing fees 16,397
Custody fees 11,923
Transfer agent fees 49,594
Shareholder communication expenses 77,006
Directors' fees and expenses 20,035
NYSE fee 22,668
Miscellaneous expense 37,226
-------------
TOTAL EXPENSES 802,648
------------
CUSTODY EARNINGS CREDIT (133)
------------
NET EXPENSES 802,515
------------
NET INVESTMENT LOSS (566,271)
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investment transactions:
Proceeds from sales 26,266,774
Cost of investments sold 23,487,655
-------------
Net realized gain on investment transactions 2,779,119
Net unrealized appreciation (depreciation) on investments:
Beginning of period (8,401,413)
End of period 7,102,000
-------------
Change in unrealized depreciation-net 15,503,413
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 17,716,261
============
See Notes to Financial Statements.
20
STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2003 DECEMBER 31,
(UNAUDITED) 2002
OPERATIONS:
Net investment loss $ (566,271) $ (1,404,182)
Net realized gain (loss) on investment transactions 2,779,119 (8,922,068)
Change in unrealized appreciation
(depreciation)-net 15,503,413 (33,534,693)
-------------- --------------
Net increase (decrease) in net assets
resulting from operations 17,716,261 (43,860,943)
-------------- --------------
DISTRIBUTIONS DECLARED FROM:*
Net realized gain on investments (2,716,709) --
Paid-in capital (2,890,772) (13,398,589)
-------------- --------------
Total distributions (5,607,481) (13,398,589)
-------------- --------------
CAPITAL TRANSACTIONS:
Increase in net assets from capital share transactions 2,924,578 6,185,822
-------------- --------------
Total increase (decrease) in net assets 15,033,358 (51,073,710)
NET ASSETS:
Beginning of period 112,220,728 163,294,438
-------------- --------------
End of period $ 127,254,086 $ 112,220,728
============== ==============
*See Note 2 of Notes to Financial Statements.
See Notes to Financial Statements.
21
FINANCIAL HIGHLIGHTS
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2003 ----------------------------------
(UNAUDITED) 2002 2001 2000
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of period $ 5.44 $ 8.31 $ 10.86 $ 13.44
---------------- -------- -------- --------
Income from Investment Operations:
Net investment income (loss) (0.03) (0.07) (0.09) (0.09)
Net realized and unrealized gain
(loss) on investments 0.88 (2.13) (1.50) (1.15)
---------------- -------- -------- --------
Total from Investment Operations 0.85 (2.20) (1.59) (1.24)
---------------- -------- -------- --------
Less Distributions from:
Net investment income -- -- -- --
Paid-in capital (0.14) (0.67) (0.92) (0.05)
Realized capital gain (0.13) -- -- (1.22)
In excess of realized capital gain -- -- -- (0.07)
---------------- -------- -------- --------
Total Distributions (0.27) (0.67) (0.92) (1.34)
---------------- -------- -------- --------
Change due to rights offering (a) -- -- (0.04) --
Impact of shares issued
in dividend reinvestment (b) -- -- -- --
---------------- -------- -------- --------
Total Distributions, Reinvestments
and Rights Offering (0.27) (0.67) (0.96) (1.34)
---------------- -------- -------- --------
Net asset value at end of period $ 6.02 $ 5.44 $ 8.31 $ 10.86
================ ======== ======== ========
Market price at end of period $ 6.52 $ 5.05 $ 8.33 $ 9.438
================ ======== ======== ========
TOTAL INVESTMENT RETURN FOR SHAREHOLDERS: (c)
Based on net asset value 16.2%(f) (27.2)% (13.7)% (9.1)%
Based on market price 35.5%(f) (32.6)% (0.5)% (1.8)%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (millions) $ 127 $ 112 $ 163 $ 180
Ratio of expenses to average net assets (d) 1.41%(e) 1.38% 1.41% 1.21%
Ratio of net investment income (loss)
to average net assets (d) (1.00)%(e) (1.07)% (1.12)% (0.71)%
Portfolio turnover rate 19%(f) 25% 41% 62%
(a) Effect of Fund's rights offerings for shares at a price below net asset
value.
(b) Effect of payment of a portion of distributions in newly issued shares at a
discount from net asset value.
(c) Calculated assuming all distributions reinvested at actual reinvestment
price and all primary rights exercised.
(d) The benefits derived from custody credits and directed brokerage
arrangements, if applicable, had an impact of less than 0.01%.
22
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1999 1998 1997 1996 1995(g) 1994 1993
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of period $ 13.03 $ 12.89 $ 11.27 $ 10.55 $ 9.95 $ 10.54 $ 10.28
-------- -------- -------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income (loss) (0.05) (0.03) (0.02) 0.01 0.31 0.23 0.18
Net realized and unrealized gain
(loss) on investments 1.83 1.73 2.88 1.86 1.05 (0.24) 0.56
-------- -------- -------- -------- -------- -------- --------
Total from Investment Operations 1.78 1.70 2.86 1.87 1.36 (0.01) 0.74
-------- -------- -------- -------- -------- -------- --------
Less Distributions from:
Net investment income -- -- -- (0.01) (0.31) (0.23) (0.18)
Paid-in capital -- (0.83) -- -- -- -- --
Realized capital gain (1.23) (0.52) (1.24) (1.01) (0.45) (0.35) (0.30)
In excess of realized capital gain -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total Distributions (1.23) (1.35) (1.24) (1.02) (0.76) (0.58) (0.48)
-------- -------- -------- -------- -------- -------- --------
Change due to rights offering (a) -- (0.21) -- -- -- -- --
Impact of shares issued
in dividend reinvestment (b) (0.14) -- -- (0.13) -- -- --
-------- -------- -------- -------- -------- -------- --------
Total Distributions, Reinvestments
and Rights Offering (1.37) (1.56) (1.24) (1.15) (0.76) (0.58) (0.48)
-------- -------- -------- -------- -------- -------- --------
Net asset value at end of period $ 13.44 $ 13.03 $ 12.89 $ 11.27 $ 10.55 $ 9.95 $ 10.54
======== ======== ======== ======== ======== ======== ========
Market price at end of period $ 10.813 $ 11.438 $ 11.938 $ 9.250 $ 9.375 $ 8.500 $ 10.250
======== ======== ======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN FOR SHAREHOLDERS: (c)
Based on net asset value 15.9% 15.3% 27.3% 18.3% 14.6% 0.5% 7.2%
Based on market price 6.2% 9.3% 43.6% 9.3% 19.3% (11.7)% 7.2%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (millions) $ 219 $ 199 $ 167 $ 137 $ 120 $ 113 $ 125
Ratio of expenses to average net assets (d) 1.20% 1.22% 1.20% 1.35% 1.42% 1.51% 1.35%
Ratio of net investment income (loss)
to average net assets (d) (0.37)% (0.22)% (0.18)% 0.06% 2.87% 2.12% 1.71%
Portfolio turnover rate 71% 33% 57% 51% 82% 50% 47%
(e) Annualized.
(f) Not annualized.
(g) Liberty Asset Management Company assumed complete management
responsibilities of the Fund in November 1995.
See Notes to Financial Statements.
23
NOTES TO FINANCIAL STATEMENTS JUNE 30, 2003 (UNAUDITED)
NOTE 1. ORGANIZATION AND ACCOUNTING POLICIES
Liberty All-Star Growth Fund, Inc. (the "Fund"), is registered under the
Investment Company Act of 1940, as amended, as a closed-end, diversified
management investment company and commenced operations on March 14, 1986. The
Fund's investment goal is to seek long term capital appreciation. The Fund is
managed by Liberty Asset Management Company (the "Manager"), a wholly-owned
subsidiary of Columbia Management Group, Inc., which is a wholly-owned
subsidiary of FleetBoston Financial Corporation.
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements. The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
VALUATION OF INVESTMENTS - Portfolio securities listed on an exchange and
over-the-counter securities quoted on the NASDAQ system are valued on the basis
of the last sale on the date as of which the valuation is made, or, lacking any
sales, at the mean of the closing bid and asked quotations on that date.
Over-the-counter securities not quoted on the NASDAQ system are valued at the
most recent bid prices on that date. Securities for which reliable quotations
are not readily available are valued at fair value, as determined pursuant to
procedures adopted by the Board of Directors ("Directors"). Short-term
instruments maturing in more than 60 days for which market quotations are
readily available are valued at current market value. Short-term instruments
with remaining maturities of 60 days or less are valued at amortized cost,
unless the Directors determine that this does not represent fair value. These
securities would then be valued at their fair value as determined pursuant to
procedures adopted by the Directors.
PROVISION FOR FEDERAL INCOME TAX - Consistent with the Fund's policy to qualify
as a regulated investment company and to distribute all of its taxable income to
shareholders, no federal income tax has been accrued.
DISTRIBUTIONS TO SHAREHOLDERS - The Fund currently has a policy of paying
distributions on its common shares totaling approximately 10% of its net asset
value per year, payable in four quarterly distributions of 2.5% of the Fund's
net asset value at the close of the New York Stock Exchange on the Friday prior
to each quarterly declaration date. Distributions to shareholders are recorded
on the ex-dividend date.
OTHER - Security transactions are accounted for on the trade date. Interest
income and expenses are recorded on the accrual basis. Dividend income is
recorded on the ex-dividend date.
NOTE 2. FEDERAL TAX INFORMATION
Income and capital gain distributions are determined in accordance with federal
income tax regulations, which may differ from accounting principles generally
accepted in the United States of America.
24
The following capital loss carryforwards, determined as of December 31, 2002,
are available to reduce taxable income arising from future net realized gains on
investments, if any, to the extent permitted by the Internal Revenue Code:
YEAR OF CAPITAL LOSS
EXPIRATION CARRYFORWARD
---------- -------------
2009 $ 12,880,379
2010 11,242,729
-------------
Total $ 24,123,108
-------------
Future realized gains offset by the loss carryforwards are not required to be
distributed to shareholders. However, under the Fund's distribution policy, as
discussed in Note 1, such gains may be distributed to shareholders in the year
the gains are realized. Any such gains distributed may be taxable to
shareholders as ordinary income. The source of the distributions in the
Statement of Changes in Net Assets for the six-month period ended June 30, 2003
are estimates and are subject to change based on Fund activity through December
31, 2003, the Fund's fiscal year-end.
NOTE 3. FEES PAID TO AFFILIATES
Under the Fund's Management Agreement, the Fund pays the Manager a management
fee for its investment management services at an annual rate of 0.80% of the
Fund's average weekly net assets. Under Portfolio Manager Agreements, the
Manager pays each Portfolio Manager a portfolio management fee at an annual rate
of 0.40% of the average weekly net assets of the investment portfolio managed by
it. The Fund also pays the Manager a fee for its administrative services at an
annual rate of 0.20% of the Fund's average weekly net assets. The annual fund
management and administrative fees are reduced to 0.72% and 0.18%, respectively,
on average weekly net assets in excess of $300 million. The aggregate annual
fees payable by the Manager to the Portfolio Managers are reduced to 0.36% of
the Fund's average weekly net assets in excess of $300 million. The Manager is
responsible for providing pricing and bookkeeping services to the Fund under a
Pricing and Bookkeeping Agreement. Under a separate agreement (the "Outsourcing
Agreement"), the Manager has delegated those functions to State Street Bank and
Trust Company ("State Street"). The Manager pays fees to State Street under the
Outsourcing Agreement.
Under its pricing and bookkeeping agreement with the Fund, the Manager
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 are more than $50 million, an
additional monthly fee is paid as calculated pursuant to the terms of the
Pricing and Bookkeeping Agreement. For the six months ended June 30, 2003, the
net asset based fee was 0.026%. The Fund also pays out-of-pocket costs for
pricing services.
OTHER - The Fund pays no compensation to its officers, all of whom are employees
of the Manager or its affiliates. The Fund had an agreement with its custodian
bank under which $133 of custody fees were reduced by balance credits applied
during the six months ended June 30, 2003. The Fund could have invested a
portion of the assets utilized in connection with the expense offset arrangement
in an income-producing asset if it had not entered into such an agreement.
NOTE 4. CAPITAL TRANSACTIONS
During the six months ended June 30, 2003
25
and the year ended December 31, 2002, distributions in the amounts of $2,924,578
and $6,185,822, respectively, were paid in newly issued shares valued at market
value or netasset value, but not less than 95% of market value, resulting in the
issuance of 534,884 and 964,320 shares, respectively.
NOTE 5. SECURITIES TRANSACTIONS
Realized gains and losses are recorded on the identified cost basis for both
financial reporting and federal income tax purposes. The cost of investments
purchased and the proceeds from investments sold excluding short-term debt
obligations for the six months ended June 30, 2003 were $21,765,338 and
$26,266,774, respectively.
The Fund may enter into repurchase agreements and require the seller of the
instrument to maintain on deposit with the Fund's custodian bank or in the
Federal Reserve Book-Entry System securities in the amount at all times equal to
or in excess of the value of the repurchase agreement plus accrued interest. The
Fund may experience costs and delays in liquidating the collateral if the issuer
defaults or enters bankruptcy.
26
RESULTS OF ANNUAL MEETING OF SHAREHOLDERS
On April 16, 2003, the Annual Meeting of Shareholders of the Fund was held to
elect three (3) Directors. On January 31, 2003, the record date for the Meeting,
the Fund had outstanding 20,618,489 shares of common stock. The votes cast at
the Meeting were as follows:
1. PROPOSAL TO ELECT THREE (3) DIRECTORS:
FOR AGAINST
--- -------
John A. Benning 17,482,315 460,528
James E. Grinnell 17,494,021 448,822
John J. Neuhauser 17,484,254 458,589
The Board of Directors is divided into the following three classes, each
with a term expiring in the indicated year:
2004 2005 2006
---- ---- ----
Mr. Lowry Mr. Benning Mr. Grinnell
Mr. Mayer Mr. Neuhauser
27
NOTES
28
[ALL STAR(TM) GROWTH FUND LOGO]
FUND MANAGER
Liberty Asset Management Company
One Financial Center
Boston, Massachusetts 02111
617-772-3626
www.all-starfunds.com
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers, LLP
160 Federal Street
Boston, Massachusetts 02110
CUSTODIAN
State Street Bank & Trust Company
225 Franklin Street
Boston, Massachusetts 02110
INVESTOR ASSISTANCE,
TRANSFER & DIVIDEND
DISBURSING AGENT & REGISTRAR
EquiServe Trust Company, N.A.
P.O. Box 43010, Providence, Rhode Island 02940-3010
1-800-LIB-FUND (1-800-542-3863)
www.equiserve.com
LEGAL COUNSEL
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, NW
Washington, DC 20036-1800
DIRECTORS
John A. Benning*
James E. Grinnell*
Richard W. Lowry*
William E. Mayer
Dr. John J. Neuhauser*
OFFICERS
William R. Parmentier, Jr., President and Chief Executive Officer
Mark T. Haley, CFA, Vice President
Fred H. Wofford, Vice President
J. Kevin Connaughton, Treasurer
Vicki L. Benjamin, Chief Accounting Officer and Controller
* Member of the audit committee.
[ASG LISTED NYSE LOGO]
[ALL STAR(TM) GROWTH FUND LOGO]
Liberty Asset Management Company
One Financial Center
Boston, Massachusetts 02111
[ASG LISTED NYSE LOGO]
A MEMBER OF THE
CLOSED-END
FUND
ASSOCIATION, INC.
WWW.CLOSED-ENDFUNDS.COM
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 at this time.
ITEM 6. [RESERVED]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES
Not applicable at this time.
ITEM 8. [RESERVED]
ITEM 9. CONTROLS AND PROCEDURES.
(a) The Registrant's Chief Executive Officer and Chief Financial Officer,
based on their evaluation of the Registrant's disclosure controls and
procedures as of a date within 90 days of the filing date 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 its reports
that it files or submits under the Securities Exchange Act of 1934, as
amended, is accumulated and communicated to the Registrant's management,
including the Chief Executive Officer and Chief Financial Officer, or persons
performing similar functions, as appropriate, to allow timely decisions
regarding required disclosure.
(b) There was no change in the registrant's internal control over financial
reporting that occurred over the registrant's last fiscal half-year that has
materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
ITEM 10. EXHIBITS.
(a) File the exhibits listed below as part of this Form. Letter or number the
exhibits in the sequence indicated.
(a)(1) Any code of ethics, or amendment thereto, that is the subject of the
disclosure required by Item 2, to the extent that the registrant intends
to satisfy the Item 2 requirements through filing of an exhibit: Not
applicable at this time.
(a)(2) A separate certification for each principal executive officer and
principal financial officer of the registrant as required by Rule
30a-2(a) under the Investment Company Act of 1940 (17 CFR 270.30a-2(a)).
Attached hereto as Exhibit 99.CERT.
(b) A separate certification for each principal executive officer and
principal financial officer of the registrant as required by 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) Liberty All Star Growth Fund, Inc.
-------------------------------------------------------------------
By (Signature and Title)* /s/ William R. Parmentier, Jr.
------------------------------------------------------
William R. Parmentier, Jr., President and Chief
Executive Officer
Date September 3, 2003
---------------------------------------------------------------------------
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/ William R. Parmentier, Jr.
------------------------------------------------------
William R. Parmentier, Jr., President and Chief
Executive Officer
Date September 3, 2003
---------------------------------------------------------------------------
By (Signature and Title)* /s/ J. Kevin Connaughton
------------------------------------------------------
J. Kevin Connaughton, Treasurer
Date September 3, 2003
---------------------------------------------------------------------------