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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 811-4809
---------------------------------------------
Liberty All Star Equity Fund
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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(SM) EQUITY FUND LOGO]
LIBERTY ALL-STAR EQUITY FUND
LIBERTY ALL-STAR EQUITY FUND
FUND STATISTICS AND PERFORMANCE 2ND QUARTER 2003 YEAR-TO-DATE
------------------------------------------------------------------------------
Period End Net Asset Value (NAV) -- $7.92
Period End Market Price -- $8.25
Period End Premium -- 4.2%
Distributions $0.19 $0.36
Market Price Trading Range $6.67 to $8.34 $6.08 to $8.34
Premium/(Discount) Range 4.2% to (2.5)% 4.2% to (6.1)%
Shares Valued at NAV 18.2% 16.5%
Shares Valued at NAV
with Dividends Reinvested 18.2% 16.3%
Shares Valued at Market Price
with Dividends Reinvested 25.5% 30.3%
Lipper Large-Cap Core
Mutual Fund Average 14.1% 10.4%
S&P 500 Index 15.4% 11.8%
Figures shown for the Fund and the Lipper Large-Cap Core Mutual Fund Average are
total returns, which include dividends, after deducting fund expenses. Figures
shown for the unmanaged S&P 500 Index are total returns, including income. Past
performance cannot predict future results.
ON THE COVER
THE PHOTOGRAPHS 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 STRUCTURE, MANAGER SELECTION, DISTRIBUTION
POLICY, MANAGER MONITORING AND FUND OBJECTIVE.
PRESIDENT'S LETTER
FELLOW SHAREHOLDERS: JULY 2003
April through June marked a solid quarter for equity markets. The S&P 500 Index
gained 15.4 percent, its best quarter since the fourth quarter of 1998 and -
from a longer term perspective - the eighth best quarterly gain since World War
II. Market breadth was perhaps the most impressive characteristic of the period,
as almost 95 percent of S&P 500 stocks posted gains. All S&P sectors rose at
least 5 percent for the first time since the S&P 500 was divided into sectors in
1989.
After slipping moderately in the first quarter (-3.2 percent), the S&P 500
ended the first half with a gain of 11.8 percent. It marked the first time in
four years that the market was up through the first six months of the year.
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. Of course, investors are
hoping for more than one quarter of gains, albeit at rates more moderate and
sustainable than the past quarter's 15 percent. The economy is providing enough
ammunition to keep bulls and bears alike blazing away. 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.
Turning to Liberty All-Star Equity Fund, the Fund posted a strong quarter,
both in absolute and relative terms. As the table on the facing page shows, Fund
shares valued at net asset value (NAV) gained 18.2 percent, the same advance for
Fund shares valued at NAV with dividends reinvested. Fund shares valued at
market price with dividends reinvested rose 25.5 percent. As noted, the S&P 500
gained 15.4 percent; meanwhile, the Fund's primary benchmark, the Lipper
Large-Cap Core Mutual Fund Average, advanced 14.1 percent.
Looking back over the quarter and the first half, we would simply return to
two points we have stressed on a consistent basis: 1) That the Fund was well
positioned once market sentiment improved; and 2) that the Fund's five
investment managers were adhering to their disciplines and that commitment would
be rewarded in the long run. We are gratified to have these convictions - which
are the foundation of the
1
Fund's multi-management investment approach - confirmed by actions in the
market.
Mentioning our managers and their investment disciplines, I urge shareholders
to read the interview with Glen Bickerstaff of TCW, which begins on page 8. TCW
remains steadfast in its philosophy of owning companies that have a competitive
advantage and that can increase market share in difficult economic environments.
In closing, we are encouraged by recent trends in the market and the Fund's
good results. At the same time, we have been through a period that tested the
resolve of investors beyond anything we could have reasonably expected. We won't
declare victory nor attempt to predict future events, but we will assure you
that - like our managers - we will stick by our disciplines and act in the best
long-term interests of shareholders.
We thank you for your continued support of the Fund.
Sincerely,
/s/ William R. Parmentier, Jr.
William R. Parmentier, Jr.
President and Chief Executive Officer
Liberty All-Star Equity Fund
2
INVESTMENT MANAGERS/PORTFOLIO CHARACTERISTICS
THE FUND'S ASSETS ARE EQUALLY DISTRIBUTED AMONG
THREE VALUE MANAGERS AND TWO GROWTH MANAGERS:
[CHART]
SCHNEIDER CAPITAL MANAGEMENT
VALUE/Companies that are overlooked and undervalued where the firm expects a
rebound in earnings.
MASTRAPASQUA ASSET MANAGEMENT, INC.
GROWTH/Companies whose valuations do not reflect the potential for accelerated
earnings and cash flow growth.
BOSTON PARTNERS ASSET MANAGEMENT, L.P.
VALUE/Companies with low price-to-earnings and price-to-book ratios where a
catalyst for positive change has been identified.
TCW INVESTMENT MANAGEMENT COMPANY
GROWTH/Companies that have superior sales growth, leading and/or rising market
shares, and high and/or rising profit margins.
OPPENHEIMER CAPITAL
VALUE/Companies that exhibit the ability to generate excess cash flow while
earning high returns on invested capital that trade below their intrinsic value.
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 a
multi-managed portfolio. The characteristics are different for each of the
Fund's five 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 final column shows portfolio
characteristics for the S&P 500 Stock Index.
[CHART]
INVESTMENT STYLE SPECTRUM
PORTFOLIO CHARACTERISTICS
AS OF JUNE 30, 2003
(UNAUDITED)
VALUE GROWTH
BOSTON OPPEN- MASTRA- TOTAL S&P
SCHNEIDER PARTNERS HEIMER PASQUA TCW FUND 500 INDEX
Number of Holdings 53 37 33 38 28 163* 500
Percent of Holdings in Top 10 44% 43% 51% 35% 56% 19% 23%
Weighted Average Market
Capitalization (billions) $ 8 $ 46 $ 67 $ 42 $ 54 $ 43 $ 85
Average Five-Year
Earnings Per Share Growth (2)% 10% 10% 15% 20% 11% 14%
Dividend Yield 1.2% 1.7% 1.8% 0.3% 0.3% 1.0% 1.9%
Price/Earnings Ratio 17x 15x 16x 27x 32x 20x 20x
Price/Book Value Ratio 2.0x 2.8x 3.2x 4.0x 5.0x 3.4x 2.9x
*Certain holdings are held by more than one manager.
3
INVESTMENT GROWTH AS OF JUNE 30, 2003
[CHART]
1. NAV of one share of All-Star as of 6/30/03 plus distributions paid since
inception.
2. To evaluate your investment in the Fund, these values should be used. Each
shows how an investment at NAV has fared by reinvesting the Fund's
distributions. The upper value includes additional investments made through
the rights offerings in 1992, 1993, 1994, 1998 and 2002.
The above chart illustrates the NAV growth of an original share of the Fund from
the Fund's inception date through June 30, 2003. The bottom region of the chart
reflects NAV growth assuming all distributions were received in cash and not
reinvested back into the Fund. The value of an original share grew to $26.62
(current NAV of $7.92 plus distributions paid since inception totaling $18.70,
which includes tax credits of $0.67 on retained capital gains).
Moving up the chart, the middle region depicts additional value added through
the reinvestment and compounding of distributions. The value of an original
share with distributions reinvested grew to $48.40 (6.111 shares times the
current NAV of $7.92).
On five occasions, the Fund has allowed the purchase of additional shares at
a discount through rights offerings. The top region illustrates the additional
value added assuming participation in all the rights offerings and the
reinvestment of all distributions. The value of an original share grew to $67.00
(8.460 shares times the current NAV of $7.92).
4
TABLE OF PER-SHARE VALUES, DISTRIBUTIONS AND REINVESTMENTS
SHARES SHARES MARKET TOTAL
SHARES PER PURCHASED ACQUIRED SHARES NAV(1) TOTAL PRICE MARKET
OWNED AT SHARE THROUGH THROUGH OWNED PER SHARE NAV OF PER SHARE PRICE OF
BEGINNING DISTRI- REINVESTMENT RIGHTS AT END AT END SHARES AT END SHARES
YEAR OF PERIOD BUTIONS PROGRAM OFFERING OF PERIOD OF PERIOD OWNED OF PERIOD OWNED
1987 1.000 $ 1.18 0.140 - 1.140 $ 7.90 $ 9.01 $ 6.00 $ 6.84
1988 1.140 0.64 0.107 - 1.247 8.29 10.34 7.25 9.04
1989 1.247 0.95 0.156 - 1.403 9.58 13.44 8.25 11.57
1990 1.403 0.90 0.167 - 1.570 8.92 14.00 7.75 12.17
1991 1.570 1.02 0.171 - 1.741 11.20 19.50 10.75 18.72
1992 1.741 1.07 0.199 0.179(2) 2.119 10.78 22.84 11.125 23.57
1993 2.119 1.25(3) 0.266 0.138(2) 2.523 10.40 26.24 11.125 28.07
1994 2.523 1.00 0.277 0.155(2) 2.955 9.26 27.36 8.50 25.12
1995 2.955 1.04 0.310 - 3.265 11.03 36.01 10.875 35.51
1996 3.265 1.31(3) 0.403 - 3.668 11.95 43.83 11.25 41.27
1997 3.668 1.69(3) 0.501 - 4.169 13.32 55.53 13.313 55.50
1998 4.169 1.40 0.487 0.173(2) 4.829 14.22 68.67 12.938 62.48
1999 4.829 1.39 0.569 - 5.398 14.02 75.68 11.063 59.72
2000 5.398 1.42 0.651 - 6.049 13.61 82.33 12.375 74.86
2001 6.049 1.20 0.703 - 6.752 10.65 71.91 11.09 74.88
2002 6.752 0.88 0.776 0.538(2) 8.066 7.14 57.59 6.64 53.56
2003
1st Quarter 8.066 0.17 0.198 - 8.264 6.86 56.69 6.73 55.62
2nd Quarter 8.264 0.19 0.196 - 8.460 7.92 67.00 8.25 69.80
1. Net Asset Value.
2. 1992: Rights offering completed in April 1992. One share offered at $10.05
for every 10 shares owned.
1993: Rights offering completed in October 1993. One share offered at $10.41
for every 15 shares owned.
1994: Rights offering completed in September 1994. One share offered at $9.14
for every 15 shares owned.
1998: Rights offering completed in April 1998. One share offered at $12.83
for every 20 shares owned.
2002: Rights offering completed in May 2002. One share offered at $8.99 for
every 10 shares owned.
3. 1993: Includes the $0.18 per share tax credit passed through to shareholders,
which was assumed to be reinvested at the year-end market price of
$11.125.
1996: Includes the $0.13 per share tax credit passed through to shareholders,
which was assumed to be reinvested at the year-end market price of
$11.25.
1997: Includes the $0.36 per share tax credit passed through to shareholders,
which was assumed to be reinvested at the year-end market price of
$13.313.
5
TOP 50 HOLDINGS
RANK AS RANK AS MARKET PERCENT OF
OF 6/30/03 OF 3/31/03 SECURITY NAME VALUE ($000) NET ASSETS
1 4 The Progressive Corp. $ 21,857 2.2%
2 2 Microsoft Corp. 21,399 2.2
3 1 Freddie Mac 20,445 2.1
4 8 Genentech, Inc. 20,143 2.1
5 6 Citigroup, Inc. 19,273 2.0
6 5 Amgen, Inc. 18,789 1.9
7 3 Countrywide Financial Corp. 17,643 1.8
8 9 Dell Computer Corp. 14,561 1.5
9 11 ChevronTexaco Corp. 14,462 1.5
10 26 Amazon.com, Inc. 13,636 1.4
11 12 Cisco Systems, Inc. 13,222 1.4
12 24 Teradyne, Inc. 12,927 1.3
13 29 Tyco International Ltd. 12,122 1.2
14 15 Applied Materials, Inc. 11,800 1.2
15 7 AFLAC, Inc. 11,328 1.2
16 18 Intel Corp. 11,319 1.2
17 30 Agilent Technologies, Inc. 11,139 1.1
18 28 MedImmune, Inc. 10,944 1.1
19 16 Network Appliance, Inc. 10,825 1.1
20 19 XL Capital Ltd., Class A 10,375 1.1
21 22 eBay, Inc. 10,220 1.0
22 10 Wells Fargo & Co. 10,080 1.0
23 83 Yahoo!, Inc. 9,602 1.0
24 44 Micron Technology, Inc. 9,510 1.0
25 New CIT Group, Inc. 9,240 0.9
26 50 PG&E Corp. 9,211 0.9
27 17 Procter & Gamble Co. 9,150 0.9
28 14 Maxim Integrated Products, Inc. 9,036 0.9
29 20 Liberty Media Corp., Class A 9,011 0.9
30 27 Kerr-McGee Corp. 8,938 0.9
31 39 EMC Corp. 8,873 0.9
32 13 American International Group, Inc. 8,840 0.9
33 57 The Boeing Co. 8,680 0.9
34 84 CVS Corp. 8,616 0.9
35 117 Pfizer, Inc. 8,377 0.9
36 34 Eli Lilly and Co. 8,276 0.8
37 32 Tate & Lyle PLC 7,938 0.8
38 37 Wyeth 7,812 0.8
39 64 VERITAS Software Corp. 7,569 0.8
40 40 ACE Ltd. 7,215 0.7
41 38 Liz Claiborne, Inc. 7,075 0.7
42 33 UST, Inc. 6,981 0.7
43 25 J.C. Penney Co., Inc. 6,946 0.7
44 46 Southwest Airlines Co. 6,698 0.7
45 54 Transocean, Inc. 6,683 0.7
46 42 Pixar, Inc. 6,650 0.7
47 41 Oracle Corp. 6,611 0.7
48 36 3M Co. 6,449 0.7
49 75 Hewlett-Packard Co. 6,386 0.7
50 53 Clear Channel Communications, Inc. 6,359 0.7
6
MAJOR STOCK CHANGES IN THE SECOND QUARTER
The following are the major ($4.0 million 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
CIT Group, Inc. 374,850 374,850
Jabil Circuit, Inc. 206,000 206,000
Navistar International Corp. 152,150 152,150
SBC Communications, Inc. 193,100 193,100
Texas Instruments, Inc. 91,900 240,000
Viacom, Inc., Class B 134,700 134,700
Xerox Corp. 378,980 378,980
SALES
Aetna, Inc. (83,675) 55,200
Biomet, Inc. (150,000) 0
Countrywide Financial Corp. (118,100) 253,600
Federated Department Stores, Inc. (184,200) 0
International Flavors & Fragrances, Inc. (82,700) 0
J.P. Morgan Chase & Co. (302,200) 0
PACCAR, Inc. (130,700) 36,850
PeopleSoft, Inc. (242,000) 0
7
MANAGER INTERVIEW
[PHOTO OF GLEN E. BICKERSTAFF]
GLEN E. BICKERSTAFF
Managing Director, U.S. Equities
TCW INVESTMENT MANAGEMENT COMPANY
In a tepid economy, TCW looks beyond the aggregate numbers to identify
opportunities and the companies that stand to benefit
TCW INVESTMENT MANAGEMENT COMPANY IS ONE OF ALL-STAR'S FIVE INVESTMENT
MANAGEMENT FIRMS. TCW IS A GROWTH MANAGER, SEEKING TO INVEST IN COMPANIES THAT
HAVE SUPERIOR SALES GROWTH, LEADING AND/OR RISING MARKET SHARES, AND HIGH AND/OR
RISING PROFIT MARGINS. TCW'S CONCENTRATED GROWTH EQUITY STRATEGY SEEKS LEADING
COMPANIES WITH DISTINCT ADVANTAGES IN THEIR BUSINESS MODEL AND AN INHERENT EDGE
OVER COMPETITORS. RESEARCH PLAYS A CRITICAL ROLE IN THE SELECTION PROCESS, AND
THE INVESTMENT HORIZON IS LONG TERM. GLEN E. BICKERSTAFF, MANAGING DIRECTOR,
U.S. EQUITIES, SHARED HIS THOUGHTS RECENTLY WITH THE FUND MANAGER, LIBERTY ASSET
MANAGEMENT COMPANY (LAMCO).
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: Everyone has the same set of facts, but how investors 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?
BICKERSTAFF: Given our long-term focus, we tend to look beyond many of the
short-term indicators, as we do not think that we can outguess other investors
in timing these short-term factors. We believe information is ubiquitous, it's
judgments that are the differentiator. Thus, it's not surprising that there are
so many different interpretations. Not surprisingly, we have some of our own
insights. For one, within the U.S. economy one needs to distinguish between the
manufacturing economy and the services economy. The economic transformation
that's occurring in China is wreaking havoc on manufacturers in the developed
world because that country has a comparative advantage when it comes to labor
costs. Pressure on U.S. manufacturers translates into a negative impact on the
manufacturing side of the economy, which drags down the aggregate numbers for
the entire economy. Meanwhile, we're seeing higher demand and some degree of
pricing power on the services side. Granted, to some
[SIDENOTE]
"[FOREIGN] PRESSURE ON U.S. MANUFACTURERS TRANSLATES INTO A NEGATIVE IMPACT ON
THE MANUFACTURING SIDE OF THE ECONOMY... MEANWHILE, WE'RE SEEING HIGHER DEMAND
AND SOME DEGREE OF PRICING POWER ON THE SERVICES SIDE."
8
extent, services are being globalized just like manufacturing. But, there is
still more differentiation on the services side and that provides a certain
amount of competitive insulation. So, our approach at TCW has been to identify
companies that have a product advantage or a cost advantage and that are selling
into growing markets.
LAMCO: So, one has to be specific as to which part of the economy one is talking
about?
BICKERSTAFF: Yes, you need to disaggregate the different sectors in the economy
to find the opportunities. But you also have to step back and think about what
happened in the past recession. It was a recession in business capital spending,
and a deep one. It was a more modest recession at the consumer level, however.
Consumers liquidated equity from their homes and spent for big ticket items,
from larger homes to home furnishings, appliances and automobiles. So, while we
typically see the emergence of pent-up consumer demand at this stage of an
economic recovery, this time around it's really not there because the consumer
has already spent heavily.
LAMCO: And the recovery is getting stretched out?
BICKERSTAFF: Yes, there's a recovery underway, but it's subdued because the
capital spending phase hasn't kicked in, although we're now seeing some signs
that is changing. Many corporations are still laboring under large amounts of
debt, and although cash flows in the first half of the year grew nicely, a lot
of that increase is going to pay down debt.
There are three additional factors I should touch on. One is the jobless
nature of this recovery. Job growth has been very slow. Job creation, however,
tends to be a lagging indicator, so one can't look at the unemployment numbers
and predict where the rest of the economy is going because companies will hire
once they're reasonably assured that demand is rising. High unemployment and
slow job creation are also a result of the huge productivity gains that the
economy has shown over the past few years, the lesson being that the marginal
dollar spent for capital equipment is proving to be more valuable than the
marginal dollar spent for labor.
The second factor is overcapacity globally. Capacity utilization rates are
low, as they typically are coming out of a recession, but we think that there
are certain industries in which capacity becomes obsolete more rapidly and is
thus rationalized more quickly. Technology, for example, is quick to rationalize
excess capacity because it becomes obsolete. That enables the cycle to start
anew much more quickly. We are mindful that in our investments, which is why we
have maintained a pretty healthy technology weighting.
Third, while we're getting some mixed messages from the economy and its
implications for the stock market, we think it's
[SIDENOTE]
"...WHILE WE TYPICALLY SEE THE EMERGENCE OF PENT-UP CONSUMER DEMAND AT THIS
STAGE OF AN ECONOMIC RECOVERY, THIS TIME AROUND IT'S REALLY NOT THERE BECAUSE
THE CONSUMER HAS ALREADY SPENT HEAVILY."
9
important to take note of impressive gains in corporate profitability. We have
seen the companies in our portion of the All-Star portfolio improve their profit
structures throughout the recession. So, despite the subdued economic recovery,
it appears that the improvement in profits could outstrip the pace of gain in
the overall economy.
LAMCO: Where are you vis a vis the Federal Reserve Board's attempts to reinflate
the economy?
BICKERSTAFF: We think that the Fed cutting the fed funds rate to 1 percent
creates a situation where the comparison between stocks and bonds has improved.
As interest rates get taken lower, bonds become less attractive and stocks
become more attractive. But in terms of a stimulus for the overall economy, I'd
argue that a fed funds rate of 1 percent isn't that meaningful. If you need to
borrow money you're going to be willing to pay 100 or 150 basis points more than
prevailing rates. Alternatively, if one doesn't need a loan, even these low
rates will not induce borrowing. So, we would view the stimulative effect of a 1
percent fed funds rate as more symbolic than anything else.
LAMCO: Do you think that today's low interest rate environment is one factor
that justifies the somewhat richer valuations that still remain in the equity
market?
BICKERSTAFF: Absolutely. Stocks are trading at a modest premium to their
historic valuations and U.S. stocks are trading at a premium to European stocks
right now. But, given the potential growth and profitability that we have for
the U.S. market, and given the typical relationship between the earnings yield
of stocks and the yields of, say, high grade corporate bonds, stocks look cheap.
Not extraordinarily cheap, but what I'd call a modest discount. One can easily
make the case that valuations here are okay, given the low levels of inflation
and interest rates.
LAMCO: Let's shift to some TCW specific topics. It has been a couple of years
since we've talked for a quarterly report, so it wouldn't be a bad idea to
revisit some basics. You seek to invest in companies with superior sales growth,
rising market shares, and high and rising profit margins. Is it difficult to
find good candidates in this somewhat sluggish world economy?
BICKERSTAFF: We are very selective and we manage concentrated portfolios. So,
we're looking for the 30 very best companies we can find. Because our standards
are extraordinarily high our rejection rates tend to be very high. Bottom line,
I'd argue that it's always difficult for us to find companies that are going to
meet our criteria.
That being said, coming out of the tech slump and the economic recession, the
competitive landscape has been shaken up quite a bit. We've got companies within
the portfolio that have come through an extraordinarily difficult time and have
had the opportunity to really differentiate themselves. So, this point in time
creates
[SIDENOTE]
"WE HAVE SEEN THE COMPANIES IN OUR PORTION OF THE ALL-STAR PORTFOLIO IMPROVE
THEIR PROFIT STRUCTURES THROUGHOUT THE RECESSION."
10
an interesting opportunity for investors like ourselves to find companies that
have been tested and to observe how those companies have behaved.
LAMCO: Is it a case of the strong getting stronger?
BICKERSTAFF: Companies are better able to distinguish themselves in difficult
times than they can when times are good. When times are good, everybody is
getting business because companies don't want to be put on allocation for
critical equipment. But when times get tough, it's the companies that have a
sustainable competitive advantage that get the lion's share of the orders. They
can also continue to spend for future growth, yet reduce their overall cost
structure and thus set themselves up to enjoy even greater wealth creation as
conditions start to improve.
Amazon.com is a company that has come through this difficult environment and
became profitable in the fourth quarter last year. Amazon has established itself
as a national brand, created further scalability by going beyond books, videos
and recorded music, and is far stronger today, despite the tepid economy. In
some respects, the difficult times made Amazon stronger.
LAMCO: You mentioned TCW's high standards. Give us a couple of examples of those
high standards, please.
BICKERSTAFF: We want companies that are growing more rapidly than the
competition, and that are more profitable than the competition. We want
companies in R&D-sensitive areas to produce very high returns on those invested
dollars. We want companies that have created a corporate culture of excellence.
We will own companies in which operations or technology are the differentiators,
and we will own companies in which cultural factors contribute to results. And,
we will seek to own these companies for the long term.
Two examples in the All-Star portfolio where corporate culture makes a big
difference are Pixar and Southwest Airlines. Pixar is certainly in the hits
business: TOY STORY and TOY STORY 2, A BUG'S LIFE, MONSTERS, INC., and its
current hit, FINDING NEMO. All five of its films have been blockbuster hits.
Pixar has created an extraordinary culture of creativity without relying on
gimmicks. The company has best-of-breed technology and wonderful stories for
their films. And a lot of it is a result of the culture that the leadership of
that company has created and the caliber of personnel that it has attracted.
Southwest Airlines is in a highly regulated industry in which everybody has
to live with the same weather conditions, energy prices, unionized labor,
government regulation, terrorist effects, consumer demand and the business
cycle. Yet through a differentiated corporate culture, Southwest Airlines has
been able to remain profitable year after year when larger competitors often
experienced losses.
LAMCO: You mentioned holding stocks
[SIDENOTE]
"...IN TERMS OF A STIMULUS FOR THE OVERALL ECONOMY, I'D ARGUE THAT A FED FUNDS
RATE OF 1 PERCENT ISN'T THAT MEANINGFUL... WE WOULD VIEW THE STIMULATIVE EFFECT
AS MORE SYMBOLIC THAN ANYTHING ELSE."
11
for the long term. I think you said in a previous interview that an ideal
investment for TCW is one you never have to sell.
BICKERSTAFF: That's right, if we need to, we will sell. But, on average, we're
going to run about a 30 percent turnover rate, which is very low for a growth
manager.
LAMCO: One of the hallmarks of your approach is to identify secular trends and
companies that are well positioned to take advantage of those trends. Can you
share a example of a secular trend that you've identified?
BICKERSTAFF: Let's talk about biotechnology, something we're emphasizing in the
portfolio. All of the health care names that we own are either pure biotech
companies or, in the case of Eli Lilly, a pharmaceutical company that has a
fairly substantial commitment to biotech. As we look at the trends for biotech
we see several things that are going our way.
For one, an aging population augurs for strong aggregate demand. Two, as you
have health care expenditures rising at a greater rate than the overall economy,
the cost-effectiveness with a drug solution is superior to a surgical solution.
It's more cost-effective for patients to take Lipitor to control their
cholesterol than to go in for quadruple bypass heart surgery. In addition, with
biotech products we think that there's potential for new therapies that are
attacking certain therapeutic categories that heretofore have had unsatisfactory
treatment. Specific to biotech products - the so-called "large molecule"
products - they are more difficult to imitate than the traditional small
molecule pharmaceutical company products. So, there's less head-to-head
competition among the biotech companies. They get to more or less "own" a
product category for a period of time and enjoy high returns on their invested
R&D dollars. In addition, the profitability for these products is enhanced by
the fact that the buyers are making a highly informed decision. The doctors are
more involved, and there isn't television advertising or a sales force going
door-to-door handing out coffee mugs with the drug's name on it. Finally, the
Food and Drug Administration may implement an improved new product approval
process, so we may see novel therapies approved more quickly.
LAMCO: What's another secular trend?
BICKERSTAFF: It would be, for instance, the notion that consumers are starting
to avail themselves of electronic commerce because of the abundant choice they
get, the convenience of shopping from their computer and the price advantage is
really coming to the fore. We think the e-commerce plays that we hold in the
portfolio - Amazon, e-Bay and Yahoo - are extraordinarily well positioned. The
markets that these companies sell into are enormous and the market penetration
levels are relatively low, so they have great long-term growth
[SIDENOTE]
"COMPANIES ARE BETTER ABLE TO DISTINGUISH THEMSELVES IN DIFFICULT TIMES THAN
THEY CAN WHEN TIMES ARE GOOD...WHEN TIMES GET TOUGH, IT'S THE COMPANIES THAT
HAVE A SUSTAINABLE COMPETITIVE ADVANTAGE THAT GET THE LION'S SHARE OF THE
ORDERS."
12
opportunities ahead of them. These companies have established themselves as
brand names in their categories, and all three are cash flow positive right now.
LAMCO: You provided three examples of electronic commerce companies, Amazon,
e-Bay and Yahoo. What are some biotech companies in the portfolio?
BICKERSTAFF: We have Amgen, Genentech and MedImmune in the portfolio. I also
mentioned that we own Eli Lilly, which is a traditional pharma company with the
greatest dedication to biotech.
LAMCO: Earlier, you mentioned Southwest Airlines. What secular trend does that
play into? That pick would seem to be counterintuitive since there is so much
headwind in the airline industry today.
BICKERSTAFF: Southwest Airlines is a carrier for business travelers but a larger
portion of its revenue mix, relative to the other airlines, is leisure
travelers. Over time, we have seen consumers devote a growing portion of their
disposable income to leisure and entertainment. Southwest Airlines absolutely
dominates airports such as Las Vegas and Orlando, and is very well positioned to
benefit from the continued trend toward increased leisure travel.
LAMCO: Tying back to your concentrated low turnover portfolios, they're also
generally what you call "conviction-weighted." Can you define that term for us?
BICKERSTAFF: Conviction-weighted is the intersection between our judgment about
the magnitude of growth a company may be able to achieve and the confidence we
have that they'll be able to do it. Growth can be driven by secular trends and
the competitive advantage a company enjoys. Confidence has to do with the extent
to which their business model is proven, the quality of management, the level of
corporate disclosure we get and potential competition. When both growth
potential and confidence are high, our conviction level is going to be much
higher.
LAMCO: Any changes at TCW since we last talked?
BICKERSTAFF: In the past year we've added two new people to our portfolio
management team, bringing us up to five. We think with the multitude of
perspectives and with different individuals evaluating each idea, we've
dramatically reduced the risk that we're going to miss some critical issue that
could impact the portfolio. It's very much a team approach, very collaborative.
LAMCO: Glen, thanks for your comments. We look forward to next time.
[SIDENOTE]
"...ON AVERAGE, WE'RE GOING TO RUN ABOUT A 30 PERCENT TURNOVER RATE, WHICH IS
VERY LOW FOR A GROWTH MANAGER."
13
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2003 (UNAUDITED)
COMMON STOCKS (95.4%) SHARES MARKET VALUE
CONSUMER DISCRETIONARY (15.9%)
AUTO COMPONENTS (0.3%)
Visteon Corp. 421,850 $ 2,898,110
------------
AUTOMOBILES (0.2%)
Harley-Davidson, Inc. 45,000 1,793,700
------------
HOTELS, RESTAURANTS & LEISURE (2.9%)
Brinker International, Inc. (a) 120,000 4,322,400
Brunswick Corp. 78,200 1,956,564
Carnival Corp. 150,000 4,876,500
Harrah's Entertainment, Inc. (a) 95,900 3,859,016
Mandalay Resort Group (a) 91,600 2,917,460
McDonald's Corp. 225,000 4,963,500
Starwood Hotels & Resorts Worldwide, Inc. 178,125 5,092,594
------------
27,988,034
------------
HOUSEHOLD DURABLES (0.4%)
Clayton Homes, Inc. 289,050 3,627,578
------------
INTERNET & CATALOG RETAIL (2.4%)
Amazon.com, Inc. (a) 373,700 13,636,313
eBay, Inc. (a) 98,100 10,220,058
------------
23,856,371
------------
LEISURE EQUIPMENT & PRODUCTS (0.5%)
Eastman Kodak Co. 100,000 2,735,000
Mattel, Inc. 100,000 1,892,000
------------
4,627,000
------------
MEDIA (5.2%)
AOL Time Warner, Inc. (a) 220,000 3,539,800
Clear Channel Communications, Inc. (a) 150,000 6,358,500
Comcast Corp., Class A (a) 125,000 3,603,750
The E.W. Scripps Co., Class A 55,000 4,879,600
Fox Entertainment Group, Inc., Class A (a) 150,000 4,317,000
Interactive Corp. (a) 100,000 3,957,000
Liberty Media Corp., Class A (a) 779,482 9,010,812
Pixar, Inc. (a) 109,300 6,649,812
Viacom, Inc., Class B (a) 134,700 5,881,002
The Walt Disney Co. 141,000 2,784,750
------------
50,982,026
------------
See Notes to Schedule of Investments.
14
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
MULTI-LINE RETAIL (3.4%)
Dollar General Corp. 175,000 $ 3,195,500
The Gap, Inc. 125,000 2,345,000
J.C. Penney Co., Inc. 412,200 6,945,570
Liz Claiborne, Inc. 200,700 7,074,675
May Department Stores Co. 100,000 2,226,000
Target Corp. 165,000 6,243,600
Wal-Mart Stores, Inc. 107,300 5,758,791
------------
33,789,136
------------
SPECIALTY RETAIL (0.6%)
The Home Depot, Inc. 143,000 4,736,160
Toys "R" Us, Inc. (a) 72,800 882,336
------------
5,618,496
------------
CONSUMER STAPLES (6.4%)
BEVERAGES (0.5%)
PepsiCo, Inc. 106,600 4,743,700
------------
FOOD & DRUG RETAILING (2.6%)
CVS Corp. 307,400 8,616,422
The Kroger Corp. (a) 300,000 5,004,000
Tate & Lyle PLC (b) 351,150 7,938,413
Walgreen Co. 123,200 3,708,320
------------
25,267,155
------------
FOOD PRODUCTS (1.0%)
Archer-Daniels-Midland Co. 256,950 3,306,946
Kraft Foods, Inc., Class A 85,300 2,776,515
Smithfield Foods, Inc. (a) 89,950 2,061,654
Tyson Foods, Inc., Class A 136,050 1,444,851
------------
9,589,966
------------
PERSONAL PRODUCTS (1.6%)
Avon Products, Inc. 47,500 2,954,500
The Gillette Co. 100,000 3,186,000
Procter & Gamble Co. 102,600 9,149,868
------------
15,290,368
------------
TOBACCO (0.7%)
UST, Inc. 199,300 6,981,479
------------
See Notes to Schedule of Investments.
15
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
ENERGY (4.3%)
ENERGY EQUIPMENT & SERVICES (1.1%)
Nabors Industries Ltd. (a) 52,100 $ 2,060,555
Patterson-UTI Energy, Inc. (a) 64,800 2,099,520
Transocean, Inc. (a) 304,200 6,683,274
------------
10,843,349
------------
OIL & GAS (3.2%)
Burlington Resources, Inc. 10,200 551,514
Canadian Natural Resources Ltd. 96,200 3,839,342
ChevronTexaco Corp. 200,300 14,461,660
Kerr-McGee Corp. 199,500 8,937,600
Premcor, Inc. (a) 145,700 3,139,835
------------
30,929,951
------------
FINANCIALS (18.8%)
BANKS (2.3%)
FleetBoston Financial Corp. (c) 200,000 5,942,000
National City Corp. 89,700 2,934,087
Wachovia Corp. 75,600 3,020,976
Wells Fargo & Co. 200,000 10,080,000
------------
21,977,063
------------
DIVERSIFIED FINANCIALS (8.4%)
The Charles Schwab Corp. 455,950 4,600,536
CIT Group, Inc. 374,850 9,240,052
Citigroup, Inc. 450,300 19,272,840
Countrywide Financial Corp. 253,600 17,642,952
Freddie Mac 402,700 20,445,079
Goldman Sachs Group, Inc. 45,000 3,768,750
Merrill Lynch & Co., Inc. 90,000 4,201,200
Morgan Stanley 75,000 3,206,250
------------
82,377,659
------------
INSURANCE (7.9%)
ACE Ltd. 210,400 7,214,616
AFLAC, Inc. 368,400 11,328,300
The Allstate Corp. 71,350 2,543,628
American International Group, Inc. 160,209 8,840,333
See Notes to Schedule of Investments.
16
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
INSURANCE (CONTINUED)
Aon Corp. 148,625 $ 3,578,890
CIGNA Corp. 38,900 1,825,966
Loews Corp. 41,150 1,945,984
PartnerRe Ltd. 61,350 3,135,598
The Progressive Corp. 299,005 21,857,266
Travelers Property Casualty Corp., Class A (a) 133,100 2,116,290
UnumProvident Corp. 175,000 2,346,750
XL Capital Ltd., Class A 125,000 10,375,000
------------
77,108,621
------------
REAL ESTATE (0.2%)
The St. Joe Co. 58,125 1,813,500
------------
HEALTH CARE (11.8%)
BIOTECHNOLOGY (6.7%)
Amgen, Inc. (a) 282,800 18,789,232
Genentech, Inc. (a) 279,300 20,143,116
Genzyme Corp. (a) 138,000 5,768,400
IDEC Pharmaceuticals Corp. (a) 146,000 4,964,000
Invitrogen Corp. (a) 130,000 4,988,100
MedImmune, Inc. (a) 300,900 10,943,733
------------
65,596,581
------------
HEALTH CARE EQUIPMENT & SERVICES (0.5%)
Quest Diagnostic, Inc. (a) 75,000 4,785,000
------------
HEALTH CARE PROVIDERS & SERVICES (0.8%)
Aetna, Inc. 55,200 3,323,040
AmerisourceBergen Corp. 47,300 3,280,255
Tenet Healthcare Corp. (a) 119,050 1,386,932
------------
7,990,227
------------
PHARMACEUTICALS (3.8%)
Biovail Corp. (a) 114,000 5,364,840
Bristol-Myers Squibb Co. 150,000 4,072,500
Eli Lilly and Co. 120,000 8,276,400
Pfizer, Inc. 245,300 8,376,995
Shire Pharmaceuticals Group PLC (a)(b) 183,300 3,611,010
Wyeth 171,500 7,811,825
------------
37,513,570
------------
See Notes to Schedule of Investments.
17
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
INDUSTRIALS (7.3%)
AEROSPACE & DEFENSE (1.2%)
The Boeing Co. 252,900 $ 8,679,528
Lockheed Martin Corp. 55,600 2,644,892
------------
11,324,420
------------
AIR FREIGHT & COURIERS (1.2%)
Expeditors International of Washington, Inc. 116,000 4,018,240
FedEx Corp. 71,000 4,404,130
Ryder System, Inc. 136,000 3,484,320
------------
11,906,690
------------
AIRLINES (0.7%)
Delta Air Lines, Inc. 38,100 559,308
Southwest Airlines Co. 389,400 6,697,680
------------
7,256,988
------------
INDUSTRIAL CONGLOMERATES (2.3%)
General Electric Co. 125,700 3,605,076
3M Co. 50,000 6,449,000
Tyco International Ltd. 638,650 12,121,577
------------
22,175,653
------------
MACHINERY (0.8%)
Navistar International Corp. (a) 152,150 4,964,654
PACCAR, Inc. 36,850 2,489,586
------------
7,454,240
------------
ROAD & RAIL (1.1%)
CSX Corp. 195,250 5,875,072
Swift Transportation Co., Inc. (a) 266,575 4,963,626
------------
10,838,698
------------
INFORMATION TECHNOLOGY (24.3%)
COMMUNICATIONS EQUIPMENT (2.0%)
Cisco Systems, Inc. (a) 792,200 13,221,818
QUALCOMM, Inc. (a) 121,800 4,354,350
3Com Corp. (a) 418,400 1,958,112
------------
19,534,280
------------
COMPUTER PERIPHERALS (4.9%)
Dell Computer Corp. (a) 455,600 14,560,976
Electronic Data Systems Corp. 148,775 3,191,224
EMC Corp. (a) 847,500 8,873,325
See Notes to Schedule of Investments.
18
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
COMPUTER PERIPHERALS (CONTINUED)
Hewlett-Packard Co. 299,800 $ 6,385,740
Network Appliance, Inc. (a) 667,800 10,825,038
Sun Microsystems, Inc. (a) 931,200 4,283,520
------------
48,119,823
------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (3.1%)
Agilent Technologies, Inc. (a) 569,750 11,138,612
Arrow Electronics, Inc. (a) 36,600 557,784
Avnet, Inc. (a) 384,850 4,879,898
Jabil Circuit, Inc. (a) 206,000 4,552,600
Sanmina-SCI Corp. (a) 693,050 4,373,146
Waters Corp. (a) 167,000 4,864,710
------------
30,366,750
------------
INTERNET SOFTWARE & SERVICES (1.0%)
Yahoo! Inc. (a) 293,100 9,601,956
------------
IT CONSULTING & SERVICES (0.4%)
Computer Sciences Corp. (a) 111,700 4,258,004
------------
OFFICE ELECTRONICS (0.4%)
Xerox Corp (a) 378,980 4,013,398
------------
SEMICONDUCTOR EQUIPMENT & PRODUCTS (7.8%)
Analog Devices, Inc. (a) 155,000 5,397,100
Applied Materials, Inc. (a) 744,020 11,800,157
Intel Corp. 544,600 11,318,966
Maxim Integrated Products, Inc. (a) 264,300 9,036,417
Micron Technology, Inc. (a) 817,750 9,510,432
Novellus Systems, Inc. (a) 160,000 5,859,360
Teradyne, Inc. (a) 746,800 12,927,108
Texas Instruments, Inc. 240,000 4,224,000
Xilinx, Inc. (a) 229,200 5,801,052
------------
75,874,592
------------
SOFTWARE (4.7%)
Microsoft Corp. (a) 835,565 21,398,820
Oracle Corp. (a) 550,000 6,611,000
Siebel Systems, Inc. (a) 592,100 5,648,634
Symantec Corp. (a) 100,000 4,386,000
VERITAS Software Corp. (a) 264,000 7,568,880
------------
45,613,334
------------
See Notes to Schedule of Investments.
19
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
MATERIALS (2.5%)
CHEMICALS (0.7%)
The Dow Chemical Co. 107,350 $ 3,323,556
IMC Global, Inc. 536,850 3,602,264
------------
6,925,820
------------
METALS & MINING (1.3%)
Alcan, Inc. 130,400 4,080,216
CONSOL Energy, Inc. 95,700 2,176,218
Freeport-McMoRan Copper & Gold, Inc., Class B 159,950 3,918,775
United States Steel Corp. 163,700 2,679,769
------------
12,854,978
------------
PAPER & FOREST PRODUCTS (0.5%)
Bowater, Inc. 63,100 2,363,095
Smurfit-Stone Container Corp. (a) 187,300 2,440,519
------------
4,803,614
------------
TELECOMMUNICATION SERVICES (2.3%)
DIVERSIFIED TELECOMMUNICATION SERVICES (2 3%)
ALLTEL Corp. 77,100 3,717,762
AT&T Wireless Services, Inc. (a) 763,150 6,265,462
Nokia Oyj (b) 226,700 3,724,681
SBC Communications, Inc. 193,100 4,933,705
Verizon Communications 100,000 3,945,000
------------
22,586,610
------------
UTILITIES (1.8%)
ELECTRIC UTILITIES (1.7%)
Edison International (a) 85,050 1,397,372
FirstEnergy Corp. 156,600 6,021,270
PG&E Corp. (a) 435,500 9,210,825
------------
16,629,467
------------
GAS UTILITIES (0.1%)
El Paso Corp. 155,300 1,254,823
------------
TOTAL COMMON STOCKS (COST OF $935,533,161) 931,382,778
------------
See Notes to Schedule of Investments.
20
PREFERRED STOCK (0.3%) SHARES MARKET VALUE
CONSUMER DISCRETIONARY (0.3%)
MEDIA (0.3%)
The News Corp., Ltd. (b) (Cost of $3,666,066) 120,000 $ 3,006,000
------------
CONVERTIBLE BONDS (0.6%) INTEREST MATURITY PAR
RATE DATE VALUE
INDUSTRIALS (0.3%)
METALS & MINING (0.3%)
Freeport-McMoRan
Copper & Gold, Inc. 8.25% 01/31/06 $ 1,701,000 3,021,401
------------
INFORMATION TECHNOLOGY (0.2%)
TELECOMMUNICATION EQUIPMENT (0.2%)
Corning, Inc. 3.50% 11/01/08 1,404,000 1,507,545
------------
UTILITIES (0.1%)
ELECTRIC UTILITIES (0.1%)
Calpine Corp. 4.00% 12/26/06 890,000 801,000
------------
GAS UTILITIES (0.0%)
El Paso Corp. (d) 02/28/21 455,000 199,063
------------
TOTAL CONVERTIBLE BONDS (COST OF $4,610,096) 5,529,009
------------
See Notes to Schedule of Investments.
21
SHORT-TERM PAR MARKET
INVESTMENT (3.9%) VALUE VALUE
REPURCHASE AGREEMENT (3.9%)
Repurchase agreement with State Street Bank & Trust Co.,
dated 06/30/03, due 07/01/03 at 1.00% collateralized by
a U.S. Treasury Bond maturing 08/15/23, market value
$38,431,875 (Repurchase proceeds $37,665,046)
(Cost of $37,664,000) $ 37,664,000 $ 37,664,000
--------------
TOTAL INVESTMENTS (100.2%) (COST OF $981,473,323) (e) 977,581,787
--------------
OTHER ASSETS AND LIABILITIES, NET (-0.2%) (2,078,885)
--------------
NET ASSETS (100.0%) $ 975,502,902
--------------
NET ASSET VALUE PER SHARE (123,125,136 SHARES OUTSTANDING) $ 7.92
--------------
NOTES TO SCHEDULE OF INVESTMENTS:
(a) Non-income producing
(b) Represents an American Depositary Receipt.
(c) Investments in Affiliates as of June 30, 2003:
Security Name: FleetBoston Financial Corp., the parent company of the
Manager.
Shares as of 12/31/02: 200,000
Shares as of 06/30/03: 200,000
Dividend income earned: $140,000
Value at end of period: $5,942,000
(d) Zero coupon bond.
(e) 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 $ 162,161,642
Gross unrealized depreciation (166,053,178)
--------------
Net unrealized depreciation $ (3,891,536)
==============
See Notes to Financial Statements.
22
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 2003 (UNAUDITED)
ASSETS:
Investments at market value (identified cost $981,473,323) $ 977,581,787
Cash 3,093
Receivable for investments sold 1,088,942
Dividends and interest receivable 580,005
----------------
TOTAL ASSETS 979,253,827
----------------
LIABILITIES:
Payable for investments purchased 2,652,946
Management, administrative, Trustees' and bookkeeping/pricing
fees payable 744,377
Accrued expenses 353,602
----------------
TOTAL LIABILITIES 3,750,925
----------------
NET ASSETS $ 975,502,902
================
NET ASSETS REPRESENTED BY:
Paid-in capital (unlimited number of shares of beneficial interest
without par value authorized; 123,125,136 shares outstanding) $ 1,039,820,500
Accumulated net realized loss on investments
less distributions (60,426,040)
Net unrealized depreciation on investments
and foreign currency transactions (3,891,558)
----------------
TOTAL NET ASSETS APPLICABLE TO OUTSTANDING SHARES
OF BENEFICIAL INTEREST ($7.92 PER SHARE) $ 975,502,902
================
See Notes to Financial Statements.
23
STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2003 (UNAUDITED)
INVESTMENT INCOME:
Dividends $ 4,707,209
Interest 296,623
--------------
TOTAL INVESTMENT INCOME (NET OF FOREIGN TAXES
WITHHELD AT SOURCE WHICH AMOUNTED TO $25,635) 5,003,832
EXPENSES:
Management fee $ 3,290,771
Administrative fee 824,439
Bookkeeping and pricing fees 109,978
Custody fees 34,150
Transfer agent fees 95,519
Shareholder communication expenses 197,741
Trustees' fees and expenses 60,338
NYSE fee 65,910
Miscellaneous expense 68,107
---------------
TOTAL EXPENSES 4,746,953
--------------
CUSTODY EARNINGS CREDIT (489)
--------------
NET EXPENSES 4,746,464
--------------
NET INVESTMENT INCOME 257,368
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investment transactions:
Proceeds from sales 268,869,071
Cost of investments sold 284,113,061
---------------
Net realized loss on investment transactions (15,243,990)
Net unrealized appreciation (depreciation) on investments
and foreign currency transactions:
Beginning of period (157,619,740)
End of period (3,891,558)
---------------
Change in unrealized depreciation-net 153,728,182
--------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 138,741,560
==============
See Notes to Financial Statements.
24
STATEMENT OF CHANGES IN NET ASSETS SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2003 DECEMBER 31,
(UNAUDITED) 2002
OPERATIONS:
Net investment income $ 257,368 $ 1,038,036
Net realized loss on investment transactions (15,243,990) (40,350,769)
Change in unrealized appreciation (depreciation)
on investments and foreign currency-net 153,728,182 (256,081,922)
---------------- ---------------
Net increase (decrease) in net assets
resulting from operations 138,741,560 (295,394,655)
---------------- ---------------
DISTRIBUTIONS DECLARED FROM:*
Net investment income (257,368) (1,038,036)
Net realized gain on investments -- (2,485,163)
Paid-in capital (43,528,549) (97,967,285)
---------------- ---------------
Total distributions (43,785,917) (101,490,484)
---------------- ---------------
CAPITAL TRANSACTIONS:
Proceeds from rights offering -- 95,753,976
Dividend reinvestments 11,995,690 36,519,053
---------------- ---------------
Increase in net assets from capital share transactions 11,995,690 132,273,029
---------------- ---------------
Total increase (decrease) in net assets 106,951,333 (264,612,110)
NET ASSETS:
Beginning of period 868,551,569 1,133,163,679
---------------- ---------------
End of period $ 975,502,902 $ 868,551,569
================ ===============
*See Note 2 of Notes to Financial Statements.
See Notes to Financial Statements.
25
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 $ 7.14 $ 10.65 $ 13.61 $ 14.02
---------------- -------- -------- --------
Income from Investment Operations:
Net investment income --(a) 0.01 0.03 0.05
Net realized and unrealized gain (loss)
on investments and foreign currency 1.14 (2.56) (1.79) 0.96
Provision for federal income tax -- -- -- --
---------------- -------- -------- --------
Total from Investment Operations 1.14 (2.55) (1.76) 1.01
---------------- -------- -------- --------
Less Distributions from:
Net investment income --(a) (0.01) (0.03) (0.06)
Realized capital gain -- (0.02) (1.17) (1.36)
Paid-in capital (0.36) (0.85) -- --
---------------- -------- -------- --------
Total Distributions (0.36) (0.88) (1.20) (1.42)
---------------- -------- -------- --------
Change due to rights offering (c) -- (0.08) -- --
Impact of shares issued in dividend
reinvestment (d) -- -- -- --
---------------- -------- -------- --------
Total Distributions, Reinvestments
and Rights Offering (0.36) (0.96) (1.20) (1.42)
---------------- -------- -------- --------
Net asset value at end of period $ 7.92 $ 7.14 $ 10.65 $ 13.61
================ ======== ======== ========
Market price at end of period $ 8.25 $ 6.64 $ 11.09 $ 12.375
================ ======== ======== ========
TOTAL INVESTMENT RETURN FOR SHAREHOLDERS: (e)
Based on net asset value 16.3%(g) (25.0%) (12.7)% 8.8%
Based on market price 30.3%(g) (33.0%) 0.0% 25.4%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (millions) $ 976 $ 869 $ 1,133 $ 1,376
Ratio of expenses to average net assets (f) 1.08%(h) 1.05% 1.03% 0.96%
Ratio of net investment income to
average net assets (f) 0.06%(h) 0.11% 0.27% 0.37%
Portfolio turnover rate 26%(g) 83% 64% 83%
(a) Rounds to less than $0.01 per share.
(b) Before provision for federal income tax.
(c) Effect of All-Star's rights offerings for shares at a price below net asset
value.
(d) Effect of payment of a portion of distributions in newly issued shares at a
discount from net asset value.
(e) Calculated assuming all distributions reinvested at actual reinvestment
price and all primary rights exercised.
See Notes to Financial Statements.
26
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994 1993
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of period $ 14.22 $ 13.32 $ 11.95 $ 11.03 $ 9.26 $ 10.40 $ 10.78
-------- -------- -------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income 0.05 0.05 0.05 0.08 0.10 0.11 0.12
Net realized and unrealized gain (loss)
on investments and foreign currency 1.22 2.35 3.01(b) 2.15(b) 2.71 (0.20) 0.78(b)
Provision for federal income tax -- -- (0.36) (0.13) -- -- (0.18)
-------- -------- -------- -------- -------- -------- --------
Total from Investment Operations 1.27 2.40 2.70 2.10 2.81 (0.09) 0.72
-------- -------- -------- -------- -------- -------- --------
Less Distributions from:
Net investment income (0.05) (0.05) (0.05) (0.08) (0.10) (0.12) (0.12)
Realized capital gain (1.34) (1.35) (1.28) (1.10) (0.94) (0.52) (0.58)
Paid-in capital -- -- -- -- -- (0.36) (0.37)
-------- -------- -------- -------- -------- -------- --------
Total Distributions (1.39) (1.40) (1.33) (1.18) (1.04) (1.00) (1.07)
-------- -------- -------- -------- -------- -------- --------
Change due to rights offering (c) -- (0.10) -- -- -- (0.05) (0.03)
Impact of shares issued in dividend
reinvestment (d) (0.08) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total Distributions, Reinvestments
and Rights Offering (1.47) (1.50) (1.33) (1.18) (1.04) (1.05) (1.10)
-------- -------- -------- -------- -------- -------- --------
Net asset value at end of period $ 14.02 $ 14.22 $ 13.32 $ 11.95 $ 11.03 $ 9.26 $ 10.40
======== ======== ======== ======== ======== ======== ========
Market price at end of period $ 11.063 $ 12.938 $ 13.313 $ 11.250 $ 10.875 $ 8.500 $ 11.125
======== ======== ======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN FOR SHAREHOLDERS:
(e)
Based on net asset value 10.2% 19.8% 26.6% 21.7% 31.8% (0.8)% 8.8%
Based on market price (4.4)% 9.1% 34.4% 16.2% 41.4% (14.9)% 12.7%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (millions) $ 1,396 $ 1,351 $ 1,150 $ 988 $ 872 $ 710 $ 725
Ratio of expenses to average net assets (f) 0.97% 1.00% 1.01% 1.03% 1.06% 1.07% 1.08%
Ratio of net investment income to
average net assets (f) 0.37% 0.39% 0.38% 0.73% 0.92% 1.16% 1.08%
Portfolio turnover rate 90% 76% 99% 70% 54% 44% 72%
(f) The benefits derived from custody credits and directed brokerage
arrangements, if applicable, had an impact of less than 0.01%.
(g) Not annualized.
(h) Annualized.
See Notes to Financial Statements.
27
NOTES TO FINANCIAL STATEMENTS JUNE 30, 2003 (UNAUDITED)
NOTE 1. ORGANIZATION AND ACCOUNTING POLICIES
Liberty All-Star Equity Fund ("All-Star" or the "Fund"), organized as a
Massachusetts business trust on August 20, 1986, is a closed-end, diversified
management investment company. All-Star's investment goal is to seek total
investment return, comprised of long term capital appreciation and current
income, through investment primarily in a diversified portfolio of equity
securities. All-Star 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
All-Star 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 current bid prices. Over-the-counter securities not quoted on the
NASDAQ system are valued on the basis of the mean between the current bid and
asked prices on that date. Debt securities generally are valued by a pricing
service based on market transactions for normal, institutional-size trading
units of similar securities. When management deems it appropriate, an
over-the-counter or exchange bid quotation is used. Securities for which
reliable quotations are not readily available are valued at fair value, as
determined pursuant to procedures adopted by the Board of Trustees ("Trustees").
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 Trustees determine that this does not represent fair value. These
securities would then be valued at fair value pursuant to procedures adopted by
the Trustees.
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 - All-Star currently has a policy of paying
distributions on its shares of beneficial interest totaling approximately 10% of
its net asset value per year, payable in four quarterly distributions of 2.5% of
All-Star'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.
28
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.
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
---------- ------------
2010 $ 7,255,400
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 All-Star's Management Agreement, All-Star pays the Manager a management
fee for its investment management services at an annual rate of 0.80% of
All-Star'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 portion of the investment
portfolio managed by it. All-Star also pays the Manager an administrative fee
for its administrative services at an annual rate of 0.20% of All-Star'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 $400 million and the aggregate annual fees payable by the Manager to the
Portfolio Managers are reduced to 0.36% of All-Star's average weekly net assets
in excess of $400 million. The annual fund management and administrative fees
are further reduced to 0.648% and 0.162%, respectively, on average weekly net
assets in excess of $800 million to $1.2 billion and 0.584% and 0.146%,
respectively, on average weekly net assets in excess of $1.2 billion. The
aggregate annual fees payable by the Manager to the Portfolio Managers are also
reduced to 0.324% of the Fund's average weekly net assets in excess of $800
million to $1.2 billion and 0.292% of the Fund's average net assets in excess of
$1.2 billion.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 0.024%. The Fund also pays out-of-pocket costs for
pricing services.
29
OTHER - The Fund pays no compensation to its officers, all of whom are employees
of the Manager or its affiliates. The Fund has an agreement with its custodian
bank under which $489 of custody fees were reduced by balance credits for the
six months ended June 30, 2003. The Fund could have invested a portion of the
assets utilized in connection with the expense offset arrangements in an
income-producing asset if it had not entered into such an agreement.
NOTE 4. CAPITAL TRANSACTIONS
In a rights offering commencing April 5, 2002, shareholders exercised rights to
purchase 10,688,506 shares at $8.99 per share for proceeds, net of expenses, of
$95,753,976. During the six months ended June 30, 2003, and the year ended
December 31, 2002, distributions in the amount of $11,995,690 and $36,519,053,
respectively, were paid in newly issued shares valued at market value or net
asset value, but not less than 95% of market value, resulting in the issuance of
1,497,589 and 4,491,951 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 $228,005,234 and
$268,869,071, 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.
30
DISTRIBUTION POLICY/DIVIDEND REINVESTMENT PLAN
DISTRIBUTION POLICY
Liberty All-Star Equity Fund's current policy, in effect since 1988, 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 tax-free 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 minimum 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. The Fund retained such excess gains in 1993, 1996 and 1997.
DIVIDEND REINVESTMENT PLAN
Through the Fund's Automatic Dividend Reinvestment and Cash Purchase Plan, the
Fund's shareholders have the opportunity to have their dividends automatically
reinvested in additional shares of the Fund. Participating shareholders have
been rewarded as a result of the consistent reinvestment of dividends. Each
share of the Fund owned by shareholders who have participated in the Dividend
Reinvestment Program since the Fund began operations in 1986 would have grown to
6.111 shares as of June 30, 2003, with a total net asset value of $48.40.
Participants are kept apprised of the status of their account through quarterly
statements.
For complete information and enrollment forms, please call Investor
Assistance toll-free at 1-800-LIB-FUND (1-800-542-3863) weekdays between 9 AM
and 5 PM Eastern Time. If your shares are held for you by a broker, bank or
other nominee, you should contact the institution holding your shares if you
wish to participate in the Plan.
31
RESULTS OF ANNUAL MEETING OF SHAREHOLDERS
On April 16, 2003, the Annual Meeting of Shareholders of the Fund was held to
elect two (2) Trustees and to approve the Fund's Portfolio Management Agreement
with Boston Partners Asset Management, L.P. On January 31, 2003, the record date
for the Meeting, the Fund had outstanding 121,627,547 shares of beneficial
interest. The votes cast at the Meeting were as follows:
1. PROPOSAL TO ELECT (2) TRUSTEES:
FOR AGAINST
--- -------
John A. Benning 114,159,225 2,072,566
William E. Mayer 114,156,855 2,074,936
The Board of Trustees is divided into the following three classes, each
with a term expiring in the indicated year:
2004 2005 2006
---- ---- ----
Mr. Lowry Mr. Benning Mr. Mayer
Mr. Neuhauser Mr. Grinnell
2. PROPOSAL TO APPROVE THE FUND'S PORTFOLIO MANAGEMENT AGREEMENT WITH
BOSTON PARTNERS ASSET MANAGEMENT, L.P.:
For 113,155,099
Against 1,494,373
Abstain 1,582,319
32
[ALL STAR(SM) EQUITY 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 and Lockhart LLP
1800 Massachusetts Avenue, NW
Washington, DC 20036-1800
TRUSTEES
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.
[USA LISTED NYSE LOGO]
[ALL STAR(SM) EQUITY FUND LOGO]
Liberty Asset Management Company
One Financial Center
Boston, Massachusetts 02111
[USA 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 Equity Fund
-------------------------------------------------------------------
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
---------------------------------------------------------------------------