<PAGE>
SECOND
QUARTER
REPORT
1999
[LOGO] LIBERTY ALL-STAR
----------------
GROWTH FUND
<PAGE>
PRESIDENT'S LETTER
- --------------------------------------------------------------------------------
FELLOW SHAREHOLDERS: August 1999
The net asset value (NAV) of a common share of the Fund rose during the
second quarter from $12.28 to $12.83, after deducting the quarter's distribution
of 32 cents. Although the Fund turned in a good quarter in absolute terms, with
its NAV advancing 7.6 percent, this lagged the Lipper Mid-Cap Mutual Fund
Average, the Fund's primary benchmark. Although the Fund has had a difficult 12
months, returns for longer periods are much stronger in both absolute and
relative terms, as the table below shows. During the quarter, the market price
for a share of the Fund traded in a range of $10.438 to $11.50 before closing
the quarter at $11.063. The ending price represented a discount to NAV of 13.8
percent compared with a discount to NAV of 13.5 percent at the end of the first
quarter.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
SHORT-TERM SUMMARY THROUGH JUNE 30, 1999 SECOND QUARTER YEAR TO DATE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIBERTY ALL-STAR GROWTH FUND, INC.
Shares Valued at Net Asset Value 7.6% 4.0%
Shares Valued at Net Asset Value with Dividends Reinvested 7.5% 4.2%
Shares Valued at Market Price with Dividends Reinvested 7.2% 2.5%
Fund's Closing Market Price Range $10.438 to $11.50 $10.375 to $11.875
Fund's Discount Range 16.9% to 10.7% 16.9% to 7.6%
Lipper Mid-Cap Mutual Fund Average 12.5% 12.1%
Russell Midcap Growth Index 10.4% 14.2%
<CAPTION>
ANNUALIZED RATES OF RETURN
------------------------------------------------------------
LONG-TERM PERFORMANCE THROUGH JUNE 30, 1999 1 YEAR 3 YEARS 3 1/2 YEARS*
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LIBERTY ALL-STAR GROWTH FUND, INC.
Shares Valued at Net Asset Value 4.3% 18.6% 18.1%
Shares Valued at Net Asset Value with Dividends Reinvested 4.6 19.1 18.5
Shares Valued at Market Price with Dividends Reinvested (0.7) 19.6 17.5
Lipper Mid-Cap Mutual Fund Average 13.4 16.9 17.5
Russell Midcap Growth Index 20.3 20.6 20.8
</TABLE>
Figures shown for the Fund and the Lipper Mid-Cap Mutual Fund Average are total
returns, which include dividends, after deducting fund expenses. The Fund's
reinvested returns assume all primary subscription rights in the Fund's rights
offering were exercised. Figures shown for the unmanaged Russell Midcap Growth
Index are total returns, including income.
* Liberty Asset Management Company (LAMCO) assumed complete management of the
Fund in November 1995, therefore, 1996 represents the first calendar year of
management by LAMCO.
- --------------------------------------------------------------------------------
The Fund's rebound after a disappointing first quarter reflects the
broadening that took place in the market over the past three months. Although
returns for the widely followed capitalization-weighted passive indices have
been highly rewarding over the past few years, the U.S. equity market has been
exceptionally narrow. Returns for these cap-weighted indices have been
disproportionately influenced by a handful of mega-capitalization stocks. In the
first quarter of this year, a narrow group of the largest capitalization stocks
was responsible for essentially all the return in the widely followed
capitalization-weighted indices. During the second quarter, however, that trend
reversed course and performance was driven by a broader group of stocks across
the entire capitalization spectrum.
1
<PAGE>
PRESIDENT'S LETTER
- -------------------------------------------------------------------------------
The table below, which separates the returns of the Russell 3000 Index by
capitalization range, an index which represents 98% of the investable U.S.
equity market, illustrates this point:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
RUSSELL 3000 INDEX RETURNS BY CAPITALIZATION FIRST QUARTER SECOND QUARTER
- ---------------------------------------------------------------------------------------
<S> <C> <C>
CAPITALIZATION RANGE
Large 5.7% 4.2%
Medium/Large 6.0 7.2
Medium 0.4 12.8
Small/Medium -3.6 14.3
Small -5.4 15.6
- ---------------------------------------------------------------------------------------
</TABLE>
Actively managed mid-cap funds, such as Liberty All-Star Growth Fund and many
others in the Lipper Mid-Cap Mutual Fund Average, have been challenged to keep
pace with the leading passive indices over the last few years. Our managers
search for quality growth stocks with excellent earnings prospects, enduring
franchises and sound fundamentals. Many of the mega-cap growth companies that
have been driving the indices are trading at historically high premiums to their
growth rates, increasing the risk of owning them at these levels. Within the
technology sector, Internet stocks have skewed the results of the smaller
capitalization indices. In fact, many companies with little or no income have
far outperformed companies that have demonstrated consistent growth in sales and
earnings. The growth managers in our Fund invest in small and mid-cap stocks
where the focus is on sustainable earnings growth, so many of those speculative
Internet related issues would not meet their criteria.
What changed in the quarter just past? With the U.S. economy expanding at a
very healthy pace and the economies abroad rebounding, equity investors rotated
into economically sensitive and cyclical stocks that could benefit from growing
demand. Also, as the market broadened, highly-priced mega-cap growth stocks
lagged in relative terms. Further, investors reasoned if rising inflation
expectations cause interest rates to increase, the higher multiple growth stocks
could be most vulnerable. We believe the broadening of the market is healthy if
it can be sustained, and with prospects for stronger economic growth around the
world, we may see greater breadth become a more permanent feature of the market.
In that event, the Fund is well positioned to benefit.
We are pleased to introduce a new portfolio management firm, M.A. Weatherbie
& Co., Inc., with the manager interview that begins on page 8. Founder Matthew
Weatherbie has an outstanding record and proven investment process, and we
welcome him and his associates to the Fund. We have confidence that managers
such as this will deliver superior long-term results, so long as they remain
focused on their strategies.
Thank you for your continuing support of the Fund.
Sincerely,
/s/ William R. Parmentier, Jr.
William R. Parmentier, Jr.
President and Chief Executive Officer
Liberty All-Star Growth Fund, Inc. and
Liberty Asset Management Company
2
<PAGE>
<TABLE>
<CAPTION>
SHAREHOLDERS' INVESTMENT GROWTH AS OF JUNE 30, 1999
- ----------------------------------------------------------------------------
Net Asset Value of Additional Investments
Net Asset Value of Shares Aquired Through Made Through Rights
One Share Dividend Reinvestment Offering
<S> <C> <C> <C>
31-Jan-96 $10.83 $10.83 $10.83
29-Feb-96 $11.02 $11.02 $11.02
31-Mar-96 $11.09 $11.09 $11.09
30-Apr-96 $11.38 $11.38 $11.38
31-May-96 $11.60 $11.60 $11.60
30-Jun-96 $11.31 $11.31 $11.31
31-Jul-96 $10.67 $10.67 $10.67
31-Aug-96 $11.16 $11.16 $11.16
30-Sep-96 $11.90 $11.90 $11.90
31-Oct-96 $12.01 $12.01 $12.01
30-Nov-96 $11.61 $12.85 $12.85
31-Dec-96 $11.27 $12.48 $12.48
31-Jan-97 $11.86 $13.13 $13.13
28-Feb-97 $11.72 $12.97 $12.97
31-Mar-97 $10.82 $12.33 $12.33
30-Apr-97 $11.17 $12.73 $12.73
31-May-97 $11.80 $13.45 $13.45
30-Jun-97 $12.41 $14.51 $14.51
31-Jul-97 $13.32 $15.57 $15.57
31-Aug-97 $12.62 $15.14 $15.14
30-Sep-97 $13.29 $15.95 $15.95
31-Oct-97 $12.79 $15.35 $15.35
30-Nov-97 $12.71 $15.25 $15.25
31-Dec-97 $12.89 $15.88 $15.88
31-Jan-98 $12.83 $15.81 $15.81
28-Feb-98 $14.01 $17.26 $17.26
31-Mar-98 $14.36 $18.15 $18.15
30-Apr-98 $14.53 $18.37 $18.37
31-May-98 $13.59 $17.18 $17.18
30-Jun-98 $14.03 $18.27 $18.27
31-Jul-98 $13.33 $17.36 $19.09
31-Aug-98 $10.40 $13.54 $14.89
30-Sep-98 $11.07 $14.87 $16.35
31-Oct-98 $12.08 $16.22 $17.84
30-Nov-98 $12.18 $16.36 $17.99
31-Dec-98 $13.03 $18.02 $19.82
31-Jan-99 $13.17 $18.21 $20.03
28-Feb-99 $12.30 $17.01 $18.71
31-Mar-99 $12.28 $17.47 $19.22
30-Apr-99 $12.86 $18.30 $20.13
31-May-99 $12.28 $17.47 $19.22
30-Jun-99 $12.82 $18.78 $20.67
</TABLE>
To evaluate your investment in the Fund, these values should be used. Each shows
how your investment has fared by keeping distributions at work in the Fund. The
upper value includes additional investments made through the rights offering in
1998.
This is the net asset value of one share of the Fund as of 6/30/99.
The Fund maintains an optional AUTOMATIC DIVIDEND REINVESTMENT AND CASH
PURCHASE PLAN, whereby distributions are automatically invested in additional
shares of the Fund. In addition, since 1996 -- the first full year that Liberty
Asset Management Company assumed complete management responsibilities for the
Fund -- one rights offering has allowed investors to acquire additional shares
at a discount from the market price. The rights offering in July 1998 allowed
investors to acquire one share at $12.41 for every 10 shares held.
As the graph above shows, an original share, assuming participation in the
rights offering and reinvestment of all distributions, has grown to a net asset
value of $20.67 (1.612 shares times the current $12.82 net asset value per
share) and a market price value of $17.83 (1.612 shares times the current
$11.063 market price per share). Excluding the rights offering shares, an
original share has grown to 1.465 shares. Thus, the original share has grown to
a net asset value of $18.78 (1.465 shares times the current $12.82 net asset
value per share) and a market price value of $16.21 (1.465 shares times the
current $11.063 market price per share).
3
<PAGE>
<TABLE>
<CAPTION>
A TABLE OF PER-SHARE VALUES, DISTRIBUTIONS AND REINVESTMENT / DISTRIBUTION POLICY
- ---------------------------------------------------------------------------------------------------------------------------
SHARES SHARES
SHARES PURCHASED ACQUIRED SHARES NAV(2) MARKET PRICE TOTAL MARKET
OWNED AT 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
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
1st Quarter 1.521 0.31 0.044 -- 1.565 12.28 19.22 10.625 16.63
2nd Quarter 1.565 0.32 0.047 -- 1.612 12.82 20.67 11.063 17.83
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
DISTRIBUTION POLICY
Liberty All-Star Growth Fund, Inc.'s current policy, in effect since 1997, is to
pay distributions on its common stock 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. If, for any calendar year, the total distributions
required by 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 amount required to be distributed under the 10 percent
pay-out policy, the Fund may, at its discretion, retain and not distribute net
realized capital gains and pay income tax thereon to the extent of such excess.
4
<PAGE>
PORTFOLIO MANAGERS/PORTFOLIO CHARACTERISTICS
- -------------------------------------------------------------------------------
THE FUND'S THREE PORTFOLIO MANAGERS AND THE INVESTMENT STYLES THEY PRACTICE ARE:
M.A. WEATHERBIE & CO., INC.
Small capitalization growth investor focusing on companies with an enduring
competitive advantage and high, sustainable earnings growth.
WILLIAM BLAIR & COMPANY, L.L.C.
Companies with high profitability and enduring growth across a broad range of
market capitalizations.
OPPENHEIMER CAPITAL
Companies that exhibit the ability to generate excess cash flow while earning
high returns on invested capital.
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 three Portfolio 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 Growth small cap, mid cap and large
cap indicies.
PORTFOLIO CHARACTERISTICS
AS OF JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
MARKET CAPITALIZATION SPECTRUM
SMALL LARGE
S&P/BARRA GROWTH:
---------------------------------
SMALL CAP MID CAP LARGE CAP M.A. WILLIAM OPPEN- TOTAL
600 INDEX 400 INDEX 500 INDEX WEATHERBIE BLAIR HEIMER FUND
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Number of Holdings 221 142 126 52 36 33 115
- ---------------------------------------------------------------------------------------------------------------------------
Percent of Holdings in S&P 500 0% 0% 100% 3% 62% 79% 49%
- ---------------------------------------------------------------------------------------------------------------------------
Median Market Capitalization (billions) $0.7 $2.7 $14.9 $1.6 $7.6 $23.2 $3.2
- ---------------------------------------------------------------------------------------------------------------------------
Average Five-Year Earnings Per Share Growth 16% 16% 17% 32% 25% 14% 24%
- ---------------------------------------------------------------------------------------------------------------------------
Dividend Yield 0.5% 0.5% 0.8% 0.1% 0.4% 1.2% 0.6%
- ---------------------------------------------------------------------------------------------------------------------------
Weighted Average Price/Earnings Ratio 27x 33x 41x 34x 35x 19x 27x
- ---------------------------------------------------------------------------------------------------------------------------
Average Price/Book Value Ratio 4.8x 6.7x 10.7x 7.5x 6.5x 4.1x 6.0x
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
TOP 50 HOLDINGS
- ---------------------------------------------------------------------------------------------------------------------------
RANK RANK MARKET
AS OF AS OF VALUE PERCENT OF
6/30/99 3/31/99 SECURITY NAME ($000) NET ASSETS
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 2 Freddie Mac $5,104 2.6%
2 1 Citigroup, Inc. 4,988 2.6
3 68 Paychex, Inc. 3,827 2.0
4 12 Texas Instruments, Inc. 3,741 1.9
5 7 Sprint Corp. 3,697 1.9
6 3 Nokia Corp. ADR 3,663 1.9
7 4 Staples, Inc. 3,550 1.8
8 8 Automatic Data Processing, Inc. 3,520 1.8
9 NEW Westwood One, Inc. 3,483 1.8
10 6 Intel Corp. 3,463 1.8
11 66 Concord EFS, Inc. 3,429 1.8
12 9 Home Depot, Inc. 3,351 1.7
13 14 Vodafone AirTouch PLC* 3,251 1.7
14 NEW Maxim Integrated Products, Inc. 3,026 1.6
15 41 Illinois Tool Works, Inc. 2,878 1.5
16 5 AFLAC, Inc. 2,873 1.5
17 NEW Family Dollar Stores, Inc. 2,791 1.4
18 NEW Fastenal, Co. 2,774 1.4
19 19 AMR Corp. 2,730 1.4
20 11 American International Group, Inc. 2,634 1.4
21 25 MBNA Corp. 2,595 1.3
22 15 Morgan Stanley Dean Witter & Co. 2,563 1.3
23 NEW Catalina Marketing Corp. 2,548 1.3
24 18 Microsoft Corp. 2,381 1.2
25 17 USFreightways Corp. 2,330 1.2
26 NEW Outdoor Systems, Inc. 2,318 1.2
27 16 XL Capital Ltd. 2,260 1.2
28 NEW Bed Bath & Beyond, Inc. 2,179 1.1
29 32 Minnesota Mining & Manufacturing Co. 2,173 1.1
30 26 Medtronic, Inc. 2,142 1.1
31 23 Countrywide Credit Industries, Inc. 2,138 1.1
32 34 Wells Fargo & Co. 2,138 1.1
33 20 ACE Ltd. 2,119 1.1
34 24 State Street Corp. 2,117 1.1
35 NEW Labor Ready, Inc. 2,116 1.1
36 39 Linear Technology Corp. 2,112 1.1
37 22 Lowe's Companies, Inc. 2,063 1.1
38 37 Molex, Inc. 2,013 1.0
39 NEW Financial Federal Corp. 2,002 1.0
40 69 Computer Associates International, Inc. 1,925 1.0
41 NEW Waste Management, Inc. 1,881 1.0
42 38 R.R. Donnelley & Sons Co. 1,853 1.0
43 30 Carnival Corp. 1,833 0.9
44 42 Sterling Commerce, Inc. 1,807 0.9
45 46 Caterpillar, Inc. 1,800 0.9
46 49 Boeing Co. 1,768 0.9
47 29 Covance, Inc. 1,767 0.9
48 60 MSC Industrial Direct Co. 1,747 0.9
49 118 Robert Half International, Inc. 1,711 0.9
50 NEW The ServiceMaster Co. 1,710 0.9
</TABLE>
*Formerly AirTouch Communications, Inc.
6
<PAGE>
MAJOR STOCK CHANGES IN THE SECOND QUARTER
- -------------------------------------------------------------------------------
The following are the major ($500,000 or more) stock changes -- both additions
and reductions -- that were made in the Fund's portfolio during the second
quarter of 1999, not including changes made in connection with the substitution
of M.A. Weatherbie & Co., Inc. for Mississippi Valley Advisors Inc. as a
Portfolio Manager effective May 3, 1999.
<TABLE>
<CAPTION>
SHARES
--------------------------------------------------
HELD AS
SECURITY NAME ADDITIONS REDUCTIONS OF 6/30/99
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Chancellor Media Corp. 25,000 25,000
Citadel Communications Corp. 19,400 19,400
Compaq Computer Corp. 20,000 50,000
Emerson Electric Co. 10,000 10,000
Illinois Tool Works, Inc. 10,000 35,100
McDonald's Corp. 35,000 35,000
The News Corp., Ltd. ADR 25,000 25,000
Paychex, Inc.* 26,750 120,050
Price Communications Corp. 49,800 49,800
Waste Management, Inc. 35,000 35,000
Citigroup, Inc.* (20,000) 105,000
CVS Corp. (40,000) 0
Freeport McMoRan Copper & Gold, Inc., Class B (40,000) 0
General Electric Co. (20,000) 0
Global Industries Ltd. (80,000) 0
Nokia Corp. ADR* (10,000) 40,000
Philip Morris Companies, Inc. (20,000) 0
Progressive Corp. (12,000) 0
RPM, Inc. (54,000) 0
*Adjusted for stock split.
</TABLE>
7
<PAGE>
MANAGER INTERVIEW
- -------------------------------------------------------------------------------
[PHOTO]
MATTHEW A. WEATHERBIE
M. A. WEATHERBIE & CO., INC.
Manager Interview: At M. A. Weatherbie & Co., the Objective Is to Buy the Best
Smaller Companies When They're in "the Sweet Spot" of Their Growth Curve
M. A. WEATHERBIE & CO. IS LIBERTY ALL-STAR GROWTH FUND'S NEWEST PORTFOLIO
MANAGER. M. A. WEATHERBIE PRACTICES A SMALL CAPITALIZATION GROWTH INVESTMENT
STYLE FOCUSING ON HIGH QUALITY COMPANIES THAT DEMONSTRATE SUPERIOR EARNINGS
GROWTH PROSPECTS, YET ARE REASONABLY PRICED RELATIVE TO THEIR INTRINSIC VALUE.
THE FIRM SEEKS TO PROVIDE SUPERIOR RETURNS RELATIVE TO SMALL CAPITALIZATION
GROWTH INDICES OVER A FULL MARKET CYCLE. RECENTLY, WE HAD THE OPPORTUNITY TO
INTRODUCE SHAREHOLDERS TO THE FIRM BY TALKING WITH ITS PRESIDENT AND FOUNDER,
MATTHEW A. WEATHERBIE. THE FUND MANAGER, LIBERTY ASSET MANAGEMENT COMPANY
(LAMCO) SERVES AS THE MODERATOR FOR THE INTERVIEW.
THE VIEWS EXPRESSED IN THIS INTERVIEW REPRESENT THE MANAGER'S VIEWS AT THE TIME
OF THE DISCUSSION AND ARE SUBJECT TO CHANGE.
LAMCO: Welcome. Why don't we start with a profile of the firm -- when and why it
was founded, key people, ownership structure, how you've grown and the types of
clients you work with.
WEATHERBIE: The firm was founded in 1995. In addition to myself, being the
senior principal, we have three other principals, two research analysts and a
director of administration. We're 100 percent employee owned and operate with
a partnership philosophy. Our clients are primarily institutional, including
large pension funds and university endowments. We're currently managing about
$280 million in assets.
LAMCO: Your entire career has been in investment management, has it not?
WEATHERBIE: Yes, prior to founding the firm I was a Managing Director at Putnam
Investments. From 1983 until 1995, I managed the Putnam Voyager Fund during the
time it grew from $200 million in assets to more than $5 billion in assets. I
was also founding Chief Investment Officer of Putnam's Specialty Growth Equities
Group, responsible for the firm's aggressive growth investments, which totaled
$13 billion at the time of my departure.
LAMCO: It would probably be safe to say that you brought your style, strategy
and philosophies with you as you formed M. A. Weatherbie & Co.?
WEATHERBIE: Yes, and it's the style and strategy we bring to managing our
portion of the Liberty All-Star Growth Fund. It's an approach we call
"Specialized Growth," and it's really a culmination and refinement of the
investment style that I've developed over the years that I've been managing
money. To summarize, we're trying to identify and invest in the best smaller
growth companies in America. We do that using fundamental company research,
including visiting the companies and interviewing their management. We then
combine that thorough, fundamental research with a disciplined approach to stock
valuation to try to make sure that we're buying really good smaller companies,
but only at prices that make them excellent values.
LAMCO: How do you establish the universe of companies that you track?
WEATHERBIE: We have a closely-followed universe of 300 companies. It's a list
that has been developed one company at a time on a bottom-up basis by applying
our stringent quality and growth criteria to small and mid-cap companies. There
are at least 1,900 companies that are potentially within our market cap range,
and we boil that down to no more than 300 that we want to follow at any one
time. It's from this actively-followed universe that we select the 50 or so
companies that are in our portfolio.
LAMCO: Now, among your criteria are sustainable earnings and return on
investment, both in the 20 percent range, and something you call an "enduring
business advantage." That's an intriguing term in a world in which nothing seems
to endure.
WEATHERBIE: Our sense of the term is enduring for a reasonable period of time
into the future, recognizing that the world does change and nothing endures
forever. That's why
8
<PAGE>
MANAGER INTERVIEW
- -------------------------------------------------------------------------------
we're an active manager, as opposed to a passive one. Enduring business
advantage refers to our way of looking at a company and asking "what does this
company do that's special, different, smarter or somehow better than what its
competitors do? To what extent has this company insulated itself from direct
competition? And, is that proprietary advantage -- which has been confirmed by a
high return on invested capital and shareholder's equity -- what you would
expect to see of a company that is special and different and highly valued by
its customers?"
To illustrate the point, we're invested in a company called Bed Bath &
Beyond, which is a specialty retailer selling bedding and linens. It's a very
successful retailing chain, one of the most profitable and fast-growing in
America. Now, when you think of retailing you know how intensely competitive a
business it is. The reason that Bed Bath & Beyond has been able to grow earnings
at a rate of 27 percent a year compounded and achieve a return on shareholder's
equity in the 25 to 30 percent range is that each department in each store is
managed by an entrepreneur. In other words, those managers are responsible for
stocking the correct inventory at the right price to appeal to customers in that
local market, taking into consideration the competitive environment. Any single
store could be made up of dozens of entrepreneurs empowered to make local market
decisions, and when you multiply that by 170 stores it becomes a very powerful
force.
Another example in a completely different industry is a semiconductor
company called Microchip Technology. It's the fastest growing company in the
market for microcontrollers, which are very inexpensive microprocessors used to
perform simple functions in toasters, coffeemakers, refrigerators, garage door
openers, automobiles and all sorts of applications where electronics has
replaced electromechanical relays. This company's competitive advantage is in
the modular design of its integrated circuits. This allows Microchip to offer a
complete and uniform product line from very simple to highly complex
microprocessors. The company also has a significant advantage in terms of the
ease of use of its products because they are field programmable by the customer
using Microchip development programs. Finally, the company supports its
customers with an engineering force that helps solve any application problems.
As a result, Microchip's business is growing much more rapidly than the overall
industry, and it's a growth industry. Over a period of eight years, Microchip
has become the second largest company in that industry, second only to Motorola.
What's more, if you look at the leading edge of future revenue growth, which is
indicated by new design wins and reliable surveys of customer intentions,
Microchip has passed Motorola in terms of prospective purchasers' "share of
mind" and level of interest. So, we have every reason to believe its strong
performance will continue and that Microchip will produce operating margins that
are in the mid-20s and return on shareholder equity in the 20 to 22 percent
range.
LAMCO: Are both of those companies in what you refer to as the "sweet spot" in a
company's growth curve?
WEATHERBIE: Yes, they're in the sweet spot, which is that time in a company's
life cycle when it has overcome the perils of infancy yet has not reached
maturity. Bed Bath & Beyond has 170 stores across the U.S., but management feels
there's room for 500. In the case of Microchip, it's a company with $500 million
in revenues, but its served markets are in the billions, growing rapidly and
Microchip is gaining market share. So, the company could grow at an above
average rate for a long time to come.
LAMCO: Let us ask you about the meaning of another Weatherbie term --
"Foundation growth stocks" and "Opportunity growth stocks."
WEATHERBIE: Foundation growth stocks must be at least two-thirds of our
portfolio in terms of assets. These are companies with a track record of
uninterrupted growth. Opportunity growth stocks may be up to one-third of
portfolio assets. These are companies that may have had an interruption in
growth, or a stumble, if you want to call it that, but where our research
indicates the fundamentals have improved and growth is reaccelerating.
LAMCO: How about your sell discipline -- what causes you to sell a stock?
WEATHERBIE: There are three reasons. The first would be any kind of meaningful
deterioration in company fundamentals. If the growth rate or profitability are
deteriorating in any meaningful way, we sell the stock. We like to say it's a
"batting average" business -- we don't bat a thousand and sometimes companies
disappoint us.
"... WE'RE TRYING TO IDENTIFY AND INVEST IN THE BEST SMALLER GROWTH COMPANIES IN
AMERICA ... USING FUNDAMENTAL COMPANY RESEARCH [COMBINED WITH] A DISCIPLINED
APPROACH TO STOCK VALUATION ..."
"ENDURING BUSINESS ADVANTAGE REFERS TO OUR WAY OF LOOKING AT A COMPANY AND
ASKING WHAT DOES THIS COMPANY DO THAT'S SPECIAL, DIFFERENT, SMARTER OR SOMEHOW
BETTER THAN WHAT ITS COMPETITORS DO?"
9
<PAGE>
MANAGER INTERVIEW
- -------------------------------------------------------------------------------
The second reason would be if the company continues to do well
fundamentally, but the valuation becomes extreme. We have a valuation discipline
that we apply on a consistent basis, and if a stock exceeds certain valuation
parameters, the size of our position will be meaningfully reduced or,
potentially, eliminated. A third reason is based on a stock's weighting in the
portfolio. We don't want any individual position in the portfolio to exceed 6
percent, so if the position did appreciate to the point where it got to be 6
percent of the assets, we'd reduce the position.
We may also harvest profits in companies as they grow in market
capitalization. We want to hold on to our winners, but not indefinitely. We
really don't want large cap stocks in the portfolio -- no $10 billion market cap
stocks, for example. So, exceeding our market cap parameters can be another
reason for a sale.
LAMCO: That brings up a point, there are a lot of definitions of small cap
companies. What definition do you use?
WEATHERBIE: We sort of back into a definition in the sense that we're looking
for the best smaller growth companies in America. We have found that most of
them fall within a market cap range of $300 million to $2 billion at the time of
initial purchase. So, that's the definition for us.
LAMCO: What would you say is the single most unique or differentiating factor
about your firm?
WEATHERBIE: It would be the fact that although we're a young firm, and we're
managing a reasonable amount of money, it's not so much money that it makes it
difficult to invest in a smaller cap universe. At the same time, we've done this
for a long time and met with a good degree of success. So, we're experienced and
successful small cap growth investors, but we're not managing so much money that
our assets are going to get in the way of flexibility.
LAMCO: You told us about a couple of stocks that have been longer-term favorites
of yours. Although you've only been managing a portion of Liberty All-Star
Growth Fund since May, perhaps you could discuss some of the stocks you've
bought in that time.
WEATHERBIE: One other long-time favorite is Fastenal, which is a distributor of
industrial fasteners and related products. It's a very successful company --
we've known the management for a long time and have great confidence in their
prospects. Fastenal serves three broad markets -- commercial and industrial
construction, the original equipment manufacturer marketplace, and the industry
for maintenance and repair operations.
In terms of recent purchases, Dollar Tree Stores is a fast growing, highly
profitable, specialty retailer selling everything for a dollar, while earning a
lot of money doing it. Its secret is in relationships with consumer packaged
goods companies plus its ability to source all sorts of seasonal merchandise in
the Orient.
LAMCO: How does this relationship with packaged goods companies play out? Does
that mean Dollar Tree can buy smarter or in larger quantities?
WEATHERBIE: It means that Dollar Tree can buy staple items and get special
packaging because it moves a lot of merchandise. The company wants to sell
merchandise at that dollar price point, and they have the leverage to say to,
for example, Wrigley's, that they need special packaging for spearmint gum in
order to meet its price point. This represents terrific value for the consumer
while being able to maintain attractive margins for Dollar Tree. With about
1,200 stores, Dollar Tree can move volume, so suppliers are willing to meet its
demands.
LAMCO: What about another recent purchase?
WEATHERBIE: Citadel Communications is one. It owns and operates radio stations,
which is a very good business and one in which we have invested successfully in
the past. Citadel went public recently and we think it is well positioned to
compete in an industry that has been consolidating for the three years since the
Telecommunications Act of 1996, which essentially deregulated the entire
industry. Citadel is a consolidator with stations primarily in secondary markets
where there's limited competition in those markets.
"... THE SWEET SPOT ... IS THAT TIME IN A COMPANY'S LIFE CYCLE WHEN IT HAS
OVERCOME THE PERILS OF INFANCY YET HAS NOT REACHED MATURITY."
"FOUNDATION GROWTH STOCKS MUST BE AT LEAST TWO-THIRDS OF OUR PORTFOLIO IN TERMS
OF ASSETS. THESE ARE COMPANIES WITH A TRACK RECORD OF UNINTERRUPTED GROWTH."
10
<PAGE>
MANAGER INTERVIEW
- -------------------------------------------------------------------------------
Another company we have added to the portfolio is Forte Software. This is a
company that provides high level system development tools to enable large
corporations to write custom development software. It's a company with terrific
technology that will be increasingly in demand as large corporations wind down
their "Y2K" efforts and turn to their backlog of custom applications that are
needed to maintain competitive advantage in an intensively competitive global
environment.
LAMCO: Are large corporations doing the development work themselves or are
they outsourcing it?
WEATHERBIE: Some of it is being outsourced to the system integrators such as IBM
Global Services and Electronic Data Systems, and some of it is being done
internally at large corporations. Either way, Forte is the system of choice to
develop these applications, and we see this business growing nicely now. Forte
is an example of an "Opportunity growth" stock because it had an interruption in
its growth when Y2K issues came along and diverted large corporations from
custom development. That seems to be reversing now, and there's a lot of pent-up
demand for Forte's systems.
LAMCO: Thank you.
"WE'RE EXPERIENCED AND SUCCESSFUL SMALL CAP GROWTH INVESTORS, BUT WE'RE NOT
MANAGING SO MUCH MONEY THAT OUR ASSETS ARE GOING TO GET IN THE WAY OF
FLEXIBILITY."
11
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------
COMMON STOCKS (95.1%) SHARES MARKET VALUE
<S> <C> <C>
AEROSPACE & DEFENSE (1.7%)
Boeing Co. 40,000 $ 1,767,500
Lockheed Martin Corp. 45,000 1,676,250
--------------
3,443,750
--------------
BANKS (2.1%)
State Street Corp. 24,800 2,117,300
Wells Fargo & Co. 50,000 2,137,500
--------------
4,254,800
--------------
BROADCASTING & CABLE (3.0%)
BHC Communications, Inc. (a) 4,000 514,500
Chancellor Media Corp. (a) 25,000 1,378,125
Citadel Communications Corp. (a) 19,400 702,037
Westwood One, Inc. (a) 97,600 3,483,100
--------------
6,077,762
--------------
BUSINESS & CONSUMER SERVICES (6.8%)
Catalina Marketing Corp. (a) 27,700 2,548,400
Cintas Corp. 11,840 795,500
Flycast Communications Corp. (a) 14,730 281,711
Getty Images, Inc. (a) 40,100 756,888
Labor Ready, Inc. (a) 65,100 2,115,750
Outdoor Systems, Inc. (a) 63,500 2,317,750
Robert Half International, Inc. (a) 65,800 1,710,800
The ServiceMaster Co. 91,200 1,710,000
TMP Worldwide, Inc. (a) 25,400 1,612,900
--------------
13,849,699
--------------
CHEMICALS (2.0%)
Hercules, Inc. 25,000 982,813
Minerals Technologies, Inc. 28,900 1,612,981
Monsanto Co. 35,000 1,380,313
--------------
3,976,107
--------------
COMMUNICATIONS EQUIPMENT (3.2%)
ADC Telecommunications, Inc. (a) 24,100 1,098,056
International Network Services (a) 25,700 1,037,637
Nokia Corp. ADR 40,000 3,662,500
VideoServer, Inc. (a) 69,800 663,100
--------------
6,461,293
--------------
COMPUTER & BUSINESS EQUIPMENT (1.1%)
Cognex Corp. (a) 29,900 943,718
Compaq Computer Corp. 50,000 1,184,375
--------------
2,128,093
--------------
COMPUTER SERVICES & SOFTWARE (13.1%)
Acxiom Corp. (a) 66,900 $ 1,668,319
Affiliated Computer
Services, Inc. (a) 19,700 997,313
Aspen Technology, Inc. (a) 27,700 325,475
Automatic Data Processing, Inc. 80,000 3,520,000
Billing Concepts Corp. (a) 55,500 620,906
CheckFree Holdings Corp. (a) 35,300 972,956
Clarify, Inc. (a) 27,100 1,117,875
Computer Associates
International, Inc. 35,000 1,925,000
Concord EFS, Inc. (a) 81,050 3,429,428
Forte Software, Inc. (a) 31,700 307,094
Keane, Inc. (a) 28,000 633,500
Lason, Inc. (a) 28,000 1,389,500
Legato Systems, Inc. (a) 15,200 877,800
Microsoft Corp. (a) 26,400 2,380,950
National Instruments Corp. (a) 28,300 1,142,613
Safeguard Scientifics, Inc. (a) 5,300 328,600
Shared Medical Systems Corp. 23,100 1,507,275
Sterling Commerce, Inc. (a) 49,500 1,806,750
Transaction Systems
Architects, Inc. (a) 29,000 1,131,000
The Vantive Corp. (a) 34,000 388,875
--------------
26,471,229
--------------
DIVERSIFIED (1.1%)
Minnesota Mining &
Manufacturing Co. 25,000 2,173,438
--------------
DRUGS & HEALTH CARE (7.2%)
Cardinal Health, Inc. 17,700 1,135,013
Covance, Inc. (a) 73,800 1,766,588
Elan Corp. ADR (a) 40,800 1,132,200
Foundation Health
Systems, Inc. (a) 49,300 739,500
HEALTHSOUTH Corp. (a) 113,400 1,693,912
Medtronic, Inc. 27,500 2,141,563
MiniMed, Inc. (a) 12,100 930,943
Omnicare, Inc. 53,400 674,175
PacifiCare Health Systems, Inc. (a) 14,100 1,014,319
Perclose, Inc. (a) 24,400 1,172,725
Quintiles Transnational Corp. (a) 21,500 903,000
Respironics, Inc. (a) 40,000 605,000
Xomed Surgical Products, Inc. (a) 14,500 705,969
--------------
14,614,907
--------------
ELECTRONICS & ELECTRICAL EQUIPMENT (8.7%)
Arrow Electronics, Inc. (a) 60,000 1,140,000
Emerson Electric Co. 10,000 628,750
Intel Corp. 58,200 3,462,900
Linear Technology Corp. 31,400 2,111,650
12 See Notes to Schedule of Investments.
<PAGE>
SCHEDULE OF INVESTMENTS AS OF June 30, 1999 (UNAUDITED)
- ----------------------------------------------------------------------------------
COMMON STOCKS (CONT.) SHARES MARKET VALUE
ELECTRONICS & ELECTRICAL EQUIPMENT (CONT.)
Maxim Integrated
Products, Inc. (a) 45,500 $ 3,025,750
Microchip Technology, Inc. (a) 31,200 1,478,100
Molex, Inc. 63,918 2,013,417
Texas Instruments, Inc. 25,800 3,741,000
--------------
17,601,567
--------------
FINANCIAL SERVICES (11.8%)
Citigroup, Inc. 105,000 4,987,500
Countrywide Credit
Industries, Inc. 50,000 2,137,500
Financial Federal Corp. (a) 91,000 2,002,000
Freddie Mac 88,000 5,104,000
Investment Technology
Group, Inc. 23,500 760,812
MBNA Corp. 84,750 2,595,469
Morgan Stanley Dean
Witter & Co. 25,000 2,562,500
Paychex, Inc. 120,050 3,826,594
--------------
23,976,375
--------------
FOOD, BEVERAGE & RESTAURANTS (2.7%)
Buffets, Inc. (a) 56,300 647,450
Diageo PLC ADR 35,000 1,505,000
Dole Food Co., Inc. 30,000 881,250
McDonald's Corp. 35,000 1,445,937
Outback Steakhouse, Inc. (a) 25,400 998,537
--------------
5,478,174
--------------
HOTELS & ENTERTAINMENT/LEISURE (1.4%)
Carnival Corp. 37,800 1,833,300
Royal Caribbean Cruises Ltd. 23,300 1,019,375
--------------
2,852,675
--------------
INDUSTRIAL EQUIPMENT (5.2%)
Caterpillar, Inc. 30,000 1,800,000
Dover Corp. 40,000 1,400,000
Fastenal Co. 52,900 2,773,944
Illinois Tool Works, Inc. 35,100 2,878,200
MSC Industrial Direct
Co., Inc. (a) 170,400 1,746,600
--------------
10,598,744
--------------
INSURANCE (5.5%)
ACE Ltd. 75,000 2,118,750
AFLAC, Inc. 60,000 2,872,500
American International
Group, Inc. 22,500 2,633,906
Conseco, Inc. 40,000 1,217,500
XL Capital Ltd. 40,000 2,260,000
--------------
11,102,656
--------------
OIL & GAS (0.8%)
Petroleum Geo-Services ADR (a) 39,100 $ 581,612
Pride International, Inc. (a) 96,600 1,020,338
--------------
1,601,950
--------------
POLLUTION CONTROL (0.9%)
Waste Management, Inc. 35,000 1,881,250
--------------
PUBLISHING (0.9%)
R.R. Donnelley & Sons Co. 50,000 1,853,125
--------------
RETAIL TRADE (9.1%)
Bed Bath & Beyond, Inc. (a) 56,600 2,179,100
Borders Group, Inc. (a) 39,200 619,850
Dollar Tree Stores, Inc. (a) 16,600 730,400
Family Dollar Stores, Inc. 116,300 2,791,200
Home Depot, Inc. 52,000 3,350,750
Lowe's Companies, Inc. 36,400 2,063,425
The Maxim Group, Inc. (a) 35,400 307,537
May Department Stores Co. 40,000 1,635,000
99 Cents Only Stores (a) 23,300 1,163,544
Staples, Inc. (a) 114,750 3,550,078
--------------
18,390,884
--------------
TELECOMMUNICATIONS (4.1%)
Price Communications Corp. (a) 49,800 747,000
Sprint Corp. (FON Group) 70,000 3,696,875
Vodafone AirTouch PLC ADR 16,500 3,250,500
Western Wireless Corp. (a) 22,500 607,500
--------------
8,301,875
--------------
TRANSPORTATION (2.7%)
AMR Corp. (a) 40,000 2,730,000
Burlington Northern Santa
Fe Corp. 10,000 310,000
USFreightways Corp. 50,300 2,329,519
--------------
5,369,519
--------------
TOTAL COMMON STOCKS
(Cost $135,281,016) 192,459,872
--------------
PREFERRED STOCK (0.4%)
BROADCASTING & CABLE (0.4%)
The News Corp., Ltd. ADR
(Cost $807,500) 25,000 789,062
--------------
</TABLE>
See Notes to Schedule of Investments. 13
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENT (4.9%) PAR MARKET
REPURCHASE AGREEMENT (4.9%) VALUE VALUE
----- ------
<S> <C> <C>
SBC Warburg Ltd., Repurchase Agreement dated 6/30/99, 4.80% to be repurchased at
$9,846,313 on 7/1/99, collateralized by U.S. Treasury bonds and notes with
various maturities to 2027, with a current market
value of $10,192,868. $9,845,000 $ 9,845,000
-------------
TOTAL INVESTMENTS (100.4%) (COST $145,933,516) (b) 203,093,934
OTHER ASSETS AND LIABILITIES, NET (-0.4%) (864,291)
-------------
NET ASSETS (100.0%) $202,229,643
-------------
-------------
NET ASSET VALUE PER SHARE (15,770,533 SHARES OUTSTANDING) $12.82
-------------
-------------
NOTES TO SCHEDULE OF INVESTMENTS:
(a) Non-income producing security.
(b) Cost of investments for federal income tax purposes is $146,061,894.
Gross unrealized appreciation and depreciation of investments at June 30, 1999 is as follows:
Gross unrealized appreciation $65,728,770
Gross unrealized depreciation (8,696,730)
------------
Net unrealized appreciation $57,032,040
------------
------------
Acronym Name
--------- ---------------------------
ADR American Depositary Receipt
</TABLE>
14 See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1999 (UNAUDITED)
- ---------------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments at market value (identified cost $145,933,516) $203,093,934
Receivable for investments sold 2,683,385
Dividends and interest receivable 68,642
Other assets 378,105
------------
TOTAL ASSETS 206,224,066
------------
LIABILITIES:
Payable for investments purchased 1,359,816
Distributions payable to shareholders 2,003,896
Management fees payable 389,363
Administrative and bookkeeping fees payable 143,109
Accrued expenses 98,239
------------
TOTAL LIABILITIES 3,994,423
------------
NET ASSETS $202,229,643
------------
------------
NET ASSETS REPRESENTED BY:
Paid-in capital (authorized 60,000,000 shares at
$0.10 Par; 15,770,533 shares outstanding) $144,237,641
Overdistributed net investment income (411,698)
Accumulated net realized gains on investments
less distributions 1,243,282
Net unrealized appreciation on investments 57,160,418
------------
TOTAL NET ASSETS APPLICABLE
TO OUTSTANDING SHARES
OF BENEFICIAL INTEREST
($12.82 PER SHARE) $202,229,643
------------
------------
</TABLE>
See Notes to Financial Statements. 15
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME:
Dividends $ 590,356
Interest 242,594
-----------
TOTAL INVESTMENT INCOME (NET OF
FOREIGN TAXES WITHHELD AT SOURCE
WHICH AMOUNTED TO $5,550) 832,950
EXPENSES:
Management fees $ 774,138
Administrative fee 193,534
Bookkeeping fee 31,722
Custodian and transfer agent fees 83,746
Proxy and shareholder communication expense 46,553
Printing expense 24,918
Legal and audit fees 28,802
Directors' fees and expense 22,009
Miscellaneous expense 39,226
-----------
TOTAL EXPENSES 1,244,648
-----------
NET INVESTMENT LOSS (411,698)
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gains on investments transactions:
Proceeds from sales 98,202,735
Cost of investments sold 85,189,056
-----------
Net realized gains on investment transactions 13,013,679
Net unrealized depreciation on investments:
Beginning of year 62,101,991
End of period 57,160,418
-----------
Change in unrealized depreciation-- net (4,941,573)
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 7,660,408
-----------
-----------
</TABLE>
16 See Notes to Financial Statements.
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1999 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Net investment loss $ (411,698) $ (387,717)
Net realized gains on investment transactions 13,013,679 3,436,236
Change in unrealized appreciation (depreciation)-- net (4,941,573) 19,887,947
------------ -----------
Net increase in net assets resulting from operations 7,660,408 22,936,466
------------ -----------
DISTRIBUTIONS DECLARED FROM:
Paid-in capital -- (11,582,263)
Net realized gains on investments (9,682,770) (7,170,633)
------------ -----------
Total distributions (9,682,770) (18,752,896)
------------ -----------
CAPITAL TRANSACTIONS:
Increase in net assets from capital share transactions 5,738,135 27,593,181
------------ -----------
Total increase in net assets 3,715,773 31,776,751
NET ASSETS:
Beginning of year 198,513,870 166,737,119
------------ -----------
End of period $202,229,643 $198,513,870
------------ -----------
------------ -----------
</TABLE>
See Notes to Financial Statements. 17
<PAGE>
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 1999 ---------------------------------------------------------
(UNAUDITED) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of year $13.03 $12.89 $11.27 $10.55 $ 9.95 $10.54
------- ------- ------- ------- ------- -------
Income from Investment Operations:
Net investment income (loss) (0.03) (0.03) (0.02) 0.01 0.31 0.23
Net realized and unrealized
gains (losses) on investments 0.45 1.73 2.88 1.86 1.05 (0.24)
------- ------- ------- ------- ------- -------
Total from Investment Operations 0.42 1.70 2.86 1.87 1.36 (0.01)
------- ------- ------- ------- ------- -------
Less Distributions from:
Net investment income -- -- -- (0.01) (0.31) (0.23)
Paid-in capital -- (0.83) -- -- -- --
Realized capital gains (0.63) (0.52) (1.24) (1.01) (0.45) (0.35)
------- ------- ------- ------- ------- -------
Total Distributions (0.63) (1.35) (1.24) (1.02) (0.76) (0.58)
------- ------- ------- ------- ------- -------
Change due to rights offering (a) -- (0.21) -- -- -- --
Impact of shares issued in dividend
reinvestment (b) -- -- -- (0.13) -- --
Total Distributions, Reinvestments
and Rights Offering (0.63) (1.56) (1.24) (1.15) (0.76) (0.58)
------- ------- ------- ------- ------- -------
Net asset value at end of period $12.82 $13.03 $12.89 $11.27 $10.55 $ 9.95
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
Market price at end of period $11.063 $11.438 $11.938 $9.250 $ 9.375 $ 8.500
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
TOTAL INVESTMENT RETURN FOR SHAREHOLDERS: (c)
Based on net asset value 4.2%(d) 15.3% 27.3% 18.3% 13.8% (1.1)%
Based on market price 2.5%(d) 9.3% 43.6% 9.3% 19.3% (11.6)%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (millions) $202 $199 $167 $137 $120 $113
Ratio of expenses to average net assets 1.28%(e) 1.22% 1.20% 1.35% 1.42% 1.51%
Ratio of net investment income to
average net assets (0.42)%(e) (0.22)% (0.18)% 0.06% 2.87% 2.12%
Portfolio turnover rate 48%(d) 33% 57% 51% 82% 50%
</TABLE>
(a) Effect of Fund's rights offering for shares at a price below net
asset value.
(b) Effect of payment of a portion of distributions in newly issued shares
valued at a discount from net asset value.
(c) Calculated assuming all distributions reinvested at the actual
reinvestment price and all primary rights exercised.
(d) Not annualized.
(e) Annualized.
18 See Notes to Financial Statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS AS OF JUNE 30, 1999 (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 objective is to
seek long term capital appreciation. The Fund is managed by Liberty Asset
Management Company (the "Manager"). The Manager is a subsidiary of Liberty
Financial Companies, Inc., a publicly traded company of which Liberty Mutual
Insurance Company is the majority shareholder.
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 generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results, if different,
are expected to be immaterial to the net assets of the Fund.
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 in good faith
and pursuant to procedures established by the Board of 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 Board of Directors determines that this does not represent fair
value.
PROVISION FOR FEDERAL INCOME TAX-The Fund qualifies as a "regulated investment
company." As a result, a federal income tax provision is not required for
amounts distributed to shareholders.
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. FEES PAID TO AFFILIATES-Under the Fund's Management and Portfolio
Management Agreements, 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. 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. Colonial Management Associates, Inc., an affiliate of
the Manager, provides bookkeeping and pricing services for $30,000 per year plus
0.0233% of the Fund's average weekly net assets over $50 million.
NOTE 3. CAPITAL TRANSACTIONS-During the six months ended June 30, 1999, and the
year ended December 31, 1998, distributions in the amount of $5,738,135 and
$11,371,038, 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 533,973 and 984,758 shares, respectively.
In a rights offering commencing June 9, 1998, shareholders exercised rights
to purchase 1,314,122 shares at $12.41 per share for proceeds, net of
expenses, of $16,222,143.
NOTE 4. 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,
1999 were $87,848,268 and $98,202,735, 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.
NOTE 5. 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. The
characterization of income and capital gain distributions are determined in
accordance with federal income tax regulations, which may differ from generally
accepted accounting principles. Reclassifications are made to the Fund's capital
accounts to reflect income and gains available for distribution (or available
capital loss carryovers) under income tax regulations.
19
<PAGE>
DIVIDEND REINVESTMENT PLAN
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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, State
Street Bank and Trust Company, P.O. Box 8200, Boston, MA 02266-8200 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 you wish to participate, or not participate, in the Plan.
Participants in the Plan have their dividends and distributions automatically
reinvested in additional shares of the Fund. Since 1996--the first full year
that Liberty Asset Management Company assumed complete management
responsibilities for the Fund--participating shareholders have been rewarded as
a result of the consistent reinvestment of distributions. Each share of the Fund
owned by shareholders, who have participated in the Dividend Reinvestment
Program since 1996, would have grown to 1.465 shares as of June 30, 1999, with a
total net asset value of $18.78. Participants are kept apprised of the status of
their account through quarterly statements.
20
<PAGE>
1999 ANNUAL MEETING OF SHAREHOLDERS
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1999 ANNUAL MEETING OF SHAREHOLDERS
Liberty All-Star Growth Fund, Inc.'s 1999 Annual Meeting of Shareholders was
held on April 21, 1999. At the meeting, Mr. Robert J. Birnbaum was reelected as
Director of the class whose term expires with the Annual Meeting in 2002.
Messrs. John V. Carberry and William E. Mayer were elected for the first time as
Directors of the class whose terms expire with the Annual Meeting in 2001 and
2002, respectively. Messrs. James E. Grinnell, Richard W. Lowry, and John J.
Neuhauser continue in office as Directors.
In addition, shareholders approved an amendment to the Fund's Articles of
Incorporation increasing the number of shares of capital stock the Fund is
authorized to issue from 20 million shares of Common Stock, par value $.10 per
share, to 60 million shares of such stock, and ratified the Board of Directors'
selection of KPMG Peat Marwick LLP as the Fund's independent auditors for the
year ending December 31, 1999. The number of votes cast for and against and the
number of abstentions and broker non-votes on these matters were as follows:
<TABLE>
1. APPROVAL OF AMENDMENT TO FUND'S ARTICLES OF INCORPORATION.
<S> <C>
FOR: 12,405,402
AGAINST: 861,950
ABSTAIN: 221,971
</TABLE>
<TABLE>
2. RATIFICATION OF SELECTION OF KPMG PEAT MARWICK LLP AS INDEPENDENT AUDITORS
FOR 1999.
<S> <C>
FOR: 13,305,330
AGAINST: 59,035
ABSTAIN: 164,958
</TABLE>
21
<PAGE>
[LOGO] LIBERTY [LETTERHEAD]
ALL-STAR
-----------
GROWTH FUND
FUND MANAGER
Liberty Asset Management Company
Federal Reserve Plaza
600 Atlantic Avenue
Boston, Massachusetts 02210-2214
1-617-722-6036
Internet: http://www.lamco.com
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
99 High Street
Boston, Massachusetts 02110
CUSTODIAN
The Chase Manhattan Bank
270 Park Avenue
New York, NY 10017-2070
INVESTOR ASSISTANCE,
TRANSFER & DIVIDEND
DISBURSING AGENT & REGISTRAR
State Street Bank and Trust Company c/o EquiServe
P.O. Box 8200, Boston, Massachusetts 02266-8200
1-800-LIB-FUND (1-800-542-3863)
Internet: http://www.equiserve.com
LEGAL COUNSEL
Bingham Dana LLP
150 Federal Street
Boston, Massachusetts 02110
TRUSTEES
Robert J. Birnbaum*
John V. Carberry
James E. Grinnell*
Richard W. Lowry*
William E. Mayer
Dr. John J. Neuhauser*
OFFICERS
John V. Carberry, Chairman of the Board of Directors
William R. Parmentier, Jr., President & Chief Executive Officer
Christopher S. Carabell, Vice President
Mark T. Haley, Vice President
Timothy J. Jacoby, Treasurer
Nancy L. Conlin, Secretary
J. Kevin Connaughton, Controller
* Member of the audit committee.
- --------------------------------------------------------------------------------
Liberty Asset Management Company, the Fund's manager, is one of the Liberty
Financial Companies (NYSE: L).
[LOGO] LIBERTY FINANCIAL
