[LOGO] LIBERTY
ALL*STAR
-----------
EQUITY FUND
[COVER GRAPHIC]
GROWTH CONSISTENCY
OBJECTIVITY VALUE
SECOND QUARTER REPORT 2000
<PAGE>
[BACKGROUND GRAPHIC]
LIBERTY ALL-STAR EQUITY FUND
1st Quarter 2nd Quarter
Fund Facts 2000 2000
---------- ----------- -----------
Net Asset Value (NAV) $14.48 $14.09
Market Price $11.188 $12.313
Quarter End Discount 22.7% 12.6%
Dividends Declared $0.33 $0.36
Market Price Trading Range $9.750 to $11.750 $10.313 to $12.750
Discount Range 24.4% to 16.0% 24.3% to 10.0%
Annualized Rates of Return
---------------------------
Performance Summary 6 1 3 5 10
Periods Ending June 30, 2000 Quarter Months Year Year Year Year
---------------------------- ------- ------ ---- ---- ---- ----
Shares Valued at NAV (0.2)% 5.4% 6.0% 14.4% 18.5% 15.7%
Shares Valued at NAV
with Dividends Reinvested 0.1 6.4 7.4 14.9 19.0 16.1
Shares Valued at Market Price
with Dividends Reinvested 13.2 17.9 0.5 10.9 17.0 16.4
Lipper Growth and Income
Mutual Fund Average (2.5) (0.5) 2.1 12.3 17.4 14.1
S&P 500 Index (2.7) (0.4) 7.3 19.7 23.8 17.8
Figures shown for the Fund and the Lipper Growth and Income Mutual Fund Average
are total returns, which include dividends, after deducting fund expenses. The
Fund's reinvested returns assume all primary subscription rights in all the
Fund's rights offerings were exercised. Figures shown for the unmanaged S&P 500
Index are total returns, including income.
<PAGE>
PRESIDENT'S LETTER
--------------------------------------------------------------------------------
Fellow Shareholders: August 2000
The stock market fell sharply during April and May, with the most
significant declines occurring in aggressive growth stocks. Growth stocks
rebounded in June, but not significantly enough to push the widely followed
indices into positive territory for the second quarter. During the quarter, the
S&P 500 Index and the Dow Jones Industrial Average declined by 4.0 and 2.7
percent, respectively. Market results for the first half of the year were also
uninspiring given the virtually flat performance of the S&P 500 Index and the
8.5 percent decline of the more cyclically oriented Dow Jones Industrial
Average.
At this point in the year, it appears the market's volatility is signaling
a change in investor sentiment. During the quarter, a greater focus on corporate
earnings and sound business fundamentals emerged, which clearly precipitated the
shakeout in the dot-com stocks. It is easy to gauge the market's volatility this
year by simply comparing monthly returns of the market indices. But the
volatility has also been significant based upon investment style as well. The
following graph illustrates this monthly style volatility as measured by the S&P
500 BARRA Style Indices.
[The following table was represented as a bar chart in the printed material.]
Monthly Returns of the
S&P 500 BARRA Style Indices
--------------------------------------------------------------------------------
Jan Feb Mar Apr May Jun YTD
Growth -6.7% 2.1% 9.2% -5.0% -4.1% 8.1% 2.6%
Value -3.2% -6.2% 10.4% -0.7% 0.3% -4.0% -4.1%
--------------------------------------------------------------------------------
In the months of February and June, the difference in returns between the
S&P 500 BARRA growth and value indices was 8.3 and 12.1 percent, respectively.
The Fund's multi-managed approach, which combines both growth and value
investment styles, fared well during this volatile period. As the table on the
inside cover of this report illustrates, shares of the Fund valued at net asset
value (NAV) with dividends reinvested rose 0.1 percent during the second
quarter, compared to declines of 2.5 percent for the Lipper Growth and Income
Mutual Fund Average, the Fund's primary benchmark, and 2.7 percent for the S&P
500 Index. Also, the Fund's performance has been consistent this year, as it
outperformed both the Lipper Growth and Income Mutual Fund Average and S&P 500
Index for the first and second quarters. Shares valued at market price have also
exceeded those benchmarks for the second quarter and are ahead by a wide margin
year-to-date. Longer-term results show that in all periods depicted, the
LIBERTY ALL-STAR EQUITY FUND 1
<PAGE>
PRESIDENT'S LETTER -- CONTINUED
--------------------------------------------------------------------------------
Fund's NAV reinvested return has consistently exceeded that of the Lipper Growth
and Income Mutual Fund Average. The Fund's NAV reinvested returns relative to
that benchmark for the quarter, 1 year, 3 year, 5 year and 10 year periods
ranked (1=Best; 100=Worst) in the 17th, 29th, 36th, 40th and 24th percentiles,
respectively.
Although the jury is still out on whether value stocks will eventually
emerge from their lengthy relative underperformance, the Fund's multi-managed
approach of employing both value and growth investment styles reduces the Fund's
volatility. For a perspective on value investing, I encourage you to read the
manager interview that begins on page 8 in which Mark Donovan, one of the fund's
value managers, offers his insights.
In closing, a number of shareholders have inquired as to why their second
quarter dividend payment was not reinvested for them. This was because the
dividend was declared payable in cash, not newly issued shares. This was a
departure from the past few years when the second quarter dividend had been paid
in newly issued shares. Shareholders who want to reinvest their dividends should
contact the Fund's transfer agent, EquiServe, at 1-800-LIB-FUND (1-800-542-3863)
to enroll in the Fund's Automatic Dividend Reinvestment and Cash Purchase Plan.
Shareholders whose shares are not held in their own name with EquiServe must
notify the brokerage firm, bank, or other nominee where their shares are held in
order to enroll in the reinvestment program.
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 Equity Fund and
Liberty Asset Management Company
2 LIBERTY ALL-STAR EQUITY FUND
<PAGE>
INVESTMENT GROWTH AS OF JUNE 30, 2000
--------------------------------------------------------------------------------
[The following table was represented as a mountain chart in the printed
material.]
<TABLE>
<CAPTION>
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
<PLOT POINTS NEEDED>
</TABLE>
Net Asset Value of One Share $14.09(1)
Net Asset Value of Shares Acquired Through Dividend Reinvestment $62.71(2)
Includes Additional Investments Made Through Rights Offerings $80.54(2)
1. Net asset value (NAV) of one share of All-Star as of 6/30/00.
2. To evaluate NAV performance of the Fund, these values should be used. Each
shows how the NAV has fared by keeping distributions at work in the Fund.
The upper value includes additional investments made through the rights
offerings in 1992, 1993, 1994 and 1998.
Since its inception, the Fund has maintained an optional Automatic
Dividend Reinvestment and Cash Purchase Plan, whereby distributions are
automatically invested in additional shares of the Fund. In addition, four
rights offerings have allowed investors to acquire additional shares at a
discount from the market price. The rights offering in April 1992 allowed
investors to acquire one share at $10.05 for every 10 shares held; the one in
October 1993 allowed investors to acquire one share at $10.41 for every 15
shares held; the one in September 1994 allowed investors to acquire one share at
$9.14 for every 15 shares held; and the one in April 1998 allowed investors to
acquire one share at $12.83 for every 20 shares held.
As the graph above shows, an original share, assuming participation in all
of the rights offerings and reinvestment of all distributions, has grown to a
net asset value of $80.54 (5.716 shares times the current $14.09 net asset value
per share). Excluding additional investments made through the rights offerings,
an original share has grown to a net asset value of $62.71 (4.451 shares times
the current $14.09 net asset value per share).
Determining investment growth using market price value, an original share,
assuming participation in all of the rights offerings and reinvestment of all
distributions, has grown to a market price value of $70.38 (5.716 shares times
the current $12.313 market price per share). Excluding additional investments
made through the rights offerings, an original share has grown to a market price
value of $54.80 (4.451 shares times the current $12.313 market price per share).
LIBERTY ALL-STAR EQUITY FUND 3
<PAGE>
A TABLE OF PER-SHARE VALUES, DISTRIBUTIONS AND REINVESTMENT
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Shares Shares
Shares Purchased Acquired Shares NAV(1) 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>
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
1st Quarter 5.398 0.33 0.159 -- 5.557 14.48 80.47 11.188 62.17
2nd Quarter 5.557 0.36 0.159 -- 5.716 14.09 80.54 12.313 70.38
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
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.
4 LIBERTY ALL-STAR EQUITY FUND
<PAGE>
PORTFOLIO MANAGERS/PORTFOLIO CHARACTERISTICS
--------------------------------------------------------------------------------
THE FUND'S FIVE PORTFOLIO MANAGERS AND THE INVESTMENT STYLES THEY PRACTICE ARE:
BOSTON PARTNERS ASSET MANAGEMENT, L.P.
Companies with low price-to-earnings and price-to-book ratios where a catalyst
for positive change has been identified.
OPPENHEIMER CAPITAL
Companies that exhibit the ability to generate excess cash flow while earning
high returns on invested capital.
J.P. MORGAN INVESTMENT MANAGEMENT INC.
Companies diversified across all sectors that are undervalued relative to the
firm's projected growth rates.
WESTWOOD MANAGEMENT CORPORATION
Growth companies selling at reasonable valuations based on the firm's earning
projections, which are not yet reflected in consensus estimates.
TCW INVESTMENT MANAGEMENT COMPANY
Growth companies that have superior sales growth, leading and/or rising market
shares, and high and/or rising profit margins.
MANAGERS' DIFFERING INVESTMENT STYLES ARE REFLECTED IN PORTFOLIO
CHARACTERISTICS: The portfolio characteristics table below is a regular feature
of the Fund's shareholder reports. It serves as a useful tool for understanding
the value of the Fund's multi-managed portfolio. The characteristics are
different for each of the Fund's five 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
final column shows portfolio characteristics for the S&P 500 Index.
PORTFOLIO CHARACTERISTICS
AS OF JUNE 30, 2000
(UNAUDITED)
INVESTMENT STYLE SPECTRUM
VALUE GROWTH
------------------------------------
------------------------------------
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
Boston Oppen- J.P. West- Total S&P
Partners heimer Morgan wood TCW Fund 500 Index
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Number of Holdings 36 32 88 43 29 185 500
--------------------------------------------------------------------------------------------
Percent of Holdings
in Top 10 43% 57% 31% 31% 53% 19% 27%
--------------------------------------------------------------------------------------------
Weighted Average
Market Capitalization
(billions) $25 $87 $142 $53 $113 $84 $148
--------------------------------------------------------------------------------------------
One-Year Forecast I/B/E/S
Earnings Per Share 17% 21% 26% 25% 26% 23% 24%
--------------------------------------------------------------------------------------------
Dividend Yield 2.0% 1.5% 1.1% 1.6% 0.2% 1.2% 1.1%
--------------------------------------------------------------------------------------------
One-Year Forecast I/B/E/S
Price/Earnings Ratio 15x 18x 22x 19x 42x 21x 25x
--------------------------------------------------------------------------------------------
Average Price/
Book Value Ratio 2.6x 3.4x 4.0x 3.3x 8.6x 4.4x 5.2x
--------------------------------------------------------------------------------------------
</TABLE>
LIBERTY ALL-STAR EQUITY FUND 5
<PAGE>
TOP 50 HOLDINGS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
RANK RANK MARKET
AS OF AS OF VALUE PERCENT OF
6/30/00 3/31/00 SECURITY NAME ($000) NET ASSETS
--------------------------------------------------------------------------------
1 1 Citigroup, Inc. $39,777 2.9%
2 2 Intel Corp. 39,772 2.9
3 10 Computer Associates
International, Inc. 26,257 1.9
4 NEW Pharmacia Corp.* 25,164 1.8
5 3 Cisco Systems, Inc. 23,283 1.7
6 13 Siebel Systems, Inc. 22,506 1.6
7 6 SBC Communications, Inc. 22,101 1.6
8 5 Dell Computer Corp. 21,505 1.6
9 4 Nokia Corp. ADR 20,974 1.5
10 17 Avon Products, Inc. 20,617 1.5
11 9 The Progressive Corp. 19,307 1.4
12 65 Deere & Co. 17,952 1.3
13 7 Microsoft Corp. 17,952 1.3
14 51 Exxon Mobil Corp. 17,445 1.3
15 8 Sprint Corp. (FON Group) 17,340 1.3
16 45 Pfizer, Inc. 17,003 1.2
17 28 El Paso Energy Corp. 16,351 1.2
18 83 Baxter International, Inc. 15,539 1.1
19 14 Maxim Integrated Products, Inc. 15,395 1.1
20 38 Countrywide Credit
Industries, Inc. 15,190 1.1
21 89 Minnesota Mining &
Manufacturing Co. 15,081 1.1
22 11 Burlington Resources, Inc. 15,040 1.1
23 18 Kansas City Southern
Industries, Inc. 14,926 1.1
24 21 ACE Ltd. 14,854 1.1
25 16 AFLAC, Inc. 14,700 1.1
26 15 XL Capital Ltd. 13,964 1.0
27 19 The Charles Schwab Corp. 12,735 0.9
28 25 Providian Financial Corp. 12,708 0.9
29 48 Paychex, Inc. 12,554 0.9
30 73 Alcoa, Inc. 12,407 0.9
31 97 Harcourt General, Inc. 12,392 0.9
32 36 WorldCom, Inc. 12,313 0.9
33 42 Amgen, Inc. 12,167 0.9
34 27 Applied Materials, Inc. 11,455 0.8
35 23 GTE Corp. 11,323 0.8
36 40 Wal-Mart Stores, Inc. 11,277 0.8
37 35 Time Warner, Inc. 11,195 0.8
38 20 The Home Depot, Inc. 11,009 0.8
39 26 Freddie Mac 10,935 0.8
40 44 AMFM, Inc. 10,916 0.8
41 34 Morgan Stanley Dean Witter & Co. 10,823 0.8
42 32 CIGNA Corp. 10,771 0.8
43 52 Hewlett-Packard Co. 10,752 0.8
44 39 International Business
Machines Corp. 10,326 0.8
45 47 Fannie Mae 10,150 0.7
46 123 Bristol-Myers Squibb Co. 9,903 0.7
47 49 Biogen, Inc. 9,894 0.7
48 81 Compaq Computer Corp. 9,803 0.7
49 50 Tyco International Ltd. 9,654 0.7
50 30 Kimberly-Clark Corp. 9,633 0.7
* Merger between Monsanto and Pharmacia & Upjohn.
6 LIBERTY ALL-STAR EQUITY FUND
<PAGE>
MAJOR STOCK CHANGES IN THE SECOND QUARTER
--------------------------------------------------------------------------------
The following are the major ($5.0 million or more) stock changes -- both
purchases and sales -- that were made in the Fund's portfolio during the second
quarter of 2000.
--------------------------------------------------------------------------------
SHARES
------------------------------------------
SECURITY NAME PURCHASED SOLD AS OF 6/30/00
--------------------------------------------------------------------------------
Baxter International, Inc. 111,000 221,000
Bristol-Myers Squibb Co. 99,000 170,000
Deere & Co. 259,200 485,200
Du Pont (E.I.) de Nemours & Co. 142,300 142,300
Exxon Mobil Corp. 93,000 222,227
Genentech, Inc. 37,700 37,700
JDS Uniphase Corp. 47,600 47,600
Minnesota Mining & Manufacturing Co. 107,800 182,800
TrizecHahn Corp. 393,500 393,500
Eli Lilly & Co. (96,200) 52,400
FleetBoston Financial Corp. (218,400) 100,000
Halliburton Co. (159,700) 153,800
Honeywell International, Inc. (176,300) 47,700
Marsh & McLennan Companies, Inc. (54,600) 0
Northrop Grumman Corp. (184,500) 0
Pfizer, Inc. (131,125) 354,225*
Safeway, Inc. (144,600) 93,300
Wellpoint Health Networks, Inc. (70,400) 108,900
* Adjusted for acquisition of Warner-Lambert Co.
LIBERTY ALL-STAR EQUITY FUND 7
<PAGE>
MANAGER INTERVIEW
--------------------------------------------------------------------------------
[PHOTO]
MARK E. DONOVAN
Boston Partners Asset Management, L.P.
Manager Interview To Boston Partners, Three Factors Must Be Present in a Stock:
Good Value, Good Fundamentals and a Catalyst for Change
Boston Partners Asset Management, L.P., is one of USA's five portfolio
management firms, having been named to the USA team in May 1998. Boston Partners
is a value style manager investing in undervalued companies that have sound
business fundamentals and positive business momentum. The firm searches for
companies with low price-to-earnings and price-to-book value ratios where a
catalyst for positive change has been identified. We recently had the
opportunity to visit with Mark E. Donovan, CFA, who was among the founders of
the firm and who serves today as Chairman of the Equity Strategy Committee.
--------------------------------------------------------------------------------
The views expressed in this interview represent the portfolio manager's views at
the time of the discussion (July 2000) and are subject to change.
--------------------------------------------------------------------------------
LAMCO: It has been two years since our first question and answer session. So, it
might make sense to start by revisiting some basics about the firm -- history,
ownership, types of clients and other distinguishing factors.
DONOVAN: We started the business in April 1995. A group of us had worked
together for a lengthy period of time at the Boston Company and we elected to
start our own firm. So, the quarter just past marked our fifth anniversary. A
little more than 80 percent of the assets we manage are in equities, with the
remainder in fixed income. All the equities are managed under a value
discipline. The various products we offer vary by market capitalization -- i.e.,
large-cap value, small-cap value and mid-cap value. In terms of people, we have
35 investment professionals and a total of 83 employees. As to institutional
clients, we have about 140 in all, and those would include corporations,
endowments, foundations and public funds. Most important when it comes to
describing the firm is our ownership. The firm is entirely owned by 36 employee
partners. There's no outside ownership at all.
LAMCO: That's something that we talked about in our first interview. You felt
that it was a key distinguishing factor because it motivated people, number one,
and, number two, it led to very low turnover.
DONOVAN: Certainly the investment management industry, in particular, is a very
competitive one when it comes to people right now. Top quality people are at a
premium. So, having a piece of the business is a big differentiating factor for
Boston Partners. We also find that it's something our clients are very pleased
with. I think it makes them comfortable with the degree of continuity and
consistency we're able to offer. With our firm being 100 percent owned by its
employees, we're able to perfectly align our interests with those of our
clients. We don't have any of the issues that come with being
8 LIBERTY ALL-STAR EQUITY FUND
<PAGE>
MANAGER INTERVIEW -- CONTINUED
--------------------------------------------------------------------------------
affiliated with a public company. It's a fairly simple, straightforward business
model that both our clients and our employees really seem to like. To that
extent, it's a real win-win.
LAMCO: Why don't we revisit the basic value strategy that you're implementing
for USA, starting with objectives and overall philosophy.
DONOVAN: As mentioned, we manage all of our equity products under a value
discipline. In doing that, we're really focusing on traditional value metrics,
such as stocks that sell at low prices relative to their earnings per share,
cash flow per share, sales per share and other fundamental measures of value. We
do, however, recognize that while some stocks are statistically inexpensive,
some deserve to be inexpensive and will stay inexpensive for a very long period
of time. Therefore, we overlay a catalyst on the pure value considerations. This
enables us to identify one or more factors that we believe will unlock a stock's
undervalued characteristics and make it a rewarding investment. In sum, there
are three characteristics to a stock that we would want to buy: good value, good
fundamentals and a catalyst for change.
LAMCO: What might a typical catalyst be?
DONOVAN: Broadly, I would sort them into two categories: internal catalysts and
external catalysts. An internal catalyst is the core business showing signs of
improvement. It could be an acceleration in sales growth or earnings per share
growth, or it may be Wall Street analysts beginning to raise earnings estimates.
External catalysts are initiatives that management is putting into place. For
example, this could be a major acquisition or divestiture program, or perhaps a
share buy-back initiative. These are actions put into place by management that
can help unlock value.
LAMCO: Research plays an important part in identifying those catalysts, does it
not?
DONOVAN: Yes, that's certainly a critical point to address. I would not want to
leave the impression that we're trying to find value by merely running
quantitative screens to find stocks with low price-to-earnings ratios. That
would expose clients to a broad group of companies that we wouldn't own given
their poor profitability characteristics, leveraged balance sheets or terrible
competitive positions. You're only going to unearth those kinds of
characteristics by having analysts and portfolio managers really dig into the
fundamentals of a company, and that's how we add value. When you're a value
manager, it's critically important to avoid those value traps -- that is,
inexpensive stocks that deserve to be inexpensive.
--------------------------------------------------------------------------------
" ...there are three characteristics to a stock that we would want to buy: good
value, good fundamentals and a catalyst for change."
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
" ... we overlay a catalyst on the pure value considerations. This enables us to
identify one or more factors that we believe will unlock a stock's undervalued
characteristics and make it a rewarding investment."
--------------------------------------------------------------------------------
LIBERTY ALL-STAR EQUITY FUND 9
<PAGE>
MANAGER INTERVIEW -- CONTINUED
--------------------------------------------------------------------------------
LAMCO: That kind of takes us into the investment process. Can you give us an
overview of your practices?
DONOVAN: The decisions that we make are driven by internal fundamental research
that is streamlined by the use of quantitative screening. I characterize
quantitative screening as about 10 percent of the research process. It helps us
to be much more efficient in identifying companies within the large cap universe
that appear to offer attractive valuations and some quantifiable measure of
business momentum.
So, the screens just represent the tip of the iceberg, but they do help
focus the attention of our analysts and portfolio managers on a manageable
number of companies that offer the characteristics we're looking for. But,
because quantitative measures can often be misleading, the analysts and
portfolio managers dig into a potential investment by reading 10Ks, 10Qs and
annual reports; meeting with management; and talking with suppliers and
competitors. This allows us to understand a company's competitive position, its
business model and strategy, its management, and its prospects.
LAMCO: And the actual buy/sell decisions, how are they made?
DONOVAN: The analysts present their buy and sell recommendations to our equity
strategy committee, a group of seven senior portfolio managers. This is the
final level of scrutiny within the investment process where we review the
analysts' quantitative and fundamental work and ultimately make the call as to
whether or not a stock is truly undervalued and has a catalyst in place.
LAMCO: Let's double back to a point that is important to the Boston Partners
philosophy, and that is risk aversion.
DONOVAN: In looking at a stock, we're constantly asking ourselves, "What could
go wrong?" We're really seeking to identify the worst case scenario, the
probability of it happening, and -- should it happen -- the level of downside
risk that exists. We believe it's a critical element in the value discipline.
It's really the basic reason investors adhere to a value philosophy and a
primary reason why value investing works. The risk-averse nature of our process
is all about limiting downside risk but not at the expense of avoiding stocks
having very solid upside potential.
It's especially important in this market environment, in particular, to
minimize your exposure to the land mines that are so prevalent these days. A
risk-averse strategy has kept us out of stocks like the dotcoms. For a time we
paid a price in terms of opportunity cost for not owning them. Now, as they've
rolled over, there's absolutely no valuation support whatsoever and it's hard to
know where they will ultimately bottom.
LAMCO: What would happen if you bought a stock and say a few days later it lost
10 or 15 percent or more. Wall Street is very unforgiving these days.
DONOVAN: Our sell discipline is really just a mirror image of the buy decision.
Remember the three characteristics for a
--------------------------------------------------------------------------------
" ... while some stocks are statistically inexpensive, some deserve to be
inexpensive and others will stay inexpensive for a very long period of time."
--------------------------------------------------------------------------------
10 LIBERTY ALL-STAR EQUITY FUND
<PAGE>
MANAGER INTERVIEW -- CONTINUED
--------------------------------------------------------------------------------
buy -- good value, good fundamentals and a catalyst for change. We would sell a
holding if we felt that any one of those three characteristics had changed for
the worse. Among the more common reasons for selling under the situation you
described might be a reversal of a company's momentum. Sometime, a company will
be cruising along with very positive business trends and then almost in the
blink of an eye, management announces a slowing of sales or profit margin
pressure. Based on the old cockroach theory, where there's one piece of bad
news, there is often more to follow. We would likely sell the stock on that
basis. On the other hand, if a stock sells off 10 to 15 percent and there is no
change in the fundamentals or the catalyst, it can be a good opportunity to buy
more. You have to evaluate every stock on a case-by-case basis.
LAMCO: How about the overall portfolio construction process? How do you go about
that in terms of number of holdings, sector diversification and other factors?
DONOVAN: Our mandate with USA is to manage a concentrated portfolio of about 35
stocks. The average position is in the range of 3 percent. The minimum size for
a new position is 1 percent. Through appreciation, some of the more longstanding
holdings in the portfolio might move up to 5 or 6 percent weightings. As for
sector diversification, our portfolios do have fairly broad sector
representation. It's our bias not to be overly concentrated in one sector of the
market. By the same token, we're not going to buy something just to have a
representation in all sectors. For quite awhile, we had no representation in the
transportation sector. Then, recently we bought CSX.
LAMCO: Let's turn to value investing in general. As you said, over the past
couple of years your risk aversion did not benefit you, but now it's paying off.
And value investing, generally, seems to be rotating back into favor now that
investors have rediscovered that earnings really do matter.
DONOVAN: It has been an interesting period of time. To put the current situation
into historical context, it's worthwhile to look at the past 10 years. Coming
out of the recession in 1990, value had a nice run, as it typically does when
the economy is emerging from a recession. From that point through 1997 it was a
fairly level playing field for value and growth. In 1998 that changed.
Ninety-eight was a poor year, on a relative basis, for value, and that persisted
into 1999. In the first half of 2000 there has been a slight advantage to growth
but the gap has closed quite a bit.
Looking a little deeper, it is interesting to see where the leadership was
coming from among growth stocks. Starting in 1998, we saw the re-emergence of
the "nifty fifty" scenario reminiscent of the early 1970s. There were 40 to 50
stocks in 1998 that investors anointed as the chosen ones. Ninety-eight was also
the year when the Asian meltdown put a lot of companies' earnings under
pressure. Investors responded by deciding that these select few companies could
sail through this difficult period. However, over the past two years, this
latter-day "nifty fifty" has been
--------------------------------------------------------------------------------
"When you're a value manager, it's critically important to avoid those value
traps -- that is, inexpensive stocks that deserve to be inexpensive."
--------------------------------------------------------------------------------
LIBERTY ALL-STAR EQUITY FUND 11
<PAGE>
MANAGER INTERVIEW -- CONTINUED
--------------------------------------------------------------------------------
getting smaller and smaller. One of the first groups to fall off the bandwagon
was consumer growth stocks, followed by the pharmaceutical stocks. Earlier this
year, the dotcoms took a hit. Eventually, the semiconductor companies were about
all that was left. In sum, it seems that the leadership within growth has gotten
narrower and narrower. All of this, I think, may be the precursor to a
leadership change. It's unlikely that you will simply flip a switch and see
leadership change from growth to value. But, recent market action suggests that
right now we may be in what I would call a transition phase.
LAMCO: What's your view of the stock market as we stand here at mid-year?
DONOVAN: I've been in the business for close to 20 years and I've never quite
seen anything like this. The market is extremely bipolar right now. There is a
broad group of stocks that looks very vulnerable to me in that they are selling
at very high multiples of earnings. At the same time, you can find many stocks
of very good companies trading at 10 to 15 times earnings. So, broadly speaking,
I think that the most widely watched market indices -- because they're dominated
by a lot of very expensive stocks -- may move lower in the months ahead. But,
beneath that, I think there will be a lot of good opportunities to make money in
individual stocks.
LAMCO: Tell us about some specific stocks that you have bought recently for USA.
DONOVAN: One is CSX, the stock is in the transportation sector, as I mentioned
earlier. It's primarily a railroad company that services the eastern United
States. The company also has operations in shipping and other assets such as
real estate. This is a stock that has been absolutely crushed over the last
year. We just bought it within the last couple of weeks in the low $20s, down
from about $50 in mid-1999. The stock had not been that low since 1991. Needless
to say, it's inexpensive. The problems at CSX center around its acquisition of a
large piece of Conrail a couple of years ago. As happened with Union Pacific, it
has been difficult for CSX to work through the logistics of merging two very
large railroads. This is a business with a lot of operating leverage, such that
when you have just fairly minor snafus in terms of getting trains out on time
and fully loaded, it can have a disproportionally large negative effect on the
bottom line. So, the operating margins for CSX have gone from 25 percent in 1997
down to an estimated 10 percent this year. Our decision to buy CSX was the
result of both internal and external factors. The internal factor is evidence of
improving logistics, suggesting that the worst of CSX's operating problems may
finally be behind them. If this can be sustained, it will have a very positive
effect on the company's operating margins. Then, an external catalyst occurred
recently when Carl Icahn announced his intention to accumulate up to 15 percent
of the stock. Typically, Icahn has forced management to take more ambitious
actions to enhance shareholder value, including, in some
--------------------------------------------------------------------------------
" ... leadership within growth has gotten narrower and narrower ... [this] may
be the precursor to a leadership change ... we may be in what I would call a
transition phase right now."
--------------------------------------------------------------------------------
12 LIBERTY ALL-STAR EQUITY FUND
<PAGE>
MANAGER INTERVIEW -- CONTINUED
--------------------------------------------------------------------------------
cases, even seeking the sale of the company.
LAMCO: How about another recent purchase?
DONOVAN: Despite my cautionary comments regarding technology, there are some
good opportunities in the sector and one of those, we think, is 3Com. The story
on 3Com is really pretty simple-- it owns about 83 percent of Palm, which makes
the Palm Pilot. This summer, 3Com is spinning off its remaining interest in Palm
to existing 3Com shareholders. At Palm's current stock price, it works out to
about $40 per share of value to 3Com shareholders. In addition to that, 3Com has
about $10 a share of net cash over and above any debt. So when we bought 3Com in
the low 50s you were paying virtually nothing for the remaining business -- a
business that generates close to $700 million in annual revenues and is expected
to grow over 20 percent a year for the next three years. In addition, 3Com has
sold off or closed most of its problem areas. So, buying 3Com is almost a free
call option on the remaining assets of the company. In a world in which the
average technology investor has been much more focused on the high flying names,
this is a restructuring story that has been overlooked.
LAMCO: What about a couple of stocks that you may have sold recently?
DONOVAN: As I said earlier, if any of our three reasons for buying a stock shows
deterioration, we will become sellers. Two names that, in our opinion, reached
full valuation levels during the second quarter were Northrop Grumman and
Circuit City. We had nice profits on both when we sold. With Circuit City, we
believed the stock was fully priced and no longer met the important criteria of
being undervalued. As an illustration of why it's important to pay attention to
valuation, subsequent to our sale Circuit City indicated that some segments of
its business were seeing a slowdown in sales. Investors reacted to this news by
knocking off over 30 percent from the stock's valuation.
Northrop Grumman was a stock that when it got up to $80 a share it no
longer embedded the pessimism that it did when we bought it in the low $50s. We
didn't see any bad news coming, but we were mildly concerned that management was
talking about making some significant acquisitions. We weren't sure that would
be well received by the market. We sold the stock, and it has since declined to
about $65.
Those would be examples of value-based sales. A momentum based-sale would
be FleetBoston Financial. We had concerns across a number of fronts. First, with
the slowing economy we were seeing growing evidence of credit problems for
lenders across the country. Secondly, we felt the volatility in technology
stocks would have negative implications for Fleet due to the fact that it owns
Robertson Stephens, a technology brokerage boutique. Finally, Fleet makes a lot
of money on its venture capital portfolio and a lot of the investments there are
technology based. Again, we felt that could be an area where profitability was
peaking.
--------------------------------------------------------------------------------
"I've been in the business for close to 20 years and I've never quite seen
anything like this. The market is extremely bipolar right now."
--------------------------------------------------------------------------------
LIBERTY ALL-STAR EQUITY FUND 13
<PAGE>
MANAGER INTERVIEW -- CONTINUED
--------------------------------------------------------------------------------
LAMCO: To close, is there a stock that more or less epitomizes the Boston
Partners approach to value investing?
DONOVAN: I'd highlight a name that is among the largest holdings in the
portfolio and that's ACE Ltd. This is a Bermuda-based, multi-line insurance
company that does business all over the world. A big boost came to ACE's
business when it acquired CIGNA's property and casualty business last year.
Outside of people who spend a lot of time looking at insurance stocks, ACE is
not exactly a household name. However, we believe it is one of the strongest
global players in the insurance industry. The stock was under some intense
selling pressure back in the first quarter of the year, and it just got down to
ridiculously low valuation levels. Even after its sharp rebound of the last few
months, ACE sells at just over 10 times next year's earnings and a small premium
to book value. Clearly, ACE meets the valuation criteria. In addition, we feel
that the cycle has started to turn in the insurance industry and the pricing
dynamics have improved. So, in ACE you have a company where the earnings are
starting to accelerate, yet it trades at only 10 times earnings. As a result,
you could have the double benefit of accelerating earnings and a widening
price-to-earnings multiple.
LAMCO: Thank you very much.
14 LIBERTY ALL-STAR EQUITY FUND
<PAGE>
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2000 (UNAUDITED)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
COMMON STOCKS (97.3%) SHARES MARKET VALUE
--------------------------------------------------------------------------------
AEROSPACE & DEFENSE (0.7%)
Boeing Co. 230,000 $ 9,616,875
--------------
AUTOS, TIRES & ACCESSORIES (0.3%)
Ford Motor Co. 31,100 1,337,300
Lear Corp. (a) 164,200 3,284,000
--------------
4,621,300
--------------
BANKS (3.6%)
ABN AMRO Holdings NV (b) 184,358 4,528,293
Astoria Financial Corp. 25,600 659,200
Banc One Corp. 217,300 5,772,031
Bank of America Corp. 28,834 1,239,862
Chase Manhattan Bank Corp. 176,150 8,113,909
First Union Corp. 130,500 3,238,031
FleetBoston Financial Corp. 100,000 3,400,000
PNC Bank Corp. 196,000 9,187,500
Washington Mutual, Inc. 93,300 2,694,038
Wells Fargo & Co. 200,000 7,750,000
Zions Bancorporation 75,900 3,483,098
--------------
50,065,962
--------------
BROADCASTING & CABLE (2.1%)
AMFM, Inc. (a) 158,200 10,915,800
AT&T Corp-Liberty Media Group Class A (a) 199,900 4,847,575
Cablevision Systems Corp. Class A (a) 50,000 3,393,750
Comcast Corp. Special Class A 33,600 1,360,800
Cox Communications, Inc. Class A (a) 112,600 5,130,338
The News Corp., Ltd. (b) 77,500 4,223,750
--------------
29,872,013
--------------
BUSINESS & CONSUMER SERVICES (1.5%)
America Online, Inc. 61,000 3,217,750
Cendant Corp. (a) 112,800 1,579,200
Paychex, Inc. 298,912 12,554,304
Sabre Holdings Corp. 115,624 3,295,284
--------------
20,646,538
--------------
CHEMICALS (0.7%)
Du Pont (E.I.) de Nemours & Co. 142,300 6,225,625
Rohm & Haas Co. 112,600 3,884,700
--------------
10,110,325
--------------
COMMUNICATIONS EQUIPMENT (4.0%)
Cisco Systems, Inc. (a) 366,300 23,282,944
Lucent Technologies, Inc. 134,400 7,963,200
See Notes to Schedule of Investments. LIBERTY ALL-STAR EQUITY FUND 15
<PAGE>
SCHEDULE OF INVESTMENTS (UNAUDITED) -- CONTINUED
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
COMMON STOCKS -- CONTINUED SHARES MARKET VALUE
--------------------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT -- CONTINUED
Nokia Corp. (b) 420,000 $ 20,973,750
Nortel Networks Corp. 40,200 2,743,650
Tellabs, Inc. (a) 19,900 1,361,906
--------------
56,325,450
--------------
COMPUTER & BUSINESS EQUIPMENT (5.0%)
Compaq Computer Corp. 383,500 9,803,219
Dell Computer Corp. (a) 436,100 21,505,181
EMC Corp. (a) 56,100 4,316,194
Hewlett-Packard Co. 86,100 10,751,738
International Business Machines Corp. 94,250 10,326,266
Seagate Technology, Inc. (a) 32,400 1,782,000
Sun Microsystems, Inc. (a) 86,600 7,875,188
3Com Corp. (a) 55,100 3,175,138
--------------
69,534,924
--------------
COMPUTER SERVICES & SOFTWARE (5.7%)
Citrix Systems, Inc. (a) 24,500 463,969
Computer Associates International, Inc. 512,948 26,256,526
Electronic Data Systems Corp. 46,400 1,914,000
Intuit, Inc. (a) 100,900 4,174,738
Microsoft Corp. (a) 224,400 17,952,000
Oracle Corp. (a) 35,200 2,959,000
Parametric Technology Corp. (a) 277,500 3,052,500
Siebel Systems, Inc. (a) 137,600 22,506,200
--------------
79,278,933
--------------
CONSUMER PRODUCTS (3.7%)
Avon Products, Inc. 463,300 20,616,850
Clorox Co. 27,500 1,232,344
Gillette Co. 230,000 8,035,625
Kimberly-Clark Corp. 167,900 9,633,263
Philip Morris Companies, Inc. 141,200 3,750,625
Procter & Gamble Co. 90,200 5,163,950
UST, Inc. 218,000 3,201,875
--------------
51,634,532
--------------
DIVERSIFIED (3.2%)
Cooper Industries, Inc. 39,400 1,282,963
General Electric Co. 148,500 7,870,500
Honeywell International, Inc. 47,700 1,606,894
Minnesota Mining & Manufacturing Co. 182,800 15,081,000
16 LIBERTY ALL-STAR EQUITY FUND See Notes to Schedule of Investments.
<PAGE>
SCHEDULE OF INVESTMENTS (UNAUDITED) -- CONTINUED
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
COMMON STOCKS -- CONTINUED SHARES MARKET VALUE
--------------------------------------------------------------------------------
DIVERSIFIED -- CONTINUED
The Seagram Co., Ltd. 52,600 $ 3,050,800
Textron, Inc. 110,000 5,974,375
Tyco International Ltd. 203,768 9,653,509
--------------
44,520,041
--------------
DRUGS & HEALTH CARE (9.3%)
ALZA Corp. (a) 85,300 5,043,363
American Home Products Corp. 49,000 2,878,750
Amgen, Inc. 173,200 12,167,300
Aventis S.A. (b) 39,600 2,872,475
Baxter International, Inc. 221,000 15,539,063
Biogen, Inc. (a) 153,400 9,894,300
Bristol-Myers Squibb Co. 170,000 9,902,500
Eli Lilly & Co. 52,400 5,233,450
Genentech, Inc. (a) 37,700 6,484,400
Medtronic, Inc. 129,900 6,470,644
PE Corp-PE Biosystems Group 20,500 1,350,438
Pfizer, Inc. 354,225 17,002,800
Pharmacia Corp. 486,840 25,163,543
Schering-Plough Corp. 62,800 3,171,400
Wellpoint Health Networks, Inc. (a) 108,900 7,888,444
--------------
131,062,870
--------------
ELECTRIC & GAS UTILITIES (2.2%)
Allegheny Energy, Inc. 63,900 1,150,200
Columbia Energy Group 43,300 2,841,563
DTE Energy Co. 44,700 1,366,144
Florida Progress Corp. 174,900 8,198,438
Peco Energy Co. 199,500 8,042,344
P G & E Corp. 54,000 1,329,750
Reliant Energy, Inc. 291,100 8,605,644
--------------
31,534,083
--------------
ELECTRONICS & ELECTRICAL EQUIPMENT (6.7%)
Agilent Technologies, Inc. 55,585 4,099,394
Applied Materials, Inc. (a) 126,400 11,455,000
Emerson Electric Co. 120,000 7,245,000
Intel Corp. 297,500 39,772,031
JDS Uniphase Corp. (a) 47,600 5,706,050
Maxim Intergrated Products, Inc. (a) 226,600 15,394,638
Motorola, Inc. 87,000 2,528,438
Sensormatic Electronics Corp. (a) 90,200 1,426,288
Synopsys, Inc. (a) 91,700 3,169,381
Texas Instruments, Inc. 49,500 3,400,031
--------------
94,196,251
--------------
See Notes to Schedule of Investments. LIBERTY ALL-STAR EQUITY FUND 17
<PAGE>
SCHEDULE OF INVESTMENTS (UNAUDITED) -- CONTINUED
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
COMMON STOCKS -- CONTINUED SHARES MARKET VALUE
--------------------------------------------------------------------------------
FINANCIAL SERVICES (9.4%)
AXA Financial, Inc. (b) 212,900 $ 7,238,600
Capital One Financial Corp. 53,300 2,378,513
The Charles Schwab Corp. 378,750 12,735,469
The CIT Group, Inc. 114,300 1,857,375
Citigroup, Inc. 660,200 39,777,050
Countrywide Credit Industries, Inc. 501,100 15,189,594
Fannie Mae 194,500 10,150,469
Freddie Mac 270,000 10,935,000
The Goldman Sachs Group, Inc. 29,400 2,789,325
MetLife, Inc. (a) 94,700 1,994,619
Morgan Stanley Dean Witter & Co. 130,000 10,822,500
Providian Financial Corp. 141,200 12,708,000
U.S. Bancorp 168,300 3,239,775
--------------
131,816,289
--------------
FOOD, BEVERAGE & RESTAURANTS (2.3%)
Anheuser-Busch Companies, Inc. 115,100 8,596,531
Bestfoods 9,100 630,175
The Coca-Cola Co. 40,400 2,320,475
Diageo PLC (b) 160,000 5,690,000
Heinz (H.J.) Co. 93,600 4,095,000
McDonald's Corp. 150,000 4,940,625
Sara Lee Corp. 333,000 6,431,063
--------------
32,703,869
--------------
HOTELS & ENTERTAINMENT/LEISURE (2.2%)
Carnival Corp. 100,000 1,950,000
Pixar, Inc. (a) 122,100 4,304,025
Starwood Hotels & Resorts Worldwide, Inc. 148,900 4,811,331
Time Warner, Inc. 147,300 11,193,536
The Walt Disney Co. 203,300 7,890,581
--------------
30,149,473
--------------
INDUSTRIAL EQUIPMENT (2.8%)
Caterpillar, Inc. 130,000 4,403,750
Deere & Co. 485,200 17,952,400
Dover Corp. 110,000 4,461,875
Illinois Tool Works, Inc. 137,500 7,837,500
Ingersoll-Rand Co. 122,000 4,910,500
--------------
39,566,025
--------------
INSURANCE (6.7%)
ACE Ltd. 530,500 14,854,000
AFLAC, Inc. 320,000 14,700,000
Allmerica Financial Corp. 174,600 9,144,675
Ambac Financial Group, Inc. 70,300 3,853,319
18 LIBERTY ALL-STAR EQUITY FUND See Notes to Schedule of Investments.
<PAGE>
SCHEDULE OF INVESTMENTS (UNAUDITED) -- CONTINUED
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
COMMON STOCKS -- CONTINUED SHARES MARKET VALUE
--------------------------------------------------------------------------------
INSURANCE -- CONTINUED
American International Group, Inc. 67,900 $ 7,978,250
CIGNA Corp. 115,200 10,771,200
The Progressive Corp. 260,900 19,306,600
XL Capital Ltd. 258,000 13,964,250
--------------
94,572,294
--------------
METALS & MINING (1.4%)
Alcan Aluminum Ltd. 254,100 7,877,100
Alcoa, Inc. 427,816 12,406,664
--------------
20,283,764
--------------
OIL & GAS (8.2%)
Apache Corp. 147,700 8,686,606
Baker Hughes, Inc. 44,200 1,414,400
Burlington Resources, Inc. 393,200 15,039,900
Conoco, Inc. Class A 336,500 7,403,000
Conoco, Inc. Class B 315,200 7,742,100
Devon Energy Corp. 146,479 8,230,289
Dynegy, Inc. 22,400 1,530,200
El Paso Energy Corp. 321,000 16,350,938
Exxon Mobil Corp. 222,227 17,444,820
Global Marine, Inc. (a) 58,300 1,643,331
Halliburton Co. 153,800 7,257,438
Occidental Petroleum Corp. 400,100 8,427,106
Royal Dutch Petroleum Co. 54,062 3,328,192
Tosco Corp. 44,300 1,254,244
USX-Marathon Group 220,200 5,518,763
The Williams Companies, Inc. 105,600 4,402,200
--------------
115,673,527
--------------
PAPER (0.2%)
Temple-Inland, Inc. 52,200 2,192,400
--------------
REAL ESTATE (0.9%)
Kimco Realty Corp. 59,900 2,455,900
TrizecHahn Corp. 393,500 7,033,813
Vornado Realty Trust 71,700 2,491,575
--------------
11,981,288
--------------
RETAIL TRADE (5.2%)
Circuit City Stores, Inc. 31,500 1,045,406
Costco Wholesale Corp. (a) 128,000 4,224,000
Federated Department Stores, Inc. (a) 254,300 8,582,625
Harcourt General, Inc. 227,900 12,392,063
The Home Depot, Inc. 220,450 11,008,722
The Limited, Inc. 336,400 7,274,650
See Notes to Schedule of Investments. LIBERTY ALL-STAR EQUITY FUND 19
<PAGE>
SCHEDULE OF INVESTMENTS (UNAUDITED) -- CONTINUED
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
COMMON STOCKS -- CONTINUED SHARES MARKET VALUE
--------------------------------------------------------------------------------
RETAIL TRADE -- CONTINUED
May Department Stores Co. 225,000 $ 5,400,000
Safeway, Inc. (a) 93,300 4,210,163
Target Corp. 34,200 1,983,600
Tiffany & Co. 64,700 4,367,250
The TJX Companies, Inc. 82,500 1,546,875
Wal-Mart Stores, Inc. 195,700 11,277,213
--------------
73,312,567
--------------
TELECOMMUNICATIONS (5.5%)
Allegiance Telecom, Inc. (a) 12,950 828,800
AT&T Corp. 158,900 5,025,213
Bell Atlantic Corp. 50,000 2,540,625
Global Crossing Ltd. (a) 53,500 1,407,719
GTE Corp. 181,900 11,323,275
Level 3 Communications, Inc. (a) 14,700 1,293,600
Qwest Communications International, Inc. (a) 26,000 1,291,875
SBC Communications, Inc. 511,000 22,100,750
Sprint Corp. (FON Group) 340,000 17,340,000
Sprint Corp. (PCS Group) (a) 22,500 1,338,750
WorldCom, Inc. (a) 268,400 12,312,850
--------------
76,803,457
--------------
TRANSPORTATION (3.8%)
AMR Corp. (a) 160,000 4,230,000
Burlington Northern Santa Fe Corp. 200,000 4,587,500
CSX Corp. 124,100 2,629,369
Delta Air Lines, Inc. 159,800 8,079,888
Kansas City Southern Industries, Inc. 168,300 14,926,106
Southwest Airlines Co. 414,700 7,853,381
Union Pacific Corp. 81,100 3,015,906
United Parcel Service, Inc. Class B 133,300 7,864,700
--------------
53,186,850
--------------
TOTAL COMMON STOCKS
(Cost $1,018,590,551) 1,365,261,900
--------------
PREFERRED STOCK (0.5%)
BROADCASTING & CABLE (0.5%)
The News Corp. Ltd. (b)
(Cost $4,611,740) 150,000 7,125,000
--------------
20 LIBERTY ALL-STAR EQUITY FUND See Notes to Schedule of Investments.
<PAGE>
SCHEDULE OF INVESTMENTS (UNAUDITED) -- CONTINUED
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SHORT-TERM INTEREST MATURITY PAR MARKET
INVESTMENTS (1.9%) RATE DATE VALUE VALUE
--------------------------------------------------------------------------------
COMMERCIAL PAPER (0.7%)
CIT Group Holdings 6.30% 7/05/00 $ 3,000,000 $ 2,997,900
Household Finance 6.58 7/06/00 700,000 699,360
Household Finance 6.55 7/13/00 2,500,000 2,494,542
Household Finance 6.65 7/11/00 4,000,000 3,992,611
--------------
TOTAL COMMERCIAL PAPER (COST $10,184,413) 10,184,413
--------------
REPURCHASE AGREEMENT (1.2%)
SBC Warburg Ltd., Repurchase Agreement dated
06/30/00, 6.60% to be repurchased at $16,946,315
on 07/03/00, collateralized by U.S. Treasury
notes with various maturities to 2026, with a
current market value of $17,292,519. 16,937,000 16,937,000
--------------
TOTAL SHORT-TERM INVESTMENTS (COST $27,121,413) 27,121,413
--------------
TOTAL INVESTMENTS (99.7%) (COST $1,050,323,704) (C) 1,399,508,313
OTHER ASSETS AND LIABILITIES, NET (0.3%) 3,744,433
--------------
NET ASSETS (100.0%) $1,403,252,746
==============
NET ASSET VALUE PER SHARE (99,577,653 SHARES OUTSTANDING) $14.09
==============
NOTES TO SCHEDULE OF INVESTMENTS:
(a) Non-income producing security.
(b) Represents an American Depositary Receipt.
(c) Cost for federal income tax purposes is $1,056,108,770.
Gross unrealized appreciation and depreciation of investments at
June 30, 2000 is as follows:
Gross unrealized appreciation $404,516,072
Gross unrealized depreciation (61,116,529)
------------
Net unrealized appreciation $343,399,543
------------
See Notes to Financial Statements. LIBERTY ALL-STAR EQUITY FUND 21
<PAGE>
FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 2000 (UNAUDITED)
--------------------------------------------------------------------------------
ASSETS:
Investments at market value (identified cost $1,050,323,704) $1,399,508,313
Cash 8,700,832
Receivable for investments sold 17,767,693
Dividends and interest receivable 1,574,584
Other assets 53,645
--------------
TOTAL ASSETS 1,427,605,067
--------------
LIABILITIES:
Payable for investments purchased 22,742,020
Management, administrative and bookkeeping fees payable 1,072,685
Accrued other expenses 411,667
Other liabilities 125,949
--------------
TOTAL LIABILITIES 24,352,321
--------------
NET ASSETS $1,403,252,746
==============
NET ASSETS REPRESENTED BY:
Paid-in capital (unlimited number of shares of
beneficial interest without par value authorized,
99,577,653 shares outstanding) $ 961,570,276
Undistributed net investment income 3,044,226
Accumulated net realized gains on investments
less distributions 89,453,635
Net unrealized appreciation of investments 349,184,609
--------------
TOTAL NET ASSETS APPLICABLE TO
OUTSTANDING SHARES OF BENEFICIAL
INTEREST ($14.09 PER SHARE) $1,403,252,746
==============
22 LIBERTY ALL-STAR EQUITY FUND See Notes to Financial Statements.
<PAGE>
FINANCIAL STATEMENTS -- CONTINUED
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED)
--------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 8,166,832
Interest 1,003,347
------------
TOTAL INVESTMENT INCOME (NET OF FOREIGN TAXES
WITHHELD AT SOURCE WHICH AMOUNTED TO $63,079) 9,170,179
EXPENSES:
Management fees $ 4,894,086
Administrative fee 1,223,085
Bookkeeping fee 141,466
Custodian and transfer agent fees 141,504
Proxy, printing and shareholder communication
expense 188,011
Legal and audit fees 14,176
Trustees' fees and expense 47,862
NYSE fees 47,896
Miscellaneous expense 11,825
------------
TOTAL EXPENSES 6,709,911
------------
NET INVESTMENT INCOME 2,460,268
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gains on investment transactions:
Proceeds from sales 536,509,567
Cost of investments sold 438,465,786
------------
Net realized gains on investment
transactions 98,043,781
Net unrealized appreciation on investments:
Beginning of year 373,928,811
End of period 349,184,609
------------
Change in net unrealized appreciation (24,744,202)
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 75,759,847
============
See Notes to Financial Statements. LIBERTY ALL-STAR EQUITY FUND 23
<PAGE>
FINANCIAL STATEMENTS -- CONTINUED
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
STATEMENT OF CHANGES IN NET ASSETS JUNE 30, 2000 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1999
------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Net investment income $ 2,460,268 $ 5,017,012
Net realized gains on investment transactions 98,043,781 157,250,175
Change in net unrealized appreciation (24,744,202) (38,966,121)
-------------- --------------
Net increase in net assets resulting
from operations 75,759,847 123,301,066
-------------- --------------
DISTRIBUTIONS DECLARED FROM:
Net investment income -- (4,396,010)
Net realized gains on investments (68,708,080) (129,123,874)
-------------- --------------
Total distributions (68,708,080) (133,519,884)
-------------- --------------
CAPITAL TRANSACTIONS:
Increase in net assets from capital share transactions -- 55,329,487
-------------- --------------
Total increase in net assets 7,051,767 45,110,669
NET ASSETS:
Beginning of year 1,396,200,979 1,351,090,310
-------------- --------------
End of period $1,403,252,746 $1,396,200,979
============== ==============
Undistributed net investment income $ 3,044,226 $ 583,958
-------------- --------------
</TABLE>
24 LIBERTY ALL-STAR EQUITY FUND See Notes to Financial Statements.
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2000 -----------------------------------------------------------------
(UNAUDITED) 1999 1998 1997 1996 1995
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of year $ 14.02 $ 14.22 $ 13.32 $ 11.95 $ 11.03 $ 9.26
------- ------- ------- ------- ------- -------
Income from Investment Operations:
Net investment income 0.03 0.05 0.05 0.05 0.08 0.10
Net realized and unrealized
gains on investments 0.73 1.22 2.35 3.01(a) 2.15(a) 2.71
Provision for federal income tax -- -- -- (0.36) (0.13) --
------- ------- ------- ------- ------- -------
Total from Investment Operations 0.76 1.27 2.40 2.70 2.10 2.81
------- ------- ------- ------- ------- -------
Less Distributions from:
Net investment income -- (0.05) (0.05) (0.05) (0.08) (0.10)
Realized capital gains (0.69) (1.34) (1.35) (1.28) (1.10) (0.94)
------- ------- ------- ------- ------- -------
Total Distributions (0.69) (1.39) (1.40) (1.33) (1.18) (1.04)
------- ------- ------- ------- ------- -------
Change due to rights offering (b) -- -- (0.10) -- -- --
Impact of shares issued in dividend
reinvestment (c) -- (0.08) -- -- -- --
------- ------- ------- ------- ------- -------
Total Distributions, Reinvestments
and Rights Offering -- (1.47) (1.50) (1.33) (1.18) (1.04)
------- ------- ------- ------- ------- -------
Net asset value at end of period $ 14.09 $ 14.02 $ 14.22 $ 13.32 $ 11.95 $ 11.03
======= ======= ======= ======= ======= =======
Market price at end of period $12.313 $11.063 $12.938 $13.313 $11.250 $10.875
======= ======= ======= ======= ======= =======
TOTAL INVESTMENT RETURN FOR SHAREHOLDERS: (d)
Based on net asset value 6.4%(e) 10.2% 19.8% 26.6% 21.7% 31.8%
Based on market price 17.9%(e) (4.4%) 9.1% 34.4% 16.2% 41.4%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (millions) $ 1,403 $ 1,396 $ 1,351 $ 1,150 $ 988 $ 872
Ratio of expenses to average net assets 0.96%(f) 0.97% 1.00% 1.01% 1.03% 1.06%
Ratio of net investment income to
average net assets 0.36%(f) 0.37% 0.39% 0.38% 0.73% 0.92%
Portfolio turnover rate 34%(e) 90% 76% 99% 70% 54%
</TABLE>
(a) Before provision for Federal income tax.
(b) Effect of All-Star's rights offerings for shares at a price below net
asset value.
(c) Effect of payment of a portion of distributions in newly issued shares
valued at a discount from net asset value.
(d) Calculated assuming all distributions reinvested at actual reinvestment
price and all primary rights exercised.
(e) Not annualized.
(f) Annualized.
See Notes to Financial Statements. LIBERTY ALL-STAR EQUITY FUND 25
<PAGE>
NOTES TO FINANCIAL STATEMENTS JUNE 30, 2000 (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 objective 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"). 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
All-Star 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 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. 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 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 Board of
Trustees 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 All-Star's Management and Portfolio Management Agreements, 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. 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%
26 LIBERTY ALL-STAR EQUITY FUND
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
--------------------------------------------------------------------------------
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. Colonial Management Associates,
Inc., an affiliate of the Manager, provides bookkeeping and pricing services for
$36,000 per year plus 0.0233% of All-Star's average weekly net assets over $50
million, 0.0167% in excess of $500 million, and 0.015% in excess of $1 billion.
NOTE 3. CAPITAL TRANSACTIONS
During the year ended December 31, 1999, distributions in the amount of
$55,329,487 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
4,579,753 shares.
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, 2000 were $465,340,025 and
$536,509,567, 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
All-Star 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 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. 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.
LIBERTY ALL-STAR EQUITY FUND 27
<PAGE>
2000 ANNUAL MEETING OF SHAREHOLDERS
--------------------------------------------------------------------------------
Liberty All-Star Equity Fund's 2000 Annual Meeting of Shareholders was held on
April 19, 2000. At the meeting Messrs. Robert J. Birnbaum and William E. Mayer
were reelected as Trustees of the class whose term expires with the Annual
Meeting in 2003. Messrs. James E. Grinnell, Richard W. Lowry and John J.
Neuhauser continue in office as Trustees. Mr. John V. Carberry continues to
serve as Chairman of the Board of Trustees.
In addition, shareholders approved the Fund's new Portfolio Management Agreement
with TCW Funds Management, Inc. and Oppenheimer Capital and ratified the Board
of Trustees' selection of PricewaterhouseCoopers LLP as the Fund's independent
auditors for the year ending December 31, 2000. The number of votes cast for and
against and the number of abstentions on these matter were as follows:
1. Approval of Portfolio Management Agreement with TCW Funds Management, Inc.
For: 90,989,945
Against: 1,044,938
Abstain: 1,371,593
2. Approval of new Portfolio Management Agreement with Oppenheimer Capital.
For: 90,945,532
Against: 1,138,799
Abstain: 1,322,145
3. Ratification of selection of PricewaterhouseCoopers LLP as Independent
Auditors for 2000.
For: 91,684,707
Against: 842,625
Abstain: 879,144
28 LIBERTY ALL-STAR EQUITY FUND
<PAGE>
DISTRIBUTION POLICY
--------------------------------------------------------------------------------
Liberty All-Star Equity Fund's current policy, in effect since 1988, is to pay
distributions on its common 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. 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.
The Fund retained such excess gains in 1993, 1996 and 1997.
LIBERTY ALL-STAR EQUITY FUND 29
<PAGE>
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 and
distributions automatically reinvested in additional shares of 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 the Fund began
operations in 1986 would have grown to 4.451 shares as of June 30, 2000, with a
total net asset value of $62.71. 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.
30 LIBERTY ALL-STAR EQUITY FUND
<PAGE>
NOTES
--------------------------------------------------------------------------------
LIBERTY ALL-STAR EQUITY FUND 31
<PAGE>
NOTES
--------------------------------------------------------------------------------
32 LIBERTY ALL-STAR EQUITY FUND
<PAGE>
[LOGO] LIBERTY USA
ALL*STAR --------
----------- Listed
EQUITY FUND --------
NYSE
THE NEW YORK STOCK EXCHANGE
FUND MANAGER
Liberty Asset Management Company
Federal Reserve Plaza
600 Atlantic Avenue
Boston, Massachusetts 02210-2214
1-617-722-6036
Internet: www.libertyallstar.com
INDEPENDENT AUDITORS
PricewaterhouseCoopers, LLP
160 Federal 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: 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 Trustees
William R. Parmentier, Jr., President and Chief Executive Officer
Christopher S. Carabell, Vice President
Mark T. Haley, Vice President
Pamela A. McGrath, 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
<PAGE>
[LOGO] LIBERTY
ALL*STAR
-----------
EQUITY FUND
Liberty Asset Management Company
Federal Reserve Plaza
600 Atlantic Avenue
Boston, Massachusetts 02210-2214
USA A MEMBER OF THE
-------- CLOSED-END
Listed FUND
-------- ASSOCIATION, INC.
NYSE WWW.CLOSED-ENDFUNDS.COM
THE NEW YORK STOCK EXCHANGE
