As filed with the Securities and Exchange Commission on August 21, 2007
1933 Act File No.
1940 Act File No. 811-4809
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-2
(Check appropriate box or boxes)
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No.
[ ] Post-Effective Amendment No.
and
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] Amendment No. 23
Liberty All-Star Equity Fund
---------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
1290 Broadway, Suite 1100
Denver, Colorado 80203
-----------------------------------------
(Address of Principal Executive Offices)
(Number, Street, City, State, Zip Code)
(303) 623-2577
--------------------------------------------------
Registrant's Telephone Number, including Area Code
Clifford J. Alexander, Esq.
Kirkpatrick & Lockhart Preston Gates Ellis LLP
1601 K Street, NW
Washington, DC 20006
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of this Registration Statement.
If any of the securities being registered on this form are offered on a delayed
or continuous basis in reliance on Rule 415 under the Securities Act of 1933,
other than securities offered in connection with a dividend reinvestment plan,
check the following box. [ ]
It is proposed that this filing will become effective (check appropriate box)
[X] when declared effective pursuant to section 8(c)
[ ] immediately upon filing pursuant to paragraph (b) of Rule 486
[ ] on (date) pursuant to paragraph (b) of Rule 486
[ ] 60 days after filing pursuant to paragraph (a) of Rule 486
[_] on(date) pursuant to paragraph (a) of Rule 486
If appropriate, check the following box:
[_] This post-effective amendment designates a new effective date for a
previously filed registration statement.
[_] The Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act and the Securities Act registration
number of the earlier effective registration statement is _____.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THIS REGISTRATION STATEMENT SHALL
THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES
ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH
DATES AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(a), MAY DETERMINE.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
PROPOSED
MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
BEING REGISTERED REGISTERED(1) UNIT(1) PRICE(1) FEE
Shares of beneficial 131,062 $7.63 $1,000,000 $30.70
interest
(1) Estimated solely for the purpose of calculating the Registration fee in
accordance with Rule 457(c) under the Securities Act of 1933. Based on 95% of
the closing price ($8.03) reported on the New York Stock Exchange on August 20,
2007.
SUBJECT TO COMPLETION, DATED [_________], 2007
[_______] RIGHTS FOR [_____] SHARES
LIBERTY ALL-STAR EQUITY FUND
SHARES OF BENEFICIAL INTEREST
Liberty All-Star Equity Fund ("All-Star") is issuing non-transferable
rights ("Rights") to its shareholders (the "Offer"). These Rights will allow you
to subscribe for new shares of beneficial interest of All-Star ("Shares"). You
will receive one Right for each outstanding Share you own on [__________], 2007
(the "Record Date"). For every ten (10) Rights that you receive, you may buy one
new Share. Fractional Shares will not be issued upon the exercise of the Rights.
Accordingly, Shares may be purchased only pursuant to the exercise of the Rights
in integral multiples of ten. Also, shareholders of record may purchase Shares
not acquired by other shareholders in the Offer, subject to limitations
discussed in this prospectus. See "Over-Subscription Privilege". The Rights are
not transferable and, therefore, may not be purchased or sold. The Rights will
not be admitted for trading on the New York Stock Exchange (the "NYSE") or any
other stock exchange. See "The Offer". THE SUBSCRIPTION PRICE PER SHARE (THE
"SUBSCRIPTION PRICE") WILL BE 95% OF THE LOWER OF (i) THE LAST REPORTED SALES
PRICE OF A SHARE ON THE NYSE ON [__________], 2007 (THE "PRICING DATE"), OR (ii)
THE NET ASSET VALUE ("NAV") OF A SHARE ON THE PRICING DATE.
THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON [__________],
2007, (THE "EXPIRATION DATE") (THE PERIOD THROUGH THE EXPIRATION DATE IS THE
"SUBSCRIPTION PERIOD". SINCE THE CLOSE OF THE OFFERING ON THE EXPIRATION DATE
WILL BE PRIOR TO THE PRICING DATE, SHAREHOLDERS WHO CHOOSE TO EXERCISE THEIR
RIGHTS WILL NOT KNOW THE SUBSCRIPTION PRICE PER SHARE AT THE TIME THEY EXERCISE
SUCH RIGHTS.
FOR ADDITIONAL INFORMATION, PLEASE CALL THE ALTMAN GROUP, INC. (THE
"INFORMATION AGENT") TOLL FREE AT 1-800-[__________].
All-Star is a multi-managed diversified, closed-end management investment
company that allocates its portfolio assets on an approximately equal basis
among several independent investment organizations (currently five in number)
(each, a "Portfolio Manager") having different investment styles recommended and
monitored by ALPS Advisers, Inc. ("AAI"), All-Star's investment adviser.
All-Star's investment objective is to seek total investment return, comprised of
long-term capital appreciation and current income. Under normal market
conditions, All-Star seeks its investment objective through investing at least
80% of its net assets in a diversified portfolio of equity securities. An
investment in All-Star is not appropriate for all investors. No assurances can
be given that All-Star's investment objective will be achieved. INVESTING IN
SHARES OF ALL-STAR INVOLVES RISKS. FOR A DISCUSSION OF CERTAIN RISK FACTORS AND
i
SPECIAL CONSIDERATIONS WITH RESPECT TO OWNING SHARES OF ALL-STAR, SEE "SPECIAL
CONSIDERATIONS AND RISK FACTORS" AND "INVESTMENT OBJECTIVE, POLICIES AND RISKS"
ON PAGE [__].
The address of All-Star is c/o ALPS Fund Services, Inc., 1290 Broadway,
Suite 1100, Denver, CO 80203 and its telephone number is 1-800-542-3863. The
Shares are listed on the NYSE under the symbol "USA".
All-Star announced the terms of the Offer before the opening of trading on
the NYSE on August 7, 2007. The NAV per Share at the close of business on August
6, 2007 and [__________], 2007, the Record Date, was $8.71 and $[________],
respectively, and the last reported sales price of a Share on the NYSE on those
dates was $8.42 and $[________], respectively.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION ("SEC") NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED
IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIME.
Subscription Price (1) Sales Load Proceeds to All-Star (2)
Per Share $[______] None $[_____]
Total $[______] None $[_____]
(1) Estimated based on an assumed Subscription Price of 95% of the last
reported sale price on the NYSE on [__________], 2007 (the "Estimated Purchase
Price"). The Estimated Purchase Price is presented solely for illustration
purposes. Shareholders wishing to exercise Rights must send the per Share amount
presented under "The Offer - Payment for Shares" on page [__].
(2) Before deduction of expenses payable by All-Star, estimated at
$450,000.
SHAREHOLDERS WHO DO NOT EXERCISE THEIR RIGHTS SHOULD EXPECT THAT THEY WILL,
AT THE COMPLETION OF THE OFFER, OWN A SMALLER PROPORTIONAL INTEREST IN ALL-STAR
THAN IF THEY EXERCISED THEIR RIGHTS. AS A RESULT OF THE OFFER, YOU MAY
EXPERIENCE AN IMMEDIATE DILUTION OF THE AGGREGATE NAV OF YOUR SHARES, WHICH
UNDER CERTAIN CIRCUMSTANCES, COULD BE SUBSTANTIAL. This is because the
Subscription Price per Share and/or the net proceeds to All-Star for each new
Share sold will be less than All-Star's NAV per Share on the Expiration Date.
All-Star cannot state precisely the extent of this dilution at this time because
it does not know what the NAV or market price per Share will be when the Offer
expires or what proportion of Rights will be exercised.
THIS PROSPECTUS SETS FORTH CONCISELY THE INFORMATION THAT A SHAREHOLDER
OUGHT TO KNOW BEFORE EXERCISING HIS OR HER RIGHTS. INVESTORS ARE ADVISED TO READ
AND RETAIN IT FOR FUTURE REFERENCE. A STATEMENT OF ADDITIONAL INFORMATION DATED
[________], 2007 HAS BEEN FILED WITH THE SEC AND IS INCORPORATED BY REFERENCE IN
ITS ENTIRETY INTO THIS PROSPECTUS. THE TABLE OF CONTENTS OF THE STATEMENT OF
ADDITIONAL INFORMATION APPEARS ON PAGE [_] OF THIS PROSPECTUS. INVESTORS MAY
ii
REQUEST A FREE COPY OF THE STATEMENT OF ADDITIONAL INFORMATION, A FREE COPY OF
ALL-STAR'S MOST RECENT ANNUAL OR SEMI-ANNUAL REPORT, AND ADDITIONAL INFORMATION
ABOUT ALL-STAR OR MAKE SHAREHOLDER INQUIRIES BY CALLING THE INFORMATION AGENT AT
1-800-[__________] OR WRITING TO THE ADDRESS PROVIDED ABOVE. INVESTORS MAY
ACCESS A COPY OF ALL-STAR'S SHAREHOLDER REPORTS AT WWW.ALL-STARFUNDS.COM. THE
SEC MAINTAINS AN INTERNET WEBSITE AT WWW.SEC.GOV THAT CONTAINS THE STATEMENT OF
ADDITIONAL INFORMATION AND OTHER INFORMATION REGARDING ALL-STAR.
Investors should rely only on the information contained in or incorporated
by reference into this prospectus. All-Star has not authorized any other person
to provide you with different information. If anyone provides you with different
or inconsistent information, you should not rely on it. All-Star is not making
an offer to sell these securities in any state or jurisdiction where the offer
or sale is not permitted. The information appearing in this prospectus is given
as of the date of this prospectus. All-Star's business, financial condition,
results of operations and prospects may have changed since the date of this
prospectus. Neither the delivery of this prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that information
contained herein is correct as of any time subsequent to the date hereof.
However, if any material change occurs while this prospectus is required by law
to be delivered, this prospectus will be amended or supplemented accordingly.
The date of this prospectus is [________], 2007.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SEC.
THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE
TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL
THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION
UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
iii
TABLE OF CONTENTS
PAGE
PROSPECTUS SUMMARY.............................................................1
EXPENSES......................................................................12
FINANCIAL HIGHLIGHTS..........................................................13
SHARE PRICE DATA..............................................................16
INVESTMENT PERFORMANCE........................................................16
THE OFFER.....................................................................17
SPECIAL CONSIDERATIONS AND RISK FACTORS.......................................27
USE OF PROCEEDS...............................................................28
THE MULTI-MANAGER METHODOLOGY.................................................29
INVESTMENT OBJECTIVE, POLICIES AND RISKS......................................30
MANAGEMENT OF ALL-STAR........................................................38
DESCRIPTION OF SHARES.........................................................41
DISTRIBUTIONS; AUTOMATIC DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN.........43
TAX MATTERS...................................................................45
GENERAL.......................................................................48
STATEMENT OF ADDITIONAL INFORMATION...........................................49
APPENDIX A: INFORMATION ABOUT THE PORTFOLIO MANAGERS........................A-1
iv
PROSPECTUS SUMMARY
This summary highlights some information that is described more fully
elsewhere in this prospectus. It may not contain all of the information that you
should consider before exercising the Rights offered hereby. To understand the
Offer fully, you should carefully review the more detailed information contained
in this prospectus and in the Statement of Additional Information.
PURPOSE OF THE OFFER
The Board of Trustees of All-Star ("Board of Trustees") has determined that
it would be in the best interests of All-Star and its shareholders to increase
the assets of All-Star available for investment so that it may be in a better
position to take advantage of investment opportunities consistent with its
investment objective that may arise. The Offer seeks to reward existing
shareholders in All-Star by giving them the opportunity to purchase additional
Shares at a price below market and/or NAV and without incurring any brokerage
commissions. See "The Offer - Purpose of the Offer".
IMPORTANT TERMS OF THE OFFER
Total number of Shares available for [___] Shares
primary subscription.....................
Number of Rights you will receive One Right for every one Share
for each outstanding Share you own
on the Record Date.......................
Number of Shares you may purchase with One Share for every ten Rights
your Rights at the Subscription
Price per Share..........................
Subscription Price....................... 95% of the lower of (i) the last
reported sale price of a Share on
the NYSE on the Pricing Date, or
(ii) the NAV of a Share on the
Pricing Date.
SHAREHOLDERS' INQUIRIES SHOULD BE DIRECTED TO THEIR BROKER, BANK OR TRUST
COMPANY, OR TO:
THE ALTMAN GROUP, INC.
1-800-[__________]
OVER-SUBSCRIPTION PRIVILEGE
The right to acquire during the Subscription Period at the Subscription
Price one additional Share for each ten Rights held is hereinafter referred to
as the "Primary Subscription". Shareholders on the Record Date who fully
exercise all Rights issued to them (other than those Rights which cannot be
exercised because they represent the right to acquire less than one Share) are
entitled to subscribe for Shares that were not otherwise subscribed for by
others in the Primary Subscription (the "Over-Subscription Privilege"). For
purposes of determining the maximum number of Shares a shareholder may acquire
pursuant to the Offer, broker-dealers whose Shares are held of record by Cede &
Co., Inc. ("Cede"), nominee for Depository Trust Company, or by any other
depository or nominee will be deemed to be the holders of the Rights that are
issued to Cede or such other depository or nominee. If enough Shares are
available, all shareholder requests to buy Shares that were not bought by other
Record Date Shareholders will be honored in full. If the requests for Shares
exceed the Shares available, All-Star may, at its discretion, issue up to an
additional 25% of the Shares available pursuant to the Offer in order to honor
such over-subscriptions. All-Star may sell additional Shares to shareholders if
and to the extent that Shares issued through the Offer would not cause any undue
dilution (reduction) of the NAV of the Shares. Whether or not All-Star
determines to issue additional Shares to honor all over-subscriptions, Shares
will be allocated pro rata among those shareholders on the Record Date who
over-subscribe based on the number of Rights originally issued to them by
All-Star. Shares acquired pursuant to the Over-Subscription Privilege are
subject to allotment, which is more fully discussed under "The Offer -
Over-Subscription Privilege".
METHOD FOR EXERCISING RIGHTS
Except as described below, subscription certificates evidencing the Rights
("Subscription Certificates") will be sent to shareholders on the Record Date
("Record Date Shareholders") or their nominees. If you wish to exercise your
Rights, you may do so in the following ways:
(1) Complete and sign the Subscription Certificate. Mail it in the envelope
provided or otherwise deliver it, together with payment in full to Computershare
Shareholder Services, Inc. (the "Subscription Agent") at the address indicated
on the Subscription Certificate. Your completed and signed Subscription
Certificate and payment must be received by the Expiration Date.
(2) Contact your broker, banker or trust company, which can arrange, on
your behalf, to guarantee delivery of payment and delivery of a properly
completed and executed Subscription Certificate pursuant to a notice of
guaranteed delivery ("Notice of Guaranteed Delivery") by the close of business
on the third business day after the Expiration Date. A fee may be charged for
this service. The Notice of Guaranteed Delivery must be received by the
Expiration Date.
Since the Expiration Date will be prior to the Pricing Date, shareholders
who choose to exercise their Rights will not know the final Subscription Price
at the time they exercise such Rights. Shareholders will have no right to
rescind their subscription after receipt of their payment for Shares by the
Subscription Agent. See "The Offer - Method of Exercise of Rights" and "The
Offer - Payment for Shares". Subscription payments will be held by the
Subscription Agent pending completion of the processing of the subscription. No
interest thereon will be paid to subscribers.
The Rights are not transferable. Therefore, only the underlying Shares, and
not the Rights, will be admitted for trading on the NYSE. Since fractional
Shares will not be issued on exercise of Rights, shareholders who receive, or
2
are left with, fewer than ten Rights will be unable to exercise such Rights and
will not be entitled to receive any cash in lieu of unexercised Rights.
SHAREHOLDERS' INQUIRIES ABOUT THE OFFER SHOULD BE DIRECTED TO THEIR BROKER,
BANK OR TRUST COMPANY, OR TO:
The Altman Group, Inc.
1-800-[__________]
IMPORTANT DATES TO REMEMBER
Please note that the dates in the table below, other than the Record Date,
may change if the Offer is extended.
EVENT DATE
Record Date...................................... [__________], 2007
Subscription Period.............................. [__________], 2007
through [__________], 2007*
Expiration Date (Deadline for delivery of
Subscription Certificate together with payment of
Estimated Subscription Price (see "The Offer -
Payment for Shares") on page [_] of this prospectus)
or for delivery of Notice of Guaranteed Delivery) [__________], 2007
Pricing Date..................................... [__________], 2007
Deadline for payment of final Subscription Price
pursuant to Notice of Guaranteed Delivery........ [__________], 2007
Confirmation to Registered Shareholders........... [__________], 2007
For Registered Shareholders' Subscriptions -
deadline for payment of unpaid balance if final
Subscription Price is higher than Estimated
Subscription Price................................ [__________], 2007
* Unless the Offer is extended.
OFFERING FEES AND EXPENSES
Offering expenses incurred by All-Star are estimated to be $450,000.
3
FOREIGN RESTRICTIONS
Record Date Shareholders whose record addresses are outside the United
States will receive written notice of the Offer; however, Subscription
Certificates will not be mailed to such shareholders. The Rights to which those
Subscription Certificates relate will be held by the Subscription Agent for such
foreign Record Date Shareholders' accounts until instructions are received in
writing with payment to exercise such Rights. If no such instructions are
received by the Expiration Date, such Rights will expire. See "Subscription
Agent".
INFORMATION ABOUT ALL-STAR
All-Star is a multi-managed diversified, closed-end management investment
company registered under the Investment Company Act of 1940, as amended ("1940
Act"), that allocates its portfolio assets on an approximately equal basis among
several independent investment management organizations (currently five in
number) (each, a "Portfolio Manager") each having a different investment style.
See "The Multi-Manager Methodology". All-Star's investment objective is to seek
total investment return, comprised of long-term capital appreciation and current
income. Under normal market conditions, the Fund seeks its investment objective
through investing at least 80% of its net assets (plus any borrowings for
investment purposes) in a diversified portfolio of equity securities. The
portion of All-Star's portfolio not invested in equity securities (not more than
20% of its net assets under normal market conditions) is generally invested in
short-term money market instruments. See "Investment Objective, Policies and
Risks".
All-Star is a Massachusetts business trust organized on August 20, 1986
that commenced investment operations in November 1986. Its Shares are listed and
traded on the NYSE (symbol "USA"). The average daily trading volume of the
Shares on the NYSE during the year ended December 31, 2006 was 321,344 Shares.
As of [__________], 2007, All-Star's net assets were [________] and [________]
Shares were issued and outstanding.
INFORMATION ABOUT ALPS ADVISERS, INC.
AAI serves as the investment adviser to All-Star. Pursuant to a Fund
Management Agreement with All-Star, AAI implements and operates All-Star's
multi-manager methodology and has overall supervisory responsibility for the
general management and investment of All-Star's assets. AAI recommends to the
Board of Trustees the investment management firms for appointment as Portfolio
Managers of All-Star. See "Management of All-Star" for the fees paid by the Fund
to AAI and by AAI to the Portfolio Managers. Since the fees of AAI and the
Portfolio Managers are based on the average daily net assets of All-Star, AAI
and the Portfolio Managers will benefit from the Offer. See "Management of
All-Star". As of December 31, 2006, AAI managed over $1.5 billion in assets.
ALPS Fund Services, Inc. ("AFS"), an affiliate of AAI, provides
administrative services to All-Star under an Administration, Bookkeeping and
Pricing Services Agreement with All-Star. AAI and AFS are wholly-owned
subsidiaries of ALPS Holdings, Inc. ("ALPS").
4
PORTFOLIO MANAGERS
All-Star allocates its portfolio assets among a number of Portfolio
Managers each having a different investment style, as selected and recommended
by AAI and approved by the Board of Trustees. As of the date of this prospectus,
All-Star's Portfolio Managers are:
o Chase Investment Counsel Corporation
o Matrix Asset Advisors, Inc.
o Pzena Investment Management, LLC
o Schneider Capital Management Corporation
o TCW Investment Management Company
The Portfolio Managers may be removed and additional Portfolio Managers may be
added from time to time. See Appendix A for more information about the current
Portfolio Managers.
SPECIAL CONSIDERATIONS AND RISK FACTORS
The following summarizes some of the risks that you should consider before
subscribing for Shares through the Offer. A more detailed description of these
and other risks of investing in All-Star are described under "Special
Considerations and Risk Factors".
Dilution............................ Record Date Shareholders who do not
fully exercise their Rights should
expect that they will, at the
completion of the Offer, own a
smaller proportional interest in
All-Star than they owned prior to
the Offer. In addition, as a result
of the Offer, all shareholders may
experience an immediate dilution of
the aggregate NAV of these Shares,
which, under certain circumstances,
may be substantial. This is because
the Subscription Price per Share
and/or the net proceeds to All-Star
for each new Share sold will be less
than All-Star's NAV per Share on the
Pricing Date. Although it is not
possible to state precisely the
amount of such dilution, because it
is not known at this time how many
Shares will be subscribed for or
what the NAV or market price per
Share will be on the Pricing Date,
All-Star estimates that such
dilution should not be substantial.
For example, if the Shares are
trading at a discount from their NAV
of 2.5% (the average discount for
the six-month period ended June 30,
2007), and assuming all Rights are
exercised, the Subscription Price
would be 7.4% below the NAV per
Share, resulting in a reduction of
such NAV of approximately $0.07 per
Share, or less than 0.8%. Further,
if you do not submit subscription
requests pursuant to the
Over-Subscription Privilege, you may
experience dilution in your holdings
if All-Star offers additional Shares
for subscription. All-Star may sell
5
additional Shares to shareholders if
and to the extent that Shares issued
through the Offer would not cause
any undue dilution of the Shares.
See "Special Considerations and Risk
Factors - Dilution".
Closed-end Fund Discounts.... Shares of closed-end funds
frequently trade at a market price
that is less than the value of the
net assets attributable to those
shares. The possibility that Shares
of All-Star will trade at a discount
from NAV is a risk separate and
distinct from the risk that
All-Star's NAV will decrease. The
risk of purchasing shares of a
closed-end fund that might trade at
a discount is more pronounced for
investors who wish to sell their
shares in a relatively short period
of time because, for those
investors, realization of a gain or
loss on their investments is likely
to be more dependent upon the
existence of a premium or discount
than upon portfolio performance. See
"Share Price Data".
Investment and Market Risk.... An investment in Shares is subject
to investment risk, including the
possible loss of the entire amount
that you invest. Your investment in
Shares represents an indirect
investment in the securities owned
by All-Star, most of which are
anticipated to be traded on a
national securities exchange or in
the over-the-counter markets. The
value of these securities, like
other market investments, may move
up or down, sometimes rapidly and
unpredictably. Your Shares at any
point in time may be worth less than
your original investment, even after
taking into account the reinvestment
of dividends and other
distributions.
Common Stock Risk............ All-Star is not limited in the
percentage of its assets that may be
invested in common stocks and other
equity securities, and therefore a
risk of investing in All-Star is
equity risk. Equity risk is the risk
that the market value of securities
held by All-Star will fall due to
general market or economic
conditions, perceptions regarding
the industries in which the issuers
of securities held by All-Star
participate, and the particular
circumstances and performance of
particular companies whose
securities All-Star holds. In
addition, common stock of an issuer
in All-Star's portfolio may decline
in price if the issuer fails to make
anticipated dividend payments
because, among other reasons, the
issuer of the security experiences a
decline in its financial condition.
Common equity securities in which
All-Star will invest are
structurally subordinated to
preferred stocks, bonds and other
debt instruments in a company's
capital structure, in terms of
priority to corporate income, and
therefore will be subject to greater
payment risk than preferred stocks
or debt instruments of such issuers.
6
In addition, while broad market
measures of common stocks have
historically generated higher
average returns than fixed income
securities, common stocks have also
experienced significantly more
volatility in their returns.
Preferred Securities Risk........ Preferred equity securities involve
credit risk, which is the risk that
a preferred equity security will
decline in price, or fail to pay
dividends when expected, because the
issuer experiences a decline in its
financial status. In addition to
credit risk, investment in preferred
equity securities involves certain
other risks. Certain preferred
equity securities contain provisions
that allow an issuer under certain
conditions to skip distributions (in
the case of "non-cumulative"
preferred equity securities) or
defer distributions (in the case of
"cumulative" preferred equity
securities). Preferred equity
securities often contain provisions
that allow for redemption in the
event of certain tax or legal
changes or at the issuers' call. In
the event of redemption, All-Star
may not be able to reinvest the
proceeds at comparable rates of
return. Preferred equity securities
typically do not provide any voting
rights, except in cases when
dividends are in arrears beyond a
certain time period, which varies by
issue. Preferred equity securities
are subordinated to bonds and other
debt instruments in a company's
capital structure in terms of
priority to corporate income and
liquidation payments, and therefore
will be subject to greater credit
risk than those debt instruments.
Preferred equity securities may be
significantly less liquid than many
other securities, such as U.S.
government securities, corporate
debt or common stock.
Convertible Security Risk....... Convertible securities generally
offer lower interest or dividend
yields than non-convertible
fixed-income securities of similar
credit quality because of the
potential for capital appreciation.
The market values of convertible
securities tend to decline as
interest rates increase and,
conversely, to increase as interest
rates decline. However, a
convertible security's market value
also tends to reflect the market
price of the common stock of the
issuing company, particularly when
the stock price is greater than the
convertible security's conversion
price. The conversion price is
defined as the predetermined price
or exchange ratio at which the
convertible security can be
converted or exchanged for the
underlying common stock. As the
market price of the underlying
common stock declines below the
conversion price, the price of the
convertible security tends to be
increasingly influenced more by the
yield of the convertible security
than by the market price of the
underlying common stock. Thus, it
may not decline in price to the same
extent as the underlying common
stock, and convertible securities
generally have less potential for
gain or loss than common stocks.
However, mandatory convertible
securities generally do not limit
the potential for loss to the same
extent as securities convertible at
the option of the holder. In the
event of a liquidation of the
issuing company, holders of
convertible securities would be paid
before that company's common
stockholders. Consequently, an
issuer's convertible securities
generally entail less risk than its
common stock. However, convertible
securities fall below debt
obligations of the same issuer in
order of preference or priority in
the event of a liquidation and are
typically unrated or rated lower
than such debt obligations. In
addition, contingent payment
convertible securities allow the
issuer to claim deductions based on
its nonconvertible cost of debt,
which generally will result in
deductions in excess of the actual
cash payments made on the securities
(and accordingly, holders will
recognize income in amounts in
7
excess of the cash payments
received). The convertible
securities in which the Fund invests
may be rated below investment grade.
See "Risks of Below-Investment Grade
Quality Securities".
Credit Risk........................ Credit risk is the risk that a
security in All-Star's portfolio
will decline in price or fail to
make dividend or interest payments
when due because the issuer of the
security experiences a decline in
its financial status. Preferred and
convertible securities are typically
subordinated to bonds and other debt
instruments in a company's capital
structure, in terms of priority to
corporate income, and therefore will
be subject to greater credit risk
than those debt instruments.
Management Risk................ All-Star is subject to management
risk because it is an actively
managed investment portfolio. AAI
and the Portfolio Managers will
apply investment techniques and risk
analyses in selecting Portfolio
Managers and making investment
decisions for All-Star,
respectively, but there can be no
guarantee that these will produce
the desired results.
Growth Stock Risk............... Growth stocks are stocks of
companies believed to have
above-average potential for growth
in revenue and earnings. In certain
market conditions, prices of growth
stocks may be more sensitive to
changes in current or expected
earnings than the prices of other
stocks. Growth stocks may not
perform as well as value stocks or
the stock market in general.
Value Stock Risk................. Value stocks are stocks of companies
that may have experienced adverse
8
business or industry developments or
may be subject to special risks that
have caused the stocks to be out of
favor and, in a Portfolio Manager's
opinion, undervalued. If the
Portfolio Manager's assessment of a
company's prospects is wrong, the
price of the company's stock may
fall or may not approach the value
the Portfolio Manager has placed on
it.
Foreign Securities Risk.......... Investments in foreign securities
involve risks in addition to those
of investments in U.S. issuers.
These risks include political and
economic risks, currency
fluctuations, higher transaction
costs, less liquidity and greater
volatility, delayed settlement,
confiscatory taxation, withholding
of taxes and less stringent investor
protection and disclosure of
standards in some foreign markets.
These risks can make investments in
foreign issuers more volatile and
potentially less liquid than
investments in U.S. issuers.
Tax Risk........................... All-Star may invest in preferred
securities, convertible securities,
or other securities the federal
income tax treatment of the income
from which may not be clear or may
be subject to recharacterization by
the Internal Revenue Service
("IRS"). The tax treatment of
distributions All-Star designates as
"qualified dividend income" may be
affected by IRS interpretations of
the Internal Revenue Code of 1986,
as amended (the "Code"), and future
changes in the Code and the
regulations thereunder. Moreover,
unless legislative action is taken,
the favorable tax treatment of
qualified dividend income, as well
as the 15% maximum federal income
tax rate on individuals' net capital
gain, will expire for taxable years
commencing after December 31, 2010.
See "Tax Matters". If All-Star has
significant holdings in securities
that generate qualified dividend
income, its Share price may be
volatile while Congress considers an
extension of that favorable tax
treatment, depending on the
anticipated outcome of the
legislation. There can be no
assurance as to what portion, if
any, of All-Star's distributions
will constitute qualified dividend
income.
Market Disruption Risk......... Certain events have a disruptive
effect on the securities markets,
such as terrorist attacks (including
the terrorist attacks in the United
States on September 11, 2001), war
and other geopolitical events.
All-Star cannot predict the effects
of similar events in the future on
the U.S. economy.
Inflation Risk..................... Inflation risk is the risk that the
value of assets or income from
investment will be worth less in the
future as inflation decreases the
9
value of money. As inflation
increases, the real value of the
shares and distributions can
decline.
Deflation Risk..................... Deflation risk is the risk that
prices throughout the economy
decline over time, which may have an
adverse effect on the market
valuation of companies, their assets
and revenues. In addition, deflation
may have an adverse effect on the
creditworthiness of issuers and may
make issuer default more likely,
which may result in a decline in the
value of All-Star's portfolio.
ANTI-TAKEOVER PROVISIONS
All-Star's Declaration of Trust and By-Laws have provisions (commonly
referred to as "anti-takeover provisions") that are intended to have the effect
of limiting the ability of other entities or persons to acquire control of
All-Star, to cause it to engage in certain transactions, or to modify its
structure. For instance, the affirmative vote of 75 percent of the Shares of the
Fund is required to authorize All-Star's conversion from a closed-end to an
open-end investment company, unless such conversion is recommended by the Board
of Trustees, in which event such conversion would only require the majority vote
of the shareholders, as defined in the 1940 Act. A similar shareholder vote is
required to authorize a merger, sale of a substantial part of the assets or
similar transactions with persons beneficially owning five percent or more of
All-Star's Shares, unless approved by the Board of Trustees under certain
conditions. These provisions cannot be amended without a similar super-majority
vote. In addition, the Board of Trustees is divided into three classes, each of
which has a term of three years and only one of which is elected at each annual
meeting of shareholders. See "Description of Shares-Anti-takeover Provisions of
the Declaration of Trust; Super-Majority Vote Requirement for Conversion to
Open-End Status".
DISPOSITION OF SHARES
You will be free to dispose of your Shares on the NYSE or other markets on
which the Shares may trade, but, because All-Star is a closed-end fund, you do
not have the right to redeem your Shares.
DISTRIBUTIONS
All-Star currently has a policy of paying distributions on its Shares
totaling approximately 10% of its NAV per year, payable in four quarterly
distributions of 2.5% of its NAV at the close of the NYSE on the Friday prior to
each quarterly declaration date. These fixed distributions, which are not
necessarily related to All-Star's net investment income or net realized capital
gains or losses, are taxable in any taxable year, up to the amount of All-Star's
current and accumulated earnings and profits ("E&P"), as ordinary dividend
income (which includes not only net investment income but also the excess of
short-term capital gain over net long-term capital loss ("short-term gain")),
qualified dividend income (taxable at a maximum 15% federal income tax rate for
individuals), or long-term capital gain to the extent they are attributable to
such income or gain All-Star earned for that year. (See "Tax Matters"). If, for
10
any taxable year, the total distributions made under All-Star's distribution
policy exceed its E&P, the excess will be treated as a non-taxable return of
capital to each shareholder (up to the amount of the shareholder's basis in his
or her Shares) and thereafter as gain from the sale of Shares. The amount
treated as a non-taxable return of capital will reduce the shareholder's
adjusted basis in his or her Shares, thereby increasing potential gain or
reducing potential loss on the subsequent sale of those Shares.
Subject to maintaining its status as a regulated investment company for
federal tax purposes ("RIC") (see "Tax Matters"), All-Star may, in the
discretion of the Board of Trustees, retain for reinvestment, and not
distribute, net investment income or net long-term capital gain in excess of net
short-term capital loss ("net capital gain") for any taxable year to the extent
that its net investment income and net realized gains exceed the amount to be
distributed for that year under its distribution policy. Retained net capital
gain will be taxed to All-Star and designated by it as long-term capital gains
within 60 days after the end of the taxable year in which the gains were
recognized. Under those circumstances, each shareholder will be required to
include in gross income a proportionate share of that gain but will be able to
claim a proportionate share of the federal income tax All-Star paid as a credit
against his or her own federal income tax liability and will be entitled to
increase the adjusted tax basis in his or her Shares by the difference between
the amount taxed and the credit.
You should carefully consider your ability to assume the foregoing risks
before making an additional investment in All-Star. An investment in Shares of
All-Star is not appropriate for all investors.
11
EXPENSES
These are the expenses that an investor incurs when buying Shares, whether
pursuant to the Offer, in the open-market or through All-Star's Automatic
Dividend Reinvestment and Cash Purchase Plan, as amended ("Plan").
SHAREHOLDER TRANSACTION EXPENSES
Sales Load..................................... None (1)
Automatic Dividend Reinvestment and
Cash Purchase Plan Fees........................ $1.25 per voluntary
cash investment
____________________
(1) No sales load or commission will be payable in connection with the
Offer. Purchases of Shares through brokers in secondary market transactions are
subject to brokers' commissions and charges.
ANNUAL EXPENSES (as a percentage of net assets attributable to Shares)
Management Fees...................................................... [0.71]%
Other Expenses....................................................... [0.30]%
Total Annual Expenses................................................ [1.01]%
EXAMPLE: You would pay the following expenses on an investment (at NAV) of
$1,000, assuming a 5% annual return and reinvestment of all dividends and
distributions at NAV.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$[103] $[321] $[558] $[1,235]
THE TABLES AND THE EXAMPLE ABOVE ARE INTENDED TO ASSIST INVESTORS IN
UNDERSTANDING THE VARIOUS COSTS AND EXPENSES THAT AN INVESTOR WILL BEAR DIRECTLY
AND INDIRECTLY IN PURCHASING AND OWNING SHARES. THE FIGURES IN THE EXAMPLE ARE
INTENDED TO ILLUSTRATE THE EFFECT OF ALL-STAR'S EXPENSES, WHICH MAY BE HIGHER OR
LOWER THAN THOSE SHOWN.
The numbers shown under the Annual Expenses table are projections based on
All-Star's actual expenses for the year ended December 31, 2006, and on its
projected net assets assuming the Offer is fully subscribed for at the Estimated
Purchase Price of $[______] per Share. See "Financial Highlights" for All-Star's
actual ratio of expenses to average net assets for the year ended December 31,
2006.
12
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand
All-Star's financial performance. Information is shown for All-Star's last ten
fiscal years. Certain information reflects financial results from a single
Share. The information for the fiscal years ended December 31, 1999 through
December 31, 2006 has been audited by PricewaterhouseCoopers LLP, independent
registered public accounting firm. The information included in All-Star's
financial statements for periods prior to 1999 had been audited by other
independent auditors, whose report expressed an unqualified opinion on those
financial statements and financial highlights. The report of the independent
registered public accounting firm, together with the financial statements of
All-Star, are included in All-Star's December 31, 2006 Annual Report and are
incorporated by reference into the Statement of Additional Information (see
cover page).
13
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
PER SHARE OPERATING PERFORMANCE: 2006 2005 2004 2003 2002
NAV at beginning of year............................... $8.85 $9.30 $9.13 $7.14 $10.65
Income from Investment Operations:
Net investment income........................... 0.04 0.02 0.02 0.01 0.01
Net realized and unrealized gain (loss) on
investments and foreign currency............. 0.75 0.40 1.09 2.76 (2.56)
Total from Investment Operations....................... 0.79 0.42 1.11 2.77 (2.55)
Less Distributions from:
Net investment income........................... (0.04) (0.02) (0.02) (0.01) (0.01)
Realized capital gain........................... (0.81) (0.56) (0.66) (0.30) (0.02)
Paid in capital................................. (0.03) (0.29) (0.21) (0.47) (0.85)
Total Distributions.................................... (0.88) (0.87) (0.89) (0.78) (0.88)
Change due to rights offering (a)...................... ---- ---- (0.05) ---- (0.08)
Total Distributions and Rights
Offering........................................ (0.88) (0.87) (0.94) (0.78) (0.96)
NAV at end of year..................................... $8.76 $8.85 $9.30 $9.13 $7.14
Market price at end of year............................ $8.29 $8.28 $9.56 $9.46 $6.64
TOTAL INVESTMENT RETURN FOR SHAREHOLDERS: (b)
Based on NAV...........................................
Based on market price.................................. 10.4% 5.0% 13.0% 40.7% (25.0)%
11.7% (4.4)% 12.1% 56.7% (33.0)%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of year (millions)................... $1,372 $1,368 $1,372 $1,153 $869
Ratio of expenses to average net assets (c)............ 1.01% 0.99% 1.01% 1.04% 1.05%
Ratio of net investment income to average net
assets (c)...................................... 0.43% 0.20% 0.20% 0.11% 0.11%
Portfolio turnover rate................................ 72% 46% 57% 64% 83%
____________________
(a) Effect of All-Star's rights offerings for Shares at a price below NAV.
(b) Calculated assuming all distributions reinvested at the actual reinvestment price and all rights offerings were fully
subscribed under the terms of each offering.
(c) The benefits derived from custody credits and directed brokerage arrangements, if applicable, had an impact of less than
0.01%.
14
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
PER SHARE OPERATING PERFORMANCE: 2001 2000 1999 1998 1997
NAV at beginning of year............................... $13.61 $14.02 $14.22 $13.32 $11.95
Income from Investment Operations:
Net investment income........................... 0.03 0.05 0.05 0.05 0.05
Net realized and unrealized gain (loss) on
investments and foreign currency............. (1.79) 0.96 1.22 2.35 3.01(a)
Total from Investment Operations....................... (1.76) 1.01 1.27 2.40 2.70
Less Distributions from:
Net investment income.......................... (0.03) (0.06) (0.05) (0.05) (0.05)
Realized capital gain.......................... (1.17) (1.36) (1.34) (1.35) (1.28)
Total Distributions.................................... (1.20) (1.42) (1.39) (1.40) (1.33)
Change due to rights offering (b)...................... ---- ---- ---- (0.10) ----
Impact of Shares issued in dividend reinvestment (c)... ---- ---- (0.08) ---- ----
Total Distributions, Reinvestments and Rights
Offering........................................ (1.20) (1.42) (1.47) (1.50) (1.33)
NAV at end of year..................................... $10.65 $13.61 $14.02 $14.22 $13.32
Market price at end of year............................ $11.09 $12.375 $11.063 $12.938 $13.313
TOTAL INVESTMENT RETURN FOR SHAREHOLDERS: (d)
Based on NAV........................................... (12.7)% 8.8% 10.2% 19.8% 26.6%
Based on market price.................................. 0.0% 25.4% (4.4)% 9.1% 34.4%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of year (millions)................... $1,133 $1,376 $1,396 $1,351 $1,150
Ratio of expenses to average net assets (e)............ 1.03% 0.96% 0.97% 1.00% 1.01%
Ratio of net investment income to average net
assets (e)..................................... 0.27% 0.37% 0.37% 0.39% 0.38%
Portfolio turnover rate................................ 64% 83% 90% 76% 99%
___________________
(a) Before provision for federal income tax
(b) Effect of All-Star's rights offerings for Shares at a price below NAV.
(c) Effect of payment of a portion of distributions in newly issued Shares valued at a discount from NAV.
(d) Calculated assuming all distributions reinvested at the actual reinvestment price and all rights offerings were fully
subscribed under the terms of each offering.
(e) The benefits derived from custody credits and directed brokerage arrangements, if applicable, had an impact of less than
0.01%.
15
SHARE PRICE DATA
All-Star's Shares were listed on the NYSE on October 24, 1986. The Shares
are listed and traded on the NYSE under the symbol "USA". The following table
sets forth for the calendar quarters indicated: (i) the high and low sales
prices for Shares, as reported in the consolidated transaction reporting system;
(ii) the NAV per share on the day or days when the Shares traded at such high
and low sales prices; and (iii) the percentage by which the Shares traded at a
premium over, or discount from, All-Star's NAV per share on the day or days when
the Shares traded at such high and low sales prices.
High Low
Sales Price NAV Premium (Discount) Sales Price NAV Premium (Discount)
----------- --- ------------------ ----------- --- ------------------
2005
1st Quarter 9.65 9.21 4.8% 8.64 8.60 0.5%
2nd Quarter 9.15 8.71 5.1% 8.50 8.27 2.8%
3rd Quarter 9.57 9.13 4.8% 8.77 8.61 1.9%
4th Quarter 9.00 8.75 2.9% 8.13 8.85 -8.1%
2006
1st Quarter 8.77 9.07 -3.3% 8.19 8.98 -8.8%
2nd Quarter 8.44 8.93 -5.5% 7.06 8.07 -12.5%
3rd Quarter 7.86 8.47 -7.2% 7.11 8.02 -11.3%
4th Quarter 8.31 8.80 -5.6% 7.76 8.46 -8.3%
2007
1st Quarter 8.75 9.08 -3.6% 8.07 8.29 -2.7%
2nd Quarter 9.19 9.28 -1.0% 8.48 9.08 -6.6%
All-Star's Shares have traded in certain periods at a discount from their
NAV. Certain features of and steps taken by All-Star may have tended to reduce
the discount from NAV at which its Shares might otherwise have traded, although
All-Star is not able to determine what effect, if any, these various features
and steps may have had. All-Star's current 10% distribution policy (see
"Distributions; Automatic Dividend Reinvestment and Cash Purchase Plan - 10%
Distribution Policy"), begun in June 1988, may have contributed to this effect.
This trend may also have resulted in whole or in part from other factors, such
as All-Star's investment performance and increased attention directed to
All-Star by securities analysts and market letters.
On [________], 2007 the NAV per share was $[_______] and the last reported
sales price was $[_________], representing a [discount from/premium to] NAV per
share of [__] %.
INVESTMENT PERFORMANCE
The table below shows two measures of All-Star's return to investors for
the one, five, ten, fifteen and twenty year periods through June 30, 2007. No. 1
("All-Star") shows All-Star's investment performance based on a valuation of its
Shares at NAV. No. 2 ("All-Star Price") shows All-Star's investment performance
based on the market price of All-Star's Shares. Both measures assume
16
reinvestment of all of All-Star's dividends and distributions in additional
Shares pursuant to All-Star's Automatic Dividend Reinvestment and Cash Purchase
Plan (see "Distributions; Automatic Dividend Reinvestment and Cash Purchase
Plan"), and full participation in All-Star's 1992, 1993, 1994, 1998, 2002 and
2004 rights offerings under the terms of each offering.
The Lipper Large-Cap Core Mutual Fund Average has been included so that
All-Star's results may be compared with an unweighted average of the total
return of open-end mutual funds classified as large-cap core funds (i.e., mutual
funds having investment objectives and policies comparable to All-Star)
published by Lipper, Inc. The Lipper Large-Cap Core Mutual Fund Average
information reflects the total return of the mutual funds included in the
average, in each case assuming reinvestment of dividends and distributions. The
record of the S&P 500 Index has also been included so that All-Star's results
may be compared with those of an unmanaged group of securities widely regarded
by investors as representative of the stock market in general. The S&P 500 Index
is a broad based capitalization-weighted index which reflects the total return
of the securities included in the index.
---------------------------------- --------------- ---------------- ------------------------------ -------------
NO. 1 NO. 2 LIPPER LARGE-CAP S&P
ALL-STAR NAV ALL-STAR PRICE CORE MUTUAL FUND AVERAGE 500 INDEX
---------------------------------- --------------- ---------------- ------------------------------ -------------
1 Year beginning July 1, 2006 20.7% 32.4% 19.6% 20.6%
---------------------------------- --------------- ---------------- ------------------------------ -------------
5 Years beginning July 1, 2002 12.3% 11.8% 9.3% 10.7%
---------------------------------- --------------- ---------------- ------------------------------ -------------
10 Years beginning 7.4% 7.6% 6.1% 7.1%
July 1, 1997
---------------------------------- --------------- ---------------- ------------------------------ -------------
15 Years beginning 10.7% 10.5% 10.0% 11.2%
July 1, 1992
---------------------------------- --------------- ---------------- ------------------------------ -------------
20 Years beginning 10.7% 11.8% 9.7% 10.8%
July 1, 1987
---------------------------------- --------------- ---------------- ------------------------------ -------------
The returns shown are the average annual return for the period indicated to
June 30, 2007.
The above results represent All-Star's past performance and are not
intended as a prediction of its future performance. The investment return, NAV
and market value of All-Star's Shares will fluctuate, so that such Shares when
sold may be worth more or less than their original cost.
THE OFFER
TERMS OF THE OFFER
All-Star is issuing to Record Date Shareholders non-transferable Rights to
subscribe for the additional Shares, without par value. Each Record Date
Shareholder is being issued one Right for each Share owned on the Record Date.
No Rights will be issued for fractional Shares. The Rights entitle the holder to
acquire in the Primary Subscription at the Subscription Price one Share for each
ten Rights held. Accordingly, Shares may be purchased only pursuant to the
17
exercise of Rights in integral multiples of ten. Rights may be exercised at any
time during the Subscription Period, which commences on [__________], 2007 and
ends at 5:00 p.m., New York City time, on [__________], 2007, the Expiration
Date.
In addition, any Record Date Shareholder who fully exercises all Rights
issued to him or her in the Primary Subscription (other than those Rights that
cannot be exercised because they represent the right to acquire less than one
Share) will be entitled to subscribe for Shares that were not otherwise
subscribed for by others in the Primary Subscription. For purposes of
determining the number of Shares a Record Date Shareholder may acquire pursuant
to the Offer, broker-dealers whose Shares are held of record on the Record Date
by Cede or by any other depository or nominee will be deemed to be the holders
of the Rights that are issued to Cede or such other depository or nominee on
their behalf. If enough Shares are available, all Record Date Shareholder
requests to buy Shares that were not bought by other Record Date Shareholders
will be honored in full. If the requests for Shares exceed the Shares available,
All-Star may, at its discretion, issue up to an additional 25% of the Shares
available pursuant to the Offer in order to honor such over-subscriptions.
All-Star may sell additional Shares to Record Date Shareholders if and to the
extent that Shares issued through the Offer would not cause any undue dilution
(reduction) of the NAV of the Shares. Whether or not All-Star determines to
issue additional Shares to honor all over-subscriptions, Shares will be
allocated pro rata among those Record Date Shareholders who over-subscribe based
on the number of Rights originally issued to them by All-Star. Shares acquired
pursuant to the Over-Subscription Privilege are subject to allotment, which is
more fully discussed under "Over-Subscription Privilege".
The Rights are not transferable. Therefore, only the underlying Shares, and
not the Rights, will be admitted for trading on the NYSE. Since fractional
Shares will not be issued, Record Date Shareholders who receive, or who are left
with, fewer than ten Rights will be unable to exercise such Rights and will not
be entitled to receive any cash in lieu thereof.
The Rights will be evidenced by Subscription Certificates, which will be
mailed to Record Date Shareholders with addresses in the United States. See
"Foreign Restrictions". Rights may be exercised by completing a Subscription
Certificate and delivering it, together with payment by means of (i) a check or
money order, or (ii) a Notice of Guaranteed Delivery, to the Subscription Agent
during the Subscription Period. The method by which Rights may be exercised and
Shares paid for is set forth under "Method of Exercise of Rights" and "Payment
for Shares."
PURPOSE OF THE OFFER
The Board of Trustees has determined that (i) it would be in the best
interests of All-Star and its shareholders to increase the assets of All-Star
available for investment, thereby permitting All-Star to be in a better position
to more fully take advantage of investment opportunities consistent with
All-Star's investment objective that may arise, and (ii) the potential benefits
of the Offer to All-Star and its shareholders will outweigh the dilution to
shareholders who do not fully exercise their Rights. The Board of Trustees voted
unanimously to approve the terms of the Offer as set forth in this prospectus.
18
In reaching its decision, the Board of Trustees considered, among other
things, advice by AAI that the proceeds of the Offer will enable the Portfolio
Managers to take advantage of perceived investment opportunities without having
to sell existing portfolio holdings, which they otherwise would retain. The
Board of Trustees considered that the Offer seeks to reward investors by giving
existing Shareholders the opportunity to purchase additional Shares at a price
below market and/or NAV and without brokerage commissions. In addition, the
Board of Trustees considered that the Offer will enhance the likelihood that
All-Star will continue to have sufficient assets remaining after the
distributions called for by its current 10% distribution policy to permit
All-Star to maintain the current ratio of its fixed expenses to its net assets.
Finally, the Board of Trustees considered that, because the Subscription
Price per Share may be less than the NAV per Share on the Pricing Date, the
Offer may result in dilution of All-Star's NAV per Share. The Board of Trustees
believes that the factors in favor of the Offer outweigh this possible dilution.
See "Special Considerations and Risk Factors - Dilution".
AAI, AFS and the Portfolio Managers will benefit from the Offer because
their fees are based on the average daily net assets of All-Star. See
"Management of All-Star". It is not possible to state precisely the amount of
additional compensation they will receive as a result of the Offer because it is
not known how many Shares will be subscribed for and because the net proceeds of
the Offer will be invested in additional portfolio securities that will
fluctuate in value. One of All-Star's Trustees who voted to authorize the Offer
is an "interested person," within the meaning of the 1940 Act, of AAI, and
therefore could benefit indirectly from the Offer. The other six Trustees are
not "interested persons" of All-Star or AAI.
All-Star may, in the future and at its discretion, choose to make
additional rights offerings from time to time for a number of Shares and on
terms which may or may not be similar to the Offer. Any such future rights
offering will be made in accordance with the then applicable requirements of the
1940 Act and the Securities Act of 1933, as amended. In 1992, All-Star completed
a rights offering to shareholders of 5,464,168 Shares at a subscription price of
$10.05 per Share, for proceeds to All-Star after expenses of approximately
$54,683,782. In 1993, All-Star completed a second rights offering to
shareholders of 4,227,570 Shares at a subscription price of $10.41 per Share,
for proceeds to All-Star after expenses of approximately $43,759,004. In 1994,
All-Star completed a third rights offering to shareholders of 4,704,931 Shares
at a subscription price of $9.14 per Share, for proceeds to All-Star after
expenses of approximately $42,793,069. In 1998, All-Star completed a fourth
rights offering to shareholders of 4,318,134 Shares at a subscription price of
$12.83 per Share, for proceeds to All-Star after expenses of approximately
$55,166,659. In 2002, All-Star completed a fifth rights offering to shareholders
of 10,688,506 Shares at a subscription price of $8.99 per Share, for proceeds to
All-Star after expenses of approximately $95,753,976. In 2004, All-Star
completed a sixth rights offering to shareholders of 15,841,927 Shares at a
subscription price of $8.34 per Share, for proceeds to All-Star after expenses
of approximately $131,705,875. All six rights offerings were oversubscribed.
OVER-SUBSCRIPTION PRIVILEGE
If all of the Rights initially issued in the Primary Subscription are not
exercised, any Shares for which Subscriptions have not been received ("Excess
Shares") will be offered, by means of the Over-Subscription Privilege, to Record
19
Date Shareholders who have exercised all Rights initially issued to them and who
wish to acquire more than the number of Shares for which Rights issued to them
are exercisable. Record Date Shareholders who exercise all Rights initially
issued to them will have the opportunity to indicate on the Subscription
Certificate how many Shares they are willing to acquire pursuant to the
Over-Subscription Privilege. If sufficient Excess Shares remain, all
over-subscriptions will be honored in full. If sufficient Excess Shares are not
available to honor all over-subscriptions, All-Star may, at the discretion of
the Board of Trustees, issue up to an additional 25% of the Shares available
pursuant to the Primary Subscription, to satisfy over-subscription requests.
All-Star may sell additional Shares to Record Date Shareholders if and to the
extent that Shares issued through the Offer would not cause any undue dilution
(reduction) of the NAV of the Shares. Whether or not All-Star determines to
issue additional Shares to honor all over-subscriptions, available Excess Shares
will be allocated (subject to elimination of fractional Shares) among Record
Date Shareholders who over-subscribe based on the number of Rights originally
issued to them.
The method by which Excess Shares will be distributed and allocated
pursuant to the Over-Subscription Privilege is as follows. Excess Shares will be
available for purchase pursuant to the Over-Subscription Privilege only to the
extent that the maximum number of Shares is not subscribed for through the
exercise of the Primary Subscription by the Expiration Date. If the Excess
Shares are not sufficient to satisfy all subscriptions pursuant to the
Over-Subscription Privilege, the Excess Shares will be allocated pro rata
(subject to the elimination of fractional Shares) among those Record Date
Shareholders exercising the Over-Subscription Privilege, in proportion, not to
the number of Shares requested pursuant to the Over-Subscription Privilege, but
to the number of Shares held on the Record Date; provided, however, that if this
pro rata allocation results in any Record Date Shareholders being allocated a
greater number of Excess Shares than the Record Date Shareholder subscribed for
pursuant to the exercise of such Record Date Shareholder's Over-Subscription
Privilege, then such Record Date Shareholder will be allocated only such number
of Excess Shares as such Record Date Shareholder subscribed for and the
remaining Excess Shares will be allocated among all other Record Date
Shareholders exercising Over-Subscription Privileges. The formula to be used in
allocating the Excess Shares is as follows:
RECORD DATE SHAREHOLDER'S RECORD DATE POSITION X EXCESS SHARES REMAINING
----------------------------------------------
TOTAL RECORD DATE POSITION OF ALL OVERSUBSCRIBERS
The allocation process with regard to any additional Shares All-Star may
offer may involve a similar allocation process as to Excess Shares. All-Star
will not offer or sell any Shares that are not subscribed for under the Primary
Subscription or the Over-Subscription Privilege.
SUBSCRIPTION PRICE
The Subscription Price for the Shares to be issued pursuant to the Offer
will be equal to 95% of the lower of (i) the last reported sale price of a Share
on the NYSE on the Pricing Date, or (ii) the NAV of a Share on the Pricing Date.
The Subscription Price will be lower than All-Star's then current NAV per share.
20
All-Star announced the terms of the Offer before the opening of trading on
the NYSE on August 7, 2007. The NAV per Share at the close of business on August
6, 2007 and on [__________], 2007 was $8.71 and $[________], respectively, and
the last reported sale price of a Share on the NYSE on those dates was $8.42 and
$[_____], respectively, representing a 3.3% discount and a [__]% [discount],
respectively, in relation to the NAV per Share at the close of business on those
dates.
EXPIRATION OF THE OFFER
The Offer will expire at 5:00 p.m., New York City time, on [__________],
2007. Rights will expire on the Expiration Date and thereafter may not be
exercised, unless the Offer is extended. Since the Expiration Date is prior to
the Pricing Date, Record Date Shareholders who decide to acquire Shares in the
Primary Subscription or pursuant to the Over-Subscription Privilege will not
know, when they make such decision, what the final Subscription Price for such
Shares will be.
Any extension, termination, or amendment of the Offer will be followed as
promptly as practicable by announcement thereof, such announcement in the case
of an extension to be issued no later than 9:00 a.m., New York City time, on the
next business day following the previously scheduled Expiration Date. Without
limiting the manner in which All-Star may choose to make such announcement,
All-Star will not, unless otherwise required by law, have any obligation to
publish, advertise, or otherwise communicate any such announcement other than by
making a release to the Dow Jones News Service or such other means of
announcement as All-Star deems appropriate.
SUBSCRIPTION AGENT
The Subscription Agent is Computershare Trust Company, N.A., P.O. Box
859208, Braintree, Massachusetts 02185-9208. Computershare Trust Company, N.A.,
is also All-Star's dividend paying agent, transfer agent and registrar. The
Subscription Agent will receive from All-Star a fee estimated at approximately
[$100,000] plus reimbursements for its out-of-pocket expenses related to the
Offer.
INFORMATION AGENT
Any questions or requests for assistance regarding the Offer may be
directed to the Information Agent at its telephone number and address listed
below:
THE ALTMAN GROUP, INC.
1200 WALL STREET WEST
LYNDHURST, NJ 07071
CALL TOLL FREE 1-800-[__________]
The Information Agent will receive a fee from All-Star estimated at
approximately [$50,000] and reimbursement for its out-of-pocket expenses related
to the Offer.
21
METHOD OF EXERCISE OF RIGHTS
Rights may be exercised by fully completing and signing the reverse side of
the Subscription Certificate and mailing it in the envelope provided, or
otherwise delivering the completed and signed Subscription Certificate to the
Subscription Agent, together with payment in full for the Shares as described
below under "Payment for Shares". Rights may also be exercised by a Record Date
Shareholder contacting his or her broker, bank or trust company, which can
arrange, on his or her behalf, to guarantee delivery of payment (using a "Notice
of Guaranteed Delivery") and of a properly completed and executed Subscription
Certificate. The broker, bank or trust company may charge a fee for this
service. Fractional Shares will not be issued. Record Date Shareholders who
receive, or who are left with, fewer than ten Rights will not be able to
exercise such Rights.
Completed Subscription Certificates and related payments must be received
by the Subscription Agent prior to 5:00 p.m., New York City time, on the
Expiration Date (unless payment is effected by means of a Notice of Guaranteed
Delivery as described below under "Payment for Shares") at the offices of the
Subscription Agent at one of the addresses set forth below.
The Subscription Certificate and payment should be sent to COMPUTERSHARE
TRUST COMPANY, N.A. by one of the following methods:
Subscription Certificate Delivery Method ADDRESS
---------------------------------------- -------
If By Mail: Computershare Trust Company, N.A.
Attn: Corporate Actions
P.O. Box 859208
Braintree, MA 02185-9208
If By Hand: Computershare Trust Company, N.A.
Attn: Corporate Actions
161 Bay State Drive
Braintree, MA 02184
If By Overnight Courier or Express Mail: Computershare Trust Company, N.A.
Attn: Corporate Actions
161 Bay State Drive
Braintree, MA 02184
By Broker-Dealer or other Nominee: Record Date Shareholders whose
(Notice of Guaranteed Delivery) Shares are held in a brokerage,
bank or trust account may contact
their broker or other nominee and
instruct them to submit a Notice
of Guaranteed Delivery and
payment on their behalf.
22
Delivery by any method or to any address not listed above will not constitute
good delivery.
All questions concerning the validity, form, eligibility (including times
of receipt and matters pertaining to beneficial ownership) and the acceptance of
Subscription Certificates and the Subscription Price will be determined by
All-Star, which determinations will be final and binding. No alternative,
conditional or contingent subscriptions will be accepted. All-Star reserves the
absolute right to reject any or all subscriptions not properly submitted or the
acceptance of which would, in the opinion of All-Star's counsel, be unlawful.
All-Star also reserves the right to waive any irregularities or conditions, and
All-Star's interpretations of the terms and conditions of the Offer shall be
final and binding. Any irregularities in connection with subscriptions must be
cured within such time, if any, as All-Star shall determine unless waived.
Neither All-Star nor the Subscription Agent shall be under any duty to give
notification of defects in such subscriptions or incur any liability for failure
to give such notification. Subscriptions will not be deemed to have been made
until such irregularities have been cured or waived.
PAYMENT FOR SHARES
Record Date Shareholders who subscribe for Shares in the Primary
Subscription or pursuant to the Over-Subscription Privilege may choose between
the following methods of payment:
(1) A subscription will be accepted by the Subscription Agent if,
prior to 5:00 p.m., New York City time, on the Expiration Date, the Subscription
Agent shall have received a Notice of Guaranteed Delivery, by facsimile or
otherwise, from a bank or trust company or a NYSE or National Association of
Securities Dealers member firm, guaranteeing delivery of (a) payment of the full
Subscription Price for Shares subscribed for in the Primary Subscription and any
additional Shares subscribed for pursuant to the Over-Subscription Privilege and
(b) a properly completed and executed Subscription Certificate. The Subscription
Agent will not honor a Notice of Guaranteed Delivery if a properly completed and
executed Subscription Certificate and full payment for the Shares is not
received by the Subscription Agent by [__________], 2007. The Notice of
Guaranteed Delivery may be delivered to the Subscription Agent in the same
manner as Subscription Certificates at the addresses set forth above, or may be
transmitted to the Subscription Agent by facsimile transmission (telecopy number
(781) [__________]; telephone number to confirm receipt (781) [__________].
(2) Alternatively, a Record Date Shareholder can, together with the
Subscription Certificate, send payment for Shares subscribed for in the Primary
Subscription and any additional Shares subscribed for pursuant to the
Over-Subscription Privilege to the Subscription Agent based on the Estimated
Subscription Price of $[_______] per Share. Please note that the Estimated
Subscription Price differs from the Estimated Purchase Price, which is presented
for illustration purposes only, shown on the cover page of this prospectus. To
be accepted, such payment, together with the Subscription Certificate, must be
received by the Subscription Agent prior to 5:00 p.m., New York City time, on
the Expiration Date. The Subscription Agent will deposit all monies received by
it prior to the final payment date into a segregated interest-bearing account
(which interest will be paid to All-Star) pending proration and distribution of
the Shares. THE SUBSCRIPTION AGENT WILL NOT ACCEPT CASH AS A MEANS OF PAYMENT
23
FOR SHARES. A PAYMENT PURSUANT TO THIS METHOD MUST BE IN UNITED STATES DOLLARS
BY MONEY ORDER OR CERTIFIED OR CASHIER'S CHECK DRAWN ON A BANK LOCATED IN THE
CONTINENTAL UNITED STATES, MUST BE PAYABLE TO LIBERTY ALL-STAR EQUITY FUND, AND
MUST ACCOMPANY A PROPERLY COMPLETED AND EXECUTED SUBSCRIPTION CERTIFICATE TO BE
ACCEPTED.
Within ten business days following the Expiration Date (the "Confirmation
Date"), a confirmation will be sent by the Subscription Agent to each Record
Date Shareholder exercising his or her Rights (or, if the Shares on the Record
Date are held by Cede or any other depository or nominee, to Cede or such other
depository or nominee), showing (i) the number of Shares acquired pursuant to
the Primary Subscription; (ii) the number of Shares, if any, acquired pursuant
to the Over-Subscription Privilege; (iii) the per Share and total purchase price
for the Shares; and (iv) any additional amount payable by such Record Date
Shareholder to All-Star or any excess to be refunded by All-Star to such Record
Date Shareholder, in each case based on the Subscription Price as determined on
the Pricing Date. Any additional payment required from a Record Date Shareholder
must be received by the Subscription Agent prior to 5:00 p.m., New York City
time, on [__________], 2007, and any excess payment to be refunded by All-Star
to such Record Date Shareholder will be mailed by the Subscription Agent with
the confirmation. All payments by a Record Date Shareholder must be in United
States dollars by money order or check drawn on a bank located in the United
States of America and be payable to LIBERTY ALL-STAR EQUITY FUND. All payments
will be held by the Subscription Agent in a segregated interest-bearing account
pending completion of the processing of the subscription, and will then be paid
to All-Star. Any interest earned on such amounts will accrue to All-Star and
none will be paid to the subscriber.
Whichever of the above two methods of payment is used, issuance and
delivery of the Shares subscribed for are subject to collection of checks and
actual payment pursuant to any Notice of Guaranteed Delivery.
Record Date Shareholders will have no right to rescind their subscription
after receipt of their payment for Shares by the Subscription Agent.
If a Record Date Shareholder who acquires Shares pursuant to the Primary
Subscription or the Over-Subscription Privilege does not make payment of any
amounts due, All-Star reserves the right to take any or all of the following
actions: (i) reallocate such subscribed and unpaid for Shares to Record Date
Shareholders exercising the Over-Subscription Privilege who did not receive the
full Over-Subscription requested; (ii) apply any payment actually received by it
toward the purchase of the greatest number of whole Shares which could be
acquired by such Record Date Shareholder upon exercise of the Primary
Subscription or the Over-Subscription Privilege; and (iii) exercise any and all
other rights or remedies to which it may be entitled, including, without
limitation, the right to set off against payments actually received by it with
respect to such subscribed Shares to enforce the relevant guaranty of payment or
monetary damages.
Record Date Shareholders whose Shares are held by a broker-dealer, bank,
trust company, depository or other nominee should contact the nominee to
exercise their Rights and request the nominee to exercise their Rights in
accordance with their instructions.
24
Brokers, banks, trust companies, depositories and other nominees who hold
Shares for the account of others should notify the respective beneficial owners
of such Shares as soon as possible to ascertain such beneficial owners'
intentions and to obtain instructions with respect to exercising the Rights. If
the beneficial owner so instructs, the record holder of such Rights should
complete Subscription Certificates and submit them to the Subscription Agent
with the proper payment.
The instructions contained on the Subscription Certificate should be read
carefully and followed in detail. DO NOT SEND SUBSCRIPTION CERTIFICATES TO
ALL-STAR. (They should be sent to Computershare Trust Company, N.A. as indicated
above.)
THE METHOD OF DELIVERY OF SUBSCRIPTION CERTIFICATES AND PAYMENT OF THE
SUBSCRIPTION PRICE TO THE SUBSCRIPTION AGENT WILL BE AT THE ELECTION AND RISK OF
THE RECORD DATE SHAREHOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT
SUBSCRIPTION CERTIFICATES AND PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY
INSURED, WITH RETURN RECEIPT REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE
ALLOWED TO ENSURE DELIVERY TO THE SUBSCRIPTION AGENT AND CLEARANCE OF PAYMENT
PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
DELIVERY OF STOCK CERTIFICATES
Participants in All-Star's Automatic Dividend Reinvestment and Cash
Purchase Plan who exercise the Rights issued on Shares held in their accounts in
the Plan will have their Shares acquired in the Primary Subscription and
pursuant to the Over-Subscription Privilege credited to their shareholder
dividend reinvestment accounts in the Plan. Record Date Shareholders whose
Shares are held of record by Cede or by any other depository or nominee on their
behalf or their broker-dealers' behalf will have their Shares acquired in the
Primary Subscription and pursuant to the Over-Subscription Privilege credited to
the account of Cede or such other depository or nominee. With respect to all
other Records Date Shareholders, stock certificates for all Shares acquired in
the Primary Subscription and pursuant to the Over-Subscription Privilege will be
delivered to subscribers who requested certificates, together with the
confirmation on or about [__________], 2007. A refund of the amount, if any,
paid in excess of the final Subscription Price will be mailed as soon as
practicable after the Confirmation Date. If the Record Date Shareholder's
confirmation shows that an additional amount is payable due to the final
Subscription Price exceeding the estimated Subscription Price, the stock
certificates will be mailed on or about [__________], 2007, provided that such
additional amount has been paid and payment for Shares subscribed for has
cleared, which clearance may take up to five days from the date of receipt of
the payment. If such payment does not clear within five business days from the
date of receipt, All-Star may exercise its rights in the event of nonpayment
under "Payment for Shares".
FOREIGN RESTRICTIONS
Record Date Shareholders whose record addresses are outside the United
States will receive written notice of the Offer; however, Subscription
Certificates will not be mailed to such shareholders. The Rights to which those
Subscription Certificates relate will be held by the Subscription Agent for such
25
foreign Record Date Shareholders' accounts until instructions are received in
writing with payment to exercise the Rights. If no such instructions are
received by the Expiration Date, such Rights will expire. See "Subscription
Agent".
FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of the significant federal income tax
consequences of the receipt of Rights by a Record Date Shareholder and a
subsequent lapse or exercise of Rights. The discussion is based on applicable
provisions of the Code, the Treasury Regulations promulgated thereunder and
other authorities currently in effect, all of which are subject to change,
possibly with a retroactive effect. The discussion does not purport to be
complete or to deal with all aspects of federal income taxation that may be
relevant to shareholders in light of their particular circumstances or to
shareholders subject to special treatment under the Code (such as insurance
companies, financial institutions, tax-exempt entities, employee benefit plans,
dealers in securities, foreign corporations and persons who are not U.S.
citizens or residents), and does not address any state, local or foreign tax
consequences. Accordingly, each Record Date Shareholder should consult his, her
or its own tax adviser with regard to the federal tax consequences of the Offer,
as well as the tax consequences arising under the laws of any state, foreign
country or other taxing jurisdiction.
For federal income tax purposes, neither the receipt nor the exercise of
the Rights by Record Date Shareholders will result in taxable income to them,
and they will realize no loss with respect to any Rights that expire without
being exercised. All-Star will realize no gain or loss on the issuance, exercise
or expiration of the Rights.
A Record Date Shareholder's holding period for a Share acquired on exercise
of Rights will begin with the date of exercise, and the shareholder's basis for
determining gain or loss on the sale of that Share will equal the sum of the
shareholder's basis in the Rights, if any, plus the Subscription Price for the
Share. A Record Date Shareholder's basis in exercised Rights will be zero unless
either (1) the Rights' fair market value on the date of distribution is 15% or
more of the fair market value on that date of the Shares with respect to which
the Rights were distributed, which All-Star considers to be unlikely, or (2) the
shareholder elects, on his, her or its federal income tax return for the taxable
year in which the Rights are received, to allocate part of the basis of those
Shares to the Rights. If either clause (1) or (2) applies, then if the Rights
are exercised, the shareholder will allocate his, her or its basis in the Shares
with respect to which the Rights were distributed between those Shares and the
Rights in proportion to their respective fair market values on the distribution
date. A Record Date Shareholder's gain or loss recognized on sale of a Share
acquired on the exercise of Rights will be a capital gain or loss (assuming the
Share was held as a capital asset at the time of sale) and will be long-term
capital gain or loss, taxable at a maximum federal income tax rate of 15% in the
case of a noncorporate shareholder, if the shareholder then holds the Share for
more than one year.
EMPLOYEE BENEFIT PLAN CONSIDERATIONS
Shareholders that are employee benefit plans subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") (including separate
profit sharing/retirement and savings plans, and plans for self-employed
individuals and their employees), and individual retirement accounts ("IRAs")
26
(collectively, "Retirement Plans") should be aware that additional contributions
of cash to a Retirement Plan (other than rollover contributions or
trustee-to-trustee transfers from other Retirement Plans) in order to exercise
Rights may, when taken together with contributions previously made, be treated
as excess or nondeductible contributions subject to excise taxes. In the case of
Retirement Plans qualified under section 401(a) of the Code, additional cash
contributions could cause violations of the maximum contribution limitations of
section 415 of the Code or other qualification rules. Retirement Plans in which
contributions are so limited should consider whether there is an additional
source of funds available within the Retirement Plan, including the liquidation
of assets, with which to exercise the Rights. Because the rules governing
Retirement Plans are extensive and complex, Retirement Plans contemplating the
exercise of Rights should consult with their counsel prior to such exercise.
Retirement Plans and other tax-exempt entities, including governmental
plans, should also be aware that if they borrow to finance their exercise of
Right, they become subject to tax on unrelated business taxable income under
section 511 of the Code. If any portion of an IRA is used as security for a
loan, that portion will be treated as a distribution to the IRA owner.
ERISA contains fiduciary responsibility requirements, and ERISA and the
Code contain prohibited transaction rules, that may impact the exercise of
Rights. Due to the complexity of these requirements and rules and the penalties
for non-compliance, Retirement Plans should consult with their counsel regarding
the consequences of their exercise of Rights under ERISA and the Code.
SPECIAL CONSIDERATIONS AND RISK FACTORS
The following discusses certain matters that should be considered, among
others, in connection with the Offer.
DILUTION
Record Date Shareholders who do not fully exercise their Rights will, upon
completion of the Offer, own a smaller proportional interest in All-Star than
they owned prior to the Offer. All-Star cannot tell you precisely how much
smaller the percentage of the Fund that you would own will be because All-Star
does not know how many Record Date Shareholders will exercise their Rights and
how many of their Rights they will exercise. Further, if you do not submit
subscription requests pursuant to the Over-Subscription Privilege, you may
experience dilution in your holdings if All-Star offers additional Shares for
subscription. All-Star may sell additional Shares to shareholders if and to the
extent that Shares issued through the Offer would not cause any undue dilution
of the NAV of the Shares.
All shareholders will experience an immediate dilution of the aggregate of
Shares as a result of the completion of the Offer because (i) the Subscription
Price per Share will be less than All-Star's NAV per Share on the Expiration
Date, (ii) All-Star will incur expenses in connection with the Offer, and (iii)
the number of Shares outstanding after the Offer will increase in a greater
percentage than the increase in the size of All-Star's assets. This dilution
also will affect Record Date Shareholders to a greater extent if they do not
exercise their Rights in full. It is not possible to state precisely the amount
of any decreases in either NAV or in ownership interests, because it is not
known at this time what the NAV per Share will be at the Expiration Date or what
proportion of the Shares will be subscribed. Finally, there may be a dilution of
27
earnings per Share due to the increase in the number of Shares outstanding, but
only to the extent that investments of the proceeds of the Offer do not achieve
the same return as current investments held by All-Star. To the extent such
investments achieve a better return than current investments; earnings per Share
will experience appreciation.
The following example assumes that all of the Shares are sold at the
Estimated Purchase Price of $[___________] and after deducting all expenses
related to the issuance of the Shares.
NAV Per Share on Dilution Per Share
[________], 2007 in Dollars
Primary Subscription or [___] Shares $ [________] $[________]
MARKET VALUE AND NAV
The shares of closed-end investment companies frequently trade at a
discount from NAV. This characteristic of shares of a closed-end fund is a risk
separate and distinct from the risk that All-Star's NAV may decrease. Since the
commencement of All-Star's operations, the Shares have traded in certain periods
in the market at a discount to NAV. The risk of purchasing shares of a
closed-end fund that might trade at a discount is more pronounced if you wish to
sell your shares in a relatively short period of time. If you do so, realization
of a gain or loss on your investment is likely to be more dependent upon the
existence of a premium or discount than upon portfolio performance. The Shares
are not subject to redemption. Investors desiring liquidity may, subject to
applicable securities laws, trade their Shares on any exchange where such Shares
are then trading at current market value, which may differ from the then current
NAV. Moreover, shareholders expecting to sell their Shares during the course of
the Offer should be aware that there is a greater risk that the potential
discount referred to above, which may increase during the Offer, will adversely
affect them. This increased risk is because, among other things, the market
price per Share may reflect the anticipated dilution that will result from this
Offer. All-Star cannot predict whether the Shares will trade at a discount or
premium to after completion of the Offer.
POSSIBLE SUSPENSION OF THE OFFER
As required by the SEC's registration form, All-Star has undertaken to
suspend the Offer until it amends this prospectus if, subsequent to the
effective date of All-Star's Registration Statement, All-Star's NAV declines
more than 10% from its NAV as of such effective date. All-Star will notify
Record Date Shareholders of any such decline and suspension and thereby permit
them to cancel their exercise of Rights.
USE OF PROCEEDS
If all of the Rights are exercised in full for Shares sold at the Estimated
Purchase Price of $[________] per Share, the net proceeds to All-Star are
estimated to be approximately $[________], after deducting expenses related to
the Offer payable by All-Star estimated at $450,000. If All-Star increases the
28
number of Shares subject to the Offer by 25% in order to satisfy
Over-Subscriptions, the proceeds will be approximately $[________]. However,
there can be no assurance that all Rights will be exercised in full, and the
Subscription Price will not be determined until the following business day after
the Expiration Date. AAI has advised All-Star that net proceeds of the Offer
will be invested by the Portfolio Managers in portfolio securities in accordance
with All-Star's investment objective and policies. It is anticipated that
investment of such net proceeds under normal market conditions will take place
during a period of approximately 30 days from their receipt by All-Star, and
would in any event be completed within three months. Pending such investment,
the net proceeds will be invested in short-term money market instruments (see
"Investment Objective, Policies and Risks - Repurchase Agreements").
THE MULTI-MANAGER METHODOLOGY
All-Star allocates its portfolio assets among a number of Portfolio
Managers, currently five in number, recommended by AAI and approved by the Board
of Trustees. Each Portfolio Manager employs a different investment style and/or
strategy, and from time to time AAI rebalances All-Star's portfolio among the
Portfolio Managers so as to maintain an approximately equal allocation of the
portfolio among them throughout all market cycles.
In the opinion of AAI, the multi-manager methodology provides advantages
over the use of a single manager because of the following primary factors:
(i) most equity investment management firms consistently employ a
distinct investment style which causes them to emphasize stocks with particular
characteristics;
(ii) because of changing investor preferences and market fluctuations,
any given investment style will generally move into and out of market favor and
will result in better performance under certain market conditions but poorer
performance under other conditions;
(iii) by allocating All-Star's portfolio on an approximately equal basis
among Portfolio Managers employing different styles, the impact of any one such
style on investment performance may be diluted, and the investment performance
of the total portfolio may be more consistent and less volatile over the
long-term than if a single style was employed throughout the entire period; and
(iv) consistent performance at a given annual rate of return over time
generally produces a higher rate of return for the long term than more volatile
performance having the same average annual rate of return.
AAI, based on the foregoing principles and on its analysis and evaluation
of information regarding the personnel and investment styles and performance of
a universe of numerous professional investment management firms, has selected
for appointment by All-Star a group of Portfolio Managers representing a
blending of different investment styles which, in its opinion, is appropriate to
All-Star's investment objective.
AAI continuously monitors the performance and investment styles of the
Portfolio Managers and from time to time recommends changes of Portfolio
Managers based on factors such as changes in a Portfolio Manager's investment
29
style or a departure by a Portfolio Manager from the investment style for which
it had been selected, a deterioration in a Portfolio Manager's performance
relative to that of other investment management firms practicing a similar
style, or adverse changes in its ownership or personnel. Portfolio Manager
changes may also be made to change the mix of investment styles employed by the
Portfolio Managers. Since its inception, All-Star has had fourteen Portfolio
Manager changes.
Portfolio Manager changes, as well as the periodic rebalancing of
All-Star's portfolio among the Portfolio Managers and the need to raise cash for
All-Star's quarterly distributions, may result in some portfolio turnover in
excess of what would otherwise be the case (see "Financial Highlights").
Increased portfolio turnover would cause increased brokerage commission costs to
All-Star, and may result in greater realization of capital gains, which are
taxable to shareholders.
Under the terms of an exemptive order issued to All-Star and AAI by the
SEC, a portfolio management agreement with a new or additional Portfolio Manager
may be entered into in advance of shareholder approval, provided that the new
agreement is at a fee no higher than that provided in, and is on terms and
conditions substantially similar to, All-Star's agreements with its other
Portfolio Managers, and that its continuance is subject to approval by
shareholders at All-Star's next regularly scheduled annual shareholder meeting
(normally held in April) following the date of the new or additional portfolio
management agreement. Information about Portfolio Manager changes or additions
made in advance of shareholder approval will be announced to the press following
Board of Trustees action and will be included in the next report to
shareholders.
All-Star's current Portfolio Managers are:
o Chase Investment Counsel Corporation
o Matrix Asset Advisors, Inc.
o Pzena Investment Management, LLC
o Schneider Capital Management Corporation
o TCW Investment Management Company
See Appendix A for information about these Portfolio Managers, including
the employees primarily responsible for the day-to-day management of the portion
of All-Star's portfolio allocated to each.
INVESTMENT OBJECTIVE, POLICIES AND RISKS
All-Star's investment objective is to seek total investment return,
comprised of long-term capital appreciation and current income. It seeks its
investment objective through investment primarily in a diversified portfolio of
equity securities.
30
Under normal market conditions, All-Star invests at least 80% of its net
assets (plus any borrowings for investment purposes) in equity securities,
defined as common stocks and securities convertible into common stocks such as
bonds and preferred stocks, and securities having common stock characteristics
such as warrants and rights to purchase equity securities (although, as a
non-fundamental policy, not more than 20% of the value of All-Star's total
assets may be invested in rights and warrants). The 80% component of this policy
only may be changed following provision of at least 60 days prior notice to
shareholders. All-Star may lend its portfolio securities, write covered call and
put options and engage in options and futures strategies (see "Investment
Practices").
Although under normal market conditions All-Star will remain substantially
fully invested in equity securities, up to 20% of the value of All-Star's net
assets may generally be invested in short-term money market instruments,
including certificates of deposit (negotiable certificates issued against bank
deposits), other interest-bearing bank deposits such as savings and money market
accounts, and bankers' acceptances (short-term bank-guaranteed credit
instruments used to finance transactions in goods) of domestic branches of U.S.
banks having assets of not less than $1 billion, obligations issued or
guaranteed by the U.S. Government and its agencies and instrumentalities ("U.S.
Government Securities"), commercial paper (unsecured short-term promissory notes
issued by corporations) rated not lower than A-1 by Standard & Poor's, a
division of the McGraw-Hill Companies, Inc. ("S&P"), or Prime-1 by Moody's
Investors Service, Inc. ("Moody's"), short-term corporate debt securities rated
not lower than AA by S&P or AA by Moody's, and repurchase agreements with
respect to the foregoing (collectively, "Short-Term Money Market Instruments").
All-Star may temporarily invest without limit in Short-Term Money Market
Instruments for defensive purposes when AAI or the Portfolio Managers deem that
market conditions are such that a more conservative approach to investment is
desirable. Taking a temporary defensive position may prevent All-Star from
achieving its investment objective.
All-Star's investment objective of seeking total investment return and its
policy of investing under normal market conditions at least 80% of the value of
its net assets (plus borrowings for investment purposes) in equity securities,
as well as certain of its investment restrictions referred to under "Reducing
Investment Risk" and in the Statement of Additional Information, are fundamental
and may not be changed without a majority vote of All-Star's outstanding Shares.
Under the 1940 Act, a "majority vote" means the vote of the lesser of (a) 67% of
the Shares of All-Star represented at a meeting at which the holders of more
than 50% of the outstanding Shares of All-Star are present or represented, or
(b) more than 50% of the outstanding Shares of All-Star. Non-fundamental
policies may be changed by vote of the Board of Trustees.
INVESTMENT PRACTICES
The following describes certain of the investment practices in which one or
more of the Portfolio Managers may engage, each of which may involve certain
special risks.
LENDING OF PORTFOLIO SECURITIES. Although All-Star has not to date engaged
in securities lending, consistent with applicable regulatory requirements,
All-Star, in order to generate additional income, may lend its portfolio
securities (principally to broker-dealers) where such loans are callable at any
31
time and are continuously secured by collateral (cash or U.S. Government
Securities) equal to not less than the market value, determined daily, of the
securities loaned. All-Star would receive amounts equal to the interest on the
securities loaned. It would also be paid for having made the loan. Any cash
collateral pursuant to these loans would be invested in Short-Term Money Market
Instruments. All-Star could be subjected to delays in recovering the loaned
securities in the event of default or bankruptcy of the borrower. All-Star will
limit such lending to not more than 30% of the value of All-Star's total assets.
All-Star may pay fees to its custodian bank or others for administrative
services in connection with securities loans.
REPURCHASE AGREEMENTS. All-Star may enter into repurchase agreements with
banks or broker-dealer firms whereby such institutions sell U.S. Government
Securities or other securities in which it may invest to All-Star and agree at
the time of sale to repurchase them at a mutually agreed upon time and price.
The resale price is greater than the purchase price, reflecting an agreed-upon
interest rate that is effective during the time between the purchase and resale
and is not related to the stated interest rate on the purchased securities.
All-Star requires the seller of the securities to maintain on deposit with
All-Star's custodian bank securities in an amount at all times equal to or in
excess of the value of the repurchase agreement. In the event that the seller of
the securities defaults on its repurchase obligation or becomes bankrupt,
All-Star could receive less than the repurchase price on the sale of the
securities to another party or could be subjected to delays in selling the
securities. Under normal market conditions, not more than 20% of All-Star's net
assets will be invested in Short-Term Money Market Instruments, including
repurchase agreements, and not more than 10% of All-Star's net assets will be
invested in repurchase agreements maturing in more than seven days.
SECURITIES OF OTHER INVESTMENT COMPANIES. All-Star may invest in the
securities of other investment companies, including open-end mutual funds,
closed-end funds, unit investment trusts, private investment companies and
offshore investment companies. An investment in an investment company involves
risks similar to those of investing directly in the investment company's
portfolio securities, including the risk that the value of the portfolio
securities may fluctuate in accordance with changes in the financial condition
of their issuers, the value of stocks and other securities generally, and other
market factors.
In addition, investing in other investment companies involves certain other
risks, costs, and expenses for All-Star. If All-Star invests in another
investment company, All-Star will be charged its proportionate share of the
advisory fees and other operating expenses of such investment company, which are
in addition to the advisory fees and other operational expenses charged to
All-Star. In addition, All-Star could incur a sales charge in connection with
purchasing an investment company security or a redemption fee upon the
redemption of such security. An investment in the shares of a closed-end
investment company may also involve the payment of a substantial premium over,
while sales of such shares may be made at a substantial discount from, the NAV
of the issuers' portfolio securities. Investments in securities of other
investment companies will be made in compliance with applicable 1940 Act
limitations. To the extent that All-Star invests in the securities of other
investment companies, All-Star's shareholders will indirectly bear a pro rata
share of the investment company's expenses in addition to the expenses
associated with an investment in All-Star. All-Star may invest in investment
companies managed by AAI or other affiliates of AAI.
32
EXCHANGE-TRADED FUNDS. All-Star may invest in exchange traded funds
("ETFs"). ETFs are ownership interests in unit investment trusts, depositary
receipts, and other pooled investment vehicles that are traded on an exchange
and that hold a portfolio of securities or stocks (the "Underlying Securities").
The Underlying Securities are typically selected to correspond to the stocks or
other securities that comprise a particular broad based, sector or international
index, or that are otherwise representative of a particular industry sector. An
investment in an ETF involves risks similar to investing directly in each of the
Underlying Securities, including the risk that the value of the Underlying
Securities may fluctuate in accordance with changes in the financial condition
of their issuers, the value of stocks and other securities generally, and other
market factors.
The performance of an ETF will be reduced by transaction and other
expenses, including fees paid by the ETF to service providers. Investors in ETFs
are eligible to receive their portion of dividends, if any, accumulated on the
securities held in the portfolio, less fees and expenses of the ETF. Typically,
ETFs are investment companies. However, the term is used in the industry in a
broad way to include securities issued by entities that are not investment
companies. To the extent an ETF is an investment company, the limitations
applicable to All-Star's ability to purchase securities issued by other
investment companies will apply.
OPTIONS AND FUTURES STRATEGIES. All-Star may seek to increase the current
return of All-Star's portfolio by writing covered call or put options with
respect to the types of securities in which All-Star is permitted to invest.
Call options written by All-Star give the purchaser the right for a stated
period to buy the underlying securities from All-Star at a stated price; put
options written by All-Star give the purchaser the right for a stated period to
sell the underlying securities to All-Star at a stated price. By writing a call
option, All-Star limits its opportunity to profit from any increase in the
market value of the underlying security above the exercise price of the option;
by writing a put option, All-Star assumes the risk that it may be required to
purchase the underlying security at a price in excess of its current market
value.
All-Star may purchase put options to protect its portfolio holdings in the
underlying security against a decline in market value. It may purchase call
options to hedge against an increase in the prices of portfolio securities that
it plans to purchase. By purchasing put or call options, All-Star, for the
premium paid, acquires the right (but not the obligation) to sell (in the case
of a put option) or purchase (in the case of a call option) the underlying
security at the option exercise price, regardless of the then current market
price.
All-Star may also seek to hedge against declines in the value of securities
owned by it or increases in the price of securities it plans to purchase, or to
gain or maintain market exposure, through the purchase of stock index futures
and related options. For example, All-Star may purchase stock index futures and
related options to enable a newly appointed Portfolio Manager to gain immediate
exposure to underlying securities markets pending the investment of the portion
of All-Star's portfolio assigned to it. A stock index future is an agreement in
which one party agrees to deliver to the other an amount of cash equal to a
specific dollar amount times the difference between the value of the specific
stock index at the close of the last trading day of the contract and the price
at which the agreement is made.
33
Expenses and losses incurred as a result of the hedging strategies
described above will reduce All-Star's current return.
Transactions in options and futures contracts may not achieve the intended
goals of protecting portfolio holdings against market declines or gaining or
maintaining market exposure, as applicable, to the extent that there is an
imperfect correlation between the price movements of the options and futures
contracts and those of the securities to be hedged. In addition, if a Portfolio
Manager's prediction on stock market movements is inaccurate, All-Star may be
worse off than if it had not engaged in such options or futures transactions.
See the Statement of Additional Information for additional information
concerning options and futures transactions and the risks thereof.
RISKS
All-Star is a diversified, multi-managed closed-end management investment
company designed primarily as a long-term investment and not as a trading
vehicle. All-Star is not intended to be a complete investment program and there
can be no assurance that All-Star will achieve its investment objective.
INVESTMENT AND MARKET RISK
An investment in All-Star's Shares is subject to investment risk, including
the possible loss of the entire amount that you invest. Your investment in
Shares represents an indirect investment in the securities owned by All-Star,
most of which are traded on a national securities exchange or in the
over-the-counter markets. The value of these securities, like other market
investments, may move up or down, sometimes rapidly and unpredictably. Your
Shares at any point in time may be worth less than your original investment,
even after taking into account the reinvestment of dividends and other
distributions.
MARKET DISCOUNT RISK
In addition, shares of closed-end management investment companies such as
All-Star frequently trade at a discount from their NAV. The Shares were designed
primarily for long-term investors, and investors in Shares should not view
All-Star as a vehicle for trading purposes. This risk is separate and distinct
from the risk that All-Star's NAV may decline. See "Share Price Data" for
information about the market price and NAV of All-Star's Shares since January 1,
2005.
COMMON STOCK RISK
All-Star is not limited in the percentage of its assets that may be
invested in common stocks and other equity securities, and therefore a risk of
investing in All-Star is equity risk. Equity risk is the risk that the market
value of securities held by All-Star will fall due to general market or economic
conditions, perceptions regarding the industries in which the issuers of
securities held by All-Star participate, and the particular circumstances and
performance of particular companies whose securities All-Star holds. For
example: an adverse event, such as an unfavorable earnings report, may depress
the value of equity securities of an issuer held by All-Star; the price of
common stock of an issuer may be particularly sensitive to general movements in
34
the stock market; or a drop in the stock market may depress the price of most or
all of the common stocks and other equity securities held by All-Star. In
addition, common stock of an issuer in All-Star's portfolio may decline in price
if the issuer fails to make anticipated dividend payments because, among other
reasons, the issuer of the security experiences a decline in its financial
condition. Common equity securities in which All-Star will invest are
structurally subordinated to preferred stocks, bonds and other debt instruments
in a company's capital structure, in terms of priority to corporate income, and
therefore will be subject to greater payment risk than preferred stocks or debt
instruments of such issuers. In addition, while broad market measures of common
stocks have historically generated higher average returns than fixed income
securities, common stocks have also experienced significantly more volatility in
those returns.
PREFERRED SECURITIES RISK
Preferred equity securities involve credit risk, which is the risk that a
preferred equity security will decline in price, or fail to pay dividends when
expected, because the issuer experiences a decline in its financial status. In
addition to credit risk, investment in preferred equity securities involves
certain other risks. Certain preferred equity securities contain provisions that
allow an issuer under certain conditions to skip distributions (in the case of
"non-cumulative" preferred equity securities) or defer distributions (in the
case of "cumulative" preferred equity securities). Preferred equity securities
often contain provisions that allow for redemption in the event of certain tax
or legal changes or at the issuer's call. In the event of redemption, All-Star
may not be able to reinvest the proceeds at comparable rates of return.
Preferred equity securities typically do not provide any voting rights, except
in cases when dividends are in arrears beyond a certain time period, which
varies by issue. Preferred equity securities are subordinated to bonds and other
debt instruments in a company's capital structure in terms of priority to
corporate income and liquidation payments, and therefore will be subject to
greater credit risk than those debt instruments. Preferred equity securities may
be significantly less liquid than many other securities, such as U.S. Government
Securities, corporate debt or common stock.
CONVERTIBLE SECURITY RISK
Convertible securities generally offer lower interest or dividend yields
than non-convertible fixed-income securities of similar credit quality because
of the potential for capital appreciation. The market values of convertible
securities tend to decline as interest rates increase and, conversely, to
increase as interest rates decline. However, a convertible security's market
value also tends to reflect the market price of the common stock of the issuing
company, particularly when the stock price is greater than the convertible
security's conversion price. The conversion price is defined as the
predetermined price or exchange ratio at which the convertible security can be
converted or exchanged for the underlying common stock. As the market price of
the underlying common stock declines below the conversion price, the price of
the convertible security tends to be increasingly influenced more by the yield
of the convertible security than by the market price of the underlying common
stock. Thus, it may not decline in price to the same extent as the underlying
common stock, and convertible securities generally have less potential for gain
or loss than common stocks. However, mandatory convertible securities (as
35
discussed below) generally do not limit the potential for loss to the same
extent as securities convertible at the option of the holder. In the event of a
liquidation of the issuing company, holders of convertible securities would be
paid before that company's common stockholders. Consequently, an issuer's
convertible securities generally entail less risk than its common stock.
However, convertible securities fall below debt obligations of the same issuer
in order of preference or priority in the event of a liquidation and are
typically unrated or rated lower than such debt obligations. In addition,
contingent payment convertible securities allow the issuer to claim deductions
based on its nonconvertible cost of debt, which generally will result in
deductions in excess of the actual cash payments made on the securities (and
accordingly, holders will recognize income in amounts in excess of the cash
payments received). The convertible securities in which All-Star invests may be
rated below investment grade. See "Risks of Below-Investment Grade Quality
Securities".
CREDIT RISK
Credit risk is the risk that a security in All-Star's portfolio will
decline in price or fail to make dividend or interest payments when due because
the issuer of the security experiences a decline in its financial status.
Preferred and convertible securities are typically subordinated to bonds and
other debt instruments in a company's capital structure, in terms of priority to
corporate income, and therefore will be subject to greater credit risk than
those debt instruments.
MANAGEMENT RISK
All-Star is subject to management risk because it is an actively managed
investment portfolio. AAI and the Portfolio Managers will apply investment
techniques and risk analyses in selecting Portfolio Managers and making
investment decisions for All-Star, respectively, but there can be no guarantee
that these will produce the desired results.
GROWTH STOCK RISK
Currently, approximately 40% of All-Star's net assets are allocated to
Portfolio Managers that utilize a "growth" approach to investing. Over time,
depending on market conditions, this allocation may increase or decrease. Growth
stocks are stocks of companies believed to have above-average potential for
growth in revenue and earnings. Prices of growth stocks may be more sensitive to
changes in current or expected earnings than the prices of other stocks. In
certain market conditions, growth stocks may not perform as well as value stocks
or the stock market in general.
VALUE STOCK RISE
Currently, approximately 60% of All-Star's net assets are allocated to
Portfolio Managers that utilize a "value" approach to investing. Over time,
depending on market conditions, this allocation may increase or decrease. Value
stocks are stocks of companies that may have experienced adverse business or
industry developments or may be subject to special risks that have caused the
stocks to be out of favor and, in a Portfolio Manager's opinion, undervalued. If
the Portfolio Manager's assessment of a company's prospects is wrong, the price
of the company's stock may fall or may not approach the value the Portfolio
Manager has placed on it.
36
FOREIGN SECURITIES RISK
Investments in foreign securities involve risks in addition to those of
investments in securities of U.S. issuers. These risks include political and
economic risks, currency fluctuations, higher transaction costs, less liquidity
and greater volatility, delayed settlement, confiscatory taxation, withholding
of taxes and less stringent investor protection and disclosure of standards in
some foreign markets. These risks can make investments in foreign issuers more
volatile and potentially less liquid than investments in U.S. issuers.
TAX RISK
All-Star may invest in preferred securities, convertible securities or
other securities the federal income tax treatment of the income from which may
not be clear or may be subject to recharacterization by the IRS.
The tax treatment of distributions All-Star designates as "qualified
dividend income" may be affected by IRS interpretations of the Code and future
changes in the Code and the regulations thereunder. Moreover, unless legislative
action is taken, the favorable tax treatment of qualified dividend income, as
well as the 15% maximum federal income tax rate on individuals' net capital
gain, will expire for taxable years commencing after December 31, 2010. See "Tax
Matters". If All-Star has significant holdings in securities that generate
qualified dividend income, its Share price may be volatile while Congress
considers an extension of that favorable tax treatment, depending on the
anticipated outcome of the legislation. There can be no assurance as to what
portion, if any, of All-Star's distributions will constitute qualified dividend
income.
MARKET DISRUPTION RISK
Certain events have a disruptive effect on the securities markets, such as
terrorist attacks (including the terrorist attacks in the United States on
September 11, 2001), war and other geopolitical events. All-Star cannot predict
the effects of similar events in the future on the U.S. economy.
INFLATION RISK
Inflation risk is the risk that the value of assets or income from
investment will be worth less in the future as inflation decreases the value of
money. As inflation increases, the real value of All-Star's shares and
distributions can decline.
DEFLATION RISK
Deflation risk is the risk that prices throughout the economy decline over
time, which may have an adverse effect on the market valuation of companies,
their assets and revenues. In addition, deflation may have an adverse effect on
the creditworthiness of issuers and may make issuer default more likely, which
may result in a decline in the value of All-Star's portfolio.
37
MANAGEMENT OF ALL-STAR
TRUSTEES AND OFFICERS
The Board of Trustees is responsible for the general oversight of
All-Star's operations, including the general oversight of AAI's and the
Portfolio Managers' management of All-Star. The names and business addresses of
the Trustees and officers of All-Star and their principal occupations during the
past five years are set forth under "Trustees and Officers" in the Statement of
Additional Information.
AAI
AAI, 1290 Broadway, Suite 1100, Denver, CO 80203, is the Fund's investment
adviser. AAI acts as the investment adviser to registered investment companies
with aggregate assets of approximately $1.5 billion as of December 31, 2006. AAI
is a wholly-owned subsidiary of ALPS, a Denver, Colorado-based company that
provides a wide range of fund services, including fund administration, fund
distribution and fund accounting. ALPS and its affiliates provide fund
administration services to funds with assets in excess of $13 billion and
distribution services to funds with assets in excess of $120 billion.
THE PORTFOLIO MANAGERS
See Appendix A for information about All-Star's current Portfolio Managers,
including the employees who are primarily responsible for the day-to-day
management of All-Star's portfolio. The Statement of Additional Information
contains additional information about these individuals, including their
compensations, other accounts managed by them and their ownership of securities
in All-Star.
THE FUND MANAGEMENT AGREEMENT AND THE PORTFOLIO MANAGEMENT AGREEMENTS
All-Star has a Fund Management Agreement with AAI pursuant to which AAI
implements and operates the Fund's multi-manager methodology and has overall
supervisory responsibility for the general management and investment of the
Fund's assets, subject to the Fund's investment objectives and policies and any
directions of the Board of Trustees. AAI recommends to the Board of Trustees the
investment management firms (currently five) for appointment as Portfolio
Managers of All-Star. (See "The Multi-Manager Methodology "). No single
individual at AAI is responsible for AAI's decisions with respect to the
retention or replacement of the Portfolio Managers.
Under All-Star's Portfolio Management Agreements with each of its Portfolio
Managers and AAI, each Portfolio Manager has discretionary authority (including
for the selection of brokers and dealers for the execution of All-Star's
portfolio transactions) with respect to the portion of All-Star's assets
allocated to it by AAI from time to time, subject to All-Star's investment
objective and policies, to the supervision and control of the Board of Trustees,
and to instructions from AAI. As described under the section entitled "The
Multi-Manager Methodology," AAI from time to time reallocates All-Star's
portfolio assets in order to maintain an approximately equal allocation among
the Portfolio Managers and to preserve an approximately equal weighting among
the different investment styles practiced by the Portfolio Managers. Although
38
the Portfolio Managers' activities are subject to general oversight by AAI, the
Board of Trustees and officers of All-Star, none of AAI, the Board of Trustees
or officers evaluate the investment merits of the Portfolio Managers' selections
of individual securities. See Appendix A for a description of the Portfolio
Managers.
Although All-Star does not permit a Portfolio Manager to act or have a
broker-dealer affiliate act as broker for All-Star's portfolio transactions
initiated by it, the Portfolio Managers are permitted to place portfolio
transactions initiated by them with another Portfolio Manager or its
broker-dealer affiliate for execution on an agency basis, provided the
commission does not exceed the usual and customary broker's commission being
paid to other brokers for comparable transactions and is otherwise in accordance
with All-Star's procedures adopted under Rule 17e-1 under the 1940 Act.
Under All-Star's Fund Management Agreement with AAI and its Portfolio
Management Agreements with the Portfolio Managers, All-Star pays AAI a fund
management fee, and AAI in turn pays the fees of the Portfolio Managers from the
fund management fees paid to it. The annual fees that are paid under the current
agreements are shown below (fees are payable monthly based on the indicated
percentage of All-Star's average daily net assets during the prior month).
Fund Management Fee Paid to AAI and Portfolio
Average Daily NAV Management Fee Paid to Portfolio Managers
----------------- -----------------------------------------
First $400 million 0.800% (0.400% to Portfolio Managers)
Next $400 million 0.720% (0.360% to Portfolio Managers)
Next $400 million 0.648% (0.324% to Portfolio Managers)
Over $1.2 billion 0.584% (0.292% to Portfolio Managers)
A discussion regarding the basis for the Board of Trustees approving the
Fund Management Agreement and the Portfolio Management Agreements is available
in All-Star's annual report for the year ended December 31, 2006.
CUSTODIAN, TRANSFER AGENT AND ADMINISTRATOR, PRICING AND BOOKKEEPING AGENT
State Street Bank & Trust Company, One Lincoln Street, Boston,
Massachusetts 02111, is All-Star's custodian. Computershare Trust Company, N.A.,
P.O. Box 43078, Providence, Rhode Island 02940 is All-Star's transfer and
dividend disbursing agent and registrar.
AFS, 1290 Broadway, Suite 1100 Denver, Colorado 80203 provides
administrative services to All-Star under an Administration, Bookkeeping and
Pricing Services Agreement with All-Star. AFS is an affiliate of AAI and a
wholly owned subsidiary of ALPS.
Under All-Star's Fund Administration Agreement with AFS, All-Star pays AFS
an administrative fee. The annual fee that is paid under the current agreement
39
is shown below (fees are payable monthly based on the indicated percentage of
All-Star's average daily net assets during the prior month).
Average Daily NAV Fund Administrative Fee Paid to AFS
----------------- -----------------------------------
First $400 million 0.200%
Next $400 million 0.180%
Next $400 million 0.162%
Over $1.2 billiion 0.146%
Under All-Star's Pricing and Bookkeeping agreement with AFS, AFS receives
from the Fund an annual fee consisting of: (i) $38,000 paid monthly plus an
additional monthly fee based on the level of average daily net assets for the
month; and (ii) a multi-manager fee based on the number of portfolio managers;
provided that during any 12-month period, the aggregate amount of (i) shall not
exceed $140,000 (exclusive of out-of-pocket expenses and charges). All-Star also
reimburses AFS for out-of-pocket expenses and charges, including fees payable to
third parties for pricing the Fund's portfolio securities and direct internal
costs incurred by AFS in connection with providing fund accounting oversight and
monitoring and certain other services.
EXPENSES OF THE FUND
AAI provides the Portfolio Manager selection, evaluation, monitoring and
rebalancing services, pays the compensation of and furnishes office space for
the officers of All-Star who are affiliated with AAI, and pays the management
fees of the Portfolio Managers. All-Star pays all its expenses, other than those
expressly assumed by AAI. The expenses payable by All-Star include: management
fees payable to AAI; administrative, bookkeeping and pricing fees payable to
AFS; fees and expenses of the independent registered public accounting firm;
fees for transfer agent and registrar, dividend disbursing, custodian and
portfolio recordkeeping services; expenses in connection with the Automatic
Dividend Reinvestment and Cash Purchase Plan; expenses in connection with
obtaining quotations for calculating the value of All-Star's net assets; taxes
(if any) and the preparation of All-Star's tax returns; brokerage fees and
commissions; interest; costs of trustee and shareholder meetings (including
expenses of printing and mailing proxy material therefor); expenses of printing
and mailing reports to shareholders; fees for filing reports with regulatory
bodies and the maintenance of All-Star's existence; membership dues for
investment company industry trade associations; legal fees; stock exchange
listing fees and expenses; fees to federal and state authorities for the
registration of Shares; fees and expenses of Trustees who are not trustees,
officers, employees or stockholders of AAI or its affiliates; insurance and
fidelity bond premiums; and any extraordinary expenses of a non-recurring
nature.
40
DESCRIPTION OF SHARES
GENERAL
All-Star's authorized capitalization consists of an unlimited number of
Shares of beneficial interest without par value, of which [ ] Shares were issued
and outstanding on the date of this prospectus. The currently outstanding Shares
are, and the Shares offered hereby when issued and paid for pursuant to the
terms of the Offer will be, fully paid and non-assessable. Shareholders would be
entitled to share pro rata in the net assets of All-Star available for
distribution to shareholders upon liquidation of All-Star.
Shareholders are entitled to one vote for each Share held. All-Star's
Shares do not have cumulative voting rights, which means that the holders of
more than 50% of the Shares voting for the election of Trustees can elect all
the Trustees standing for election, and, in such event, the holders of the
remaining Shares will not be able to elect any of such Trustees.
REPURCHASE OF SHARES
All-Star is a closed-end investment company and as such its shareholders do
not have the right to cause All-Star to redeem their Shares. All-Star, however,
is authorized to repurchase its Shares on the open market when its Shares are
trading at a discount from their NAV. All-Star has no current plans to
repurchase its Shares.
ANTI-TAKEOVER PROVISIONS OF THE DECLARATION OF TRUST; SUPER-MAJORITY VOTE
REQUIREMENT FOR CONVERSION TO OPEN-END STATUS
All-Star's Declaration of Trust contains provisions (commonly referred to
as "anti-takeover" provisions) which are intended to have the effect of limiting
the ability of other entities or persons to acquire control of All-Star, to
cause it to engage in certain transactions, or to modify its structure. The
Board of Trustees is divided into three classes, each having a term of three
years. On the date of the annual meeting of shareholders in each year the term
of one class expires. This provision could delay for up to three years the
replacement of a majority of the Board of Trustees. The affirmative vote of 75%
of the Shares will be required to authorize All-Star's conversion from a
closed-end to an open-end investment company, unless such conversion is
recommended by the Board of Trustees, in which event such conversion would only
require the majority vote of All-Star's shareholders (as defined under
"Investment Objective, Policies and Risks" above).
In addition, the affirmative vote of the holders of 75% of the Shares of
the Fund will be required generally to authorize any of the following
transactions:
(i) All-Star's merger or consolidation with or into any other
corporation;
(ii) the issuance of any securities of All-Star to any person or entity
for cash;
(iii) the sale, lease or exchange of all or any substantial part of
All-Star's assets to any entity or person (except assets having an
aggregate fair market value of less than $1,000,000); or
41
(iv) the sale, lease or exchange to All-Star, in exchange for securities
of All-Star, of any assets of any entity or person (except assets
having an aggregate fair market value of less than $1,000,000);
if such corporation, person or entity is directly, or indirectly through
affiliates, the beneficial owner of 5% or more of the outstanding Shares of
All-Star. (A 66 2/3% vote would otherwise be required for a merger or
consolidation or a sale, lease or exchange of all or substantially all of
All-Star's assets unless recommended by the Board of Trustees, in which case
only a majority vote would be required). However, such 75% vote will not be
required with respect to the transactions listed in (i) through (iv) above where
the Board of Trustees under certain conditions approves the transaction.
However, depending upon the transaction, a different shareholder vote may
nevertheless be required under Massachusetts law.
The foregoing super-majority vote requirements may not be amended except
with a similar supermajority vote of the shareholders.
These provisions will make more difficult a change in All-Star's structure
or management or consummation of the foregoing transactions without the Board of
Trustees' approval. The anti-takeover provisions could have the effect of
depriving shareholders of an opportunity to sell their Shares at a premium over
prevailing market prices by discouraging a third party from seeking to obtain
control of All-Star in a tender offer or similar transaction. However, the Board
of Trustees continues to believe that the anti-takeover provisions are in the
best interests of All-Star and its shareholders because they provide the
advantage of potentially requiring persons seeking control of All-Star to
negotiate with its management regarding the price to be paid and facilitating
the continuity of All-Star's management and its continuing application of the
multi-manager concept.
The Board of Trustees also believes that the super-majority vote
requirement for conversion to an open-end investment company is in the best
interest of All-Star and its shareholders because it will allow All-Star to
continue to benefit from the advantages of its closed-end structure until such
time that, based on relevant factors including the then current relationship of
the market price of the Shares to their NAV, the Board of Trustees determines to
recommend to shareholders All-Star's conversion to an open-end investment
company.
In accordance with the Declaration of Trust, the question of conversion to
an open-end investment company was submitted to the vote of shareholders at
All-Star's 1993 annual meeting held on April 6, 1993, such conversion then
requiring only the affirmative vote of a majority of All-Star's Shares (as
defined in the 1940 Act). In accordance with the Board of Trustees'
recommendation, shareholders, by a substantial majority, rejected the conversion
proposal and approved an amendment to All-Star's Declaration of Trust
instituting the 75% super-majority vote referred to above for any future
conversion to open-end status.
42
DISTRIBUTIONS; AUTOMATIC DIVIDEND
REINVESTMENT AND CASH PURCHASE PLAN
10% DISTRIBUTION POLICY
All-Star currently has a policy of paying distributions on its Shares
totaling approximately 10% of its NAV per year, payable in four quarterly
distributions of 2.5% of its NAV at the close of the NYSE on the Friday prior to
each quarterly declaration date. These fixed distributions, which are not
necessarily related to All-Star's net investment income or net realized capital
gains or losses, are taxable in any taxable year, up to the amount of All-Star's
E&P as ordinary dividend income (which includes not only net investment income
but also short-term gains), "qualified dividend income" (taxable at a maximum
15% federal income tax rate for individuals), or long term capital gain to the
extent they are attributable to such income or gain All-Star earned for that
year. (See "Tax Matters"). If, for any taxable year, the total distributions
made under All-Star's distribution policy exceed its E&P, the excess will be
treated as a non-taxable return of capital to each shareholder (up to the amount
of the shareholder's basis in his or her shares) and thereafter as gain from the
sale of Shares. The amount treated as a non-taxable return of capital will
reduce the shareholder's adjusted basis in his or her Shares, thereby increasing
his or her potential gain or reducing his or her potential loss on the
subsequent sale of those Shares. In any given year, the Board of Trustees may
decide to distribute more than 10% of All-Star's net assets if necessary for tax
purposes. Shareholders should read any written disclosure accompanying a
distribution carefully and should not assume that the source of any distribution
from the Fund is net profit.
To the extent All-Star's distribution policy results in distributions in
excess of its net investment income and net realized capital gains, such
distributions will decrease its total assets and increase its expense ratio to a
greater extent than would have been the case without the distribution policy. In
addition, in order to make distributions under the distribution policy, All-Star
may have to sell portfolio securities at times when the particular investment
styles of its Portfolio Managers would dictate not doing so.
Subject to maintaining its status as a RIC (See "Tax Matters"), All-Star
may, in the discretion of the Board of Trustees, retain for reinvestment, and
not distribute net investment income or net capital gain for any taxable year to
the extent that its net investment income and net realized gains exceed the
amount to be distributed for that year under the distribution policy. Retained
net capital gain will be taxed to All-Star and designated by it as long-term
capital gains within 60 days after the end of the taxable year in which the
gains were recognized. Under these circumstances, each shareholder will be
required to include in gross income a proportionate share of the gain but will
be able to claim a proportionate share of the federal income tax paid by
All-Star as a credit against his or her own federal income tax liability and
will be entitled to increase the adjusted tax basis in his or her shares by the
difference between the amount taxed and the credit.
All-Star intends to pay all or a substantial portion of its distributions
in each year in the form of newly issued Shares (plus cash in lieu of any
fractional Shares that would otherwise be issuable) to all Shareholders, except
as otherwise noted below.
43
The number of Shares to be issued to a shareholder in payment of a
distribution declared payable in Shares will be determined by dividing the total
dollar amount of the distribution by the lower of the market value or the NAV
per Share on the valuation date for the distribution (but not at a discount of
more than 5% from the market value). Market value per Share for this purpose
will be the last sales price on the NYSE on the valuation date or, if there are
no sales on that day, the mean between the closing bid and closing asked
quotations for that date.
You should consult a tax adviser about state, local and foreign taxes on
your distributions from All-Star.
AUTOMATIC DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
Under the Plan, shareholders whose Shares are registered in their own name
may elect to participate in the Plan and have all distributions automatically
reinvested by Computershare Trust Company, N.A., as agent for participants in
the Plan (the "Plan Agent"), in additional Shares. Shareholders who do not elect
to participate in the Plan will receive all distributions (other than those
declared payable in Shares as described above) in cash.
Under the Plan, distributions declared payable in Shares or cash at the
option of shareholders are paid to participants in the Plan entirely in newly
issued full and fractional Shares valued at the lower of the market value or the
NAV per Share on the valuation date for the distribution (but not a discount of
more than 5% from the market value). Distributions declared payable in cash will
be reinvested for the accounts of participants in the Plan in additional Shares
purchased by the Plan Agent on the open market, on the NYSE or elsewhere, at
prevailing market prices (if Shares are trading at a discount to their NAV) or
in newly issued shares (if Shares are trading at or above their NAV). Dividends
and distributions are subject to taxation, whether received in cash or in
Shares. See "Tax Matters".
Participants in the Plan have the option of making additional cash payments
in any amount on a monthly basis for investment in Shares purchased on the open
market. These voluntary cash payments will be invested on or about the 15th day
of each month, and voluntary payments should be sent so as to be received by the
Plan Agent no later than ten business days before the next investment date.
Barring suspension of trading, voluntary cash payments will be invested within
45 days of receipt. A participant may withdraw a voluntary cash payment by
written notice received by the Plan Agent at least 48 hours before such payment
is to be invested.
The Plan Agent maintains all shareholder accounts in the Plan and furnishes
written confirmations of all transactions in the account, including information
needed by Shareholders for tax records. Shares in the account of each Plan
participant will be held by the Plan Agent in non-certificated form in the name
of the participant, and each shareholder's proxy will include those Shares
purchased or received pursuant to the Plan.
In the case of banks, brokers or nominees that hold Shares for others who
are the beneficial owners, the Plan Agent will administer the Plan on the basis
of the number of Shares certified from time to time by the record shareholder as
representing the total amount registered in the record shareholder's name and
held for the account of beneficial owners who participate in the Plan.
44
There is no charge to participants for reinvesting distributions payable in
either Shares or cash. The Plan Agent's fees for handling the reinvestment of
such distributions are paid by All-Star. There are no brokerage charges with
respect to Shares issued directly by All-Star as a result of distributions
payable in Shares or in cash. However, each participant bears a pro rata share
of brokerage commissions incurred with respect to the Plan Agent's open market
purchases in connection with the reinvestment of distributions declared payable
in cash.
With respect to purchases from voluntary cash payments, the Plan Agent will
charge $1.25 for each such purchase for a participant, plus a pro rata share of
the brokerage commissions. Brokerage charges for purchasing small amounts of
Shares for individual accounts through the Plan are expected to be less than the
usual brokerage charges for such transactions, as the Plan Agent will be
purchasing Shares for all participants in blocks and prorating the lower
commission thus attainable.
The automatic reinvestment of dividends and other distributions will not
relieve plan participants of any income tax that may be payable thereon. See
"Tax Matters".
A participant may elect to withdraw from the Plan at any time by notifying
the Plan Agent in writing. There will be no penalty for withdrawal from the
Plan, and shareholders who have previously withdrawn from the Plan may rejoin it
at any time. A withdrawal will be effective only for subsequent distributions
with a record date at least ten days after the notice of withdrawal is received
by the Plan Agent.
Experience under the Plan may indicate that changes are desirable.
Accordingly, All-Star reserves the right to amend or terminate the Plan.
TAX MATTERS
The following discussion briefly summarizes the general rules applicable to
taxation of All-Star and its shareholders. Shareholders are urged to consult
with their own tax advisers concerning the tax consequences of their continued
investment in All-Star and of their receipt and exercise of the Rights.
All-Star has elected to be, and intends to continue to qualify each year
for federal income tax treatment as a regulated investment company ("RIC"). As a
result, it is expected that All-Star will be relieved of federal income tax on
its net investment income and net realized capital gains to the extent it
distributes them to its shareholders. (See "Distributions; Automatic Dividend
Reinvestment and Cash Purchase Plan--10% Distribution Policy" regarding
All-Star's authority to retain and pay taxes on net investment income and net
capital gain).
To avoid incurring a 4% federal excise tax, All-Star must distribute (or be
deemed to have distributed) by December 31 of each calendar year an amount at
least equal to the sum of (i) 98% of its ordinary income for such year plus (ii)
98% of its capital gain net income (which is the excess of its realized capital
gain over its realized capital loss), generally computed on the basis of the
one-year period ending on October 31 of such year, after reduction by any
available capital loss carryforwards, plus 100% of any ordinary income and
capital gain net income from the prior year (as so computed) that were not paid
out during such year and on which All-Star paid no federal income tax. All-Star
also expects to make sufficient annual distributions to avoid being subject to
45
that excise tax. Under current law, provided that All-Star qualifies as a RIC
for federal tax purposes, All-Star should not be liable for any income,
corporate excise or franchise tax in the Commonwealth of Massachusetts.
If All-Star fails to qualify for treatment as a RIC in any taxable year, it
would incur federal corporate income tax on the full amount of its taxable
income for that year (even if it distributed that income to its shareholders),
and its distributions (including distributions of net capital gain) would be
taxable as ordinary dividend income to the shareholders to the extent of its
E&P. In addition, All-Star could be required to recognize unrealized gains, pay
substantial taxes and interest and make substantial distributions before
requalifying for treatment as a RIC.
Distributions by All-Star from net investment income and net realized
capital gains are subject to taxation whether received by shareholders in cash
or in Shares. Shareholders receiving a dividend or other distribution in the
form of newly issued Shares will be treated for federal income tax purposes as
receiving a distribution in an amount equal to the fair market value, determined
as of the distribution date, of the Shares received. Such shareholders will have
a cost basis in each newly issued Share equal to the fair market value of a
Share on the distribution date. Distributions are generally taken into account
for tax purposes when paid, except that distributions paid in January but
declared in the last quarter of the preceding calendar year may be taken into
account as if paid on December 31 of such preceding calendar year. A portion of
All-Star's net investment income paid to corporate shareholders that is
attributable to dividends from domestic corporations may be eligible for the 70%
dividends-received deduction available to corporations. Availability of the
deduction for particular corporate shareholders is subject to certain
limitations, and deducted amounts may be subject to the federal alternative
minimum tax or result in certain basis adjustments. Distributions from net
capital gain are taxable as long-term capital gains, regardless of how long the
shareholder has held the Shares, and are not eligible for the dividends-received
deduction.
The U.S. federal income tax rate on net capital gain recognized by
individuals is currently 15% (or 5% for individuals in the 10% or 15% tax
brackets). Certain income dividends paid by All-Star to individual taxpayers
will also be taxed at these reduced rates if the shareholder satisfies certain
holding period and other requirements with respect to the shareholder's Shares
and the dividends are attributable to qualified dividend income received by
All-Star. For this purpose, "qualified dividend income" means dividends received
by All-Star from U.S. corporations and "qualified foreign corporations," (as
described below), provided that All-Star satisfies certain holding period and
other requirements with respect to the stock of such corporations. In the case
of securities lending transactions, payments in lieu of dividends are not
qualified dividend income. Dividends received by All-Star from real estate
investment trusts are qualified dividends only in limited circumstances. These
special rules relating to the taxation of dividends of qualified dividend income
from RICs generally apply to taxable years beginning before January 1, 2011.
Thereafter, All-Star's dividends, other than capital gain dividends, will be
fully taxable at ordinary income tax rates unless further Congressional action
is taken.
A dividend will not be treated as qualified dividend income (whether
received by All-Star or paid by All-Star to a shareholder) if (1) the dividend
is received with respect to any share held for fewer than 61 days during the
121-day period beginning on the date that is 60 days before the date on which
such share becomes ex-dividend with respect to such dividend or, in the case of
46
certain preferred shares, 91 days during the 181-day period beginning 90 days
before such ex-dividend date, (2) to the extent that the recipient is under an
obligation (whether pursuant to a short sale or otherwise) to make related
payments with respect to positions in substantially similar or related property,
or (3) if the recipient elects to have the dividend treated as investment income
for purposes of the limitation on deductibility of investment interest.
Subject to certain exceptions, a "qualified foreign corporation" is any
foreign corporation that is either (1) incorporated in a possession of the
United States (the "possessions test") or (2) eligible for benefits of a
comprehensive income tax treaty with the United States, that the Secretary of
the Treasury determines is satisfactory for these purposes and that includes an
exchange of information program (the "treaty test"). The Secretary of the
Treasury has identified a substantial number of tax treaties between the United
States and other countries that satisfy the treaty test.
Subject to the same exceptions, a foreign corporation that does not satisfy
either the possessions test or the treaty test will still be considered a
"qualified foreign corporation" with respect to any dividend it pays if the
stock with respect to which such dividend is paid is readily tradable on an
established securities market in the United States ("readily taxable"). The
Treasury Department has issued a notice stating that common or ordinary stock,
or an American Depositary Receipt in respect of such stock, is considered
readily tradable if it is listed on a national securities exchange that is
registered under section 6 of the Securities Exchange Act of 1934, as amended,
or on the NASDAQ Stock Market.
A qualified foreign corporation does not include any foreign corporation
that, for its taxable year in which the dividend is paid or the preceding
taxable year, is a passive foreign investment company.
The benefits of the reduced tax rates applicable to net capital gain and
qualified dividend income may be impacted by the application of the alternative
minimum tax to individual shareholders.
If a Shareholder holds Shares for six months or less, any loss on the sale
of the Shares will be treated as a long-term capital loss to the extent of any
amount reportable by the shareholder as long-term capital gain with respect to
such Shares. Any loss realized on a disposition of Shares may also be disallowed
under rules relating to wash sales.
Dividends and other distributions on Shares are generally subject to
federal income tax as described herein to the extent they do not exceed
All-Star's E&P, even though such distributions may economically represent a
return of a particular shareholder's investment. Such distributions are likely
to occur with respect to Shares purchased when All-Star's NAV reflects gains
that are either unrealized, or realized but not distributed. Such realized gains
may be required to be distributed even when All-Star's NAV also reflects
unrealized losses. As of June 30, 2007 All-Star's investments had net unrealized
gains of $185,011,855
Certain distributions All-Star makes after the close of its taxable year
may be "spilled back" and treated as paid by All-Star (except for purposes of
47
the 4% excise tax) during such taxable year. In such case, shareholders will be
treated as having received such distributions in the taxable year in which they
were actually made.
Individuals and certain other non-corporate All-Star shareholders may be
subject to 28% withholding on reportable dividends and capital gain
distributions ("backup withholding"). Generally, shareholders subject to backup
withholding will be those for whom a taxpayer identification number and certain
required certifications are not on file with All-Star or who, to All-Star's
knowledge, have furnished an incorrect number. In addition, All-Star is required
to withhold distributions to any shareholder who does not certify to All-Star
that the shareholder is not subject to backup withholding due to notification by
the Internal Revenue Service that the shareholder has under-reported interest or
dividend income.
Dividends All-Star pays to a foreign shareholder other than a foreign
shareholder whose ownership of shares is effectively connected with a U.S. trade
or business the shareholder carries on and capital gain distributions paid to a
nonresident alien individual who is physically present in the United States for
no more than 182 days during the taxable year generally will be subject to a
federal withholding tax of 30% (or lower treaty rate). The American Jobs
Creation Act of 2004, however, established two categories of dividends,
"short-term capital gain dividends" and "interest-related dividends," that, if
properly designated by All-Star, will be exempt from that tax. "Short-term
capital gain dividends" are dividends that are attributable to short-term
capital gain, computed with certain adjustments. "Interest-related dividends"
are dividends that are attributable to "qualified net interest income"
("qualified interest income" less allocable deductions), which generally
consists of certain original issue discount, interest on obligations "in
registered form," and interest on deposits. The exemption from withholding tax
will apply to short-term capital gain dividends and interest-related dividends
All-Star pays to foreign investors, with certain exceptions, with respect to its
taxable years beginning after December 31, 2004, and before January 1, 2008.
Information concerning the federal income tax status of All-Star dividends
and other distributions is mailed to shareholders annually.
Distributions and the transactions referred to in the preceding paragraphs
may be subject to state and local income taxes, and the treatment thereof may
differ from the federal income tax consequences discussed herein. Shareholders
are advised to consult with their tax advisers concerning the application of
state and local taxes.
See "The Offer--Federal Income Tax Consequences" for a discussion of the
federal income tax consequences regarding the Rights.
GENERAL
Under the Fund Management Agreement between All-Star and AAI, All-Star may
use the name "Liberty All-Star" or "All-Star" only so long as the Fund
Management Agreement remains in effect. If the Fund Management Agreement is no
longer in effect, All-Star is obligated (to the extent it lawfully can) to cease
using such name or any other name indicating that it is advised by or otherwise
connected with AAI. In addition, AAI may grant the non-exclusive right to use
48
the name "Liberty All-Star" or "All-Star" to any other entity, including any
other investment company of which AAI or any of its affiliates is the investment
adviser or distributor.
STATEMENT OF ADDITIONAL INFORMATION
Additional information about All-Star is contained in the Statement of
Additional Information, a copy of which is available at no charge by calling the
Information Agent at the telephone number indicated on the cover of this
prospectus. Set forth below is the Table of Contents of the Statement of
Additional Information.
49
TABLE OF CONTENTS
PAGE
INVESTMENT OBJECTIVE AND POLICIES..............................................1
INVESTMENT RESTRICTIONS.......................................................11
INVESTMENT ADVISORY AND OTHER SERVICES........................................13
PROXY VOTING..................................................................15
TRUSTEES AND OFFICERS.........................................................15
PORTFOLIO SECURITY TRANSACTIONS...............................................35
TAXES.........................................................................36
PRINCIPAL SHAREHOLDERS........................................................39
FINANCIAL STATEMENTS..........................................................39
APPENDIX A: PROXY VOTING GUIDELINES.........................................A-1
50
APPENDIX A: INFORMATION ABOUT THE PORTFOLIO MANAGERS
CHASE INVESTMENT COUNSEL CORPORATION ("CHASE")
300 PRESTON AVENUE, SUITE 403
CHARLOTTESVILLE, VA 22902
The portion of All-Star allocated to Chase is managed by a team of
investment professionals directed by David B. Scott, Senior Vice President and
Chief Investment Officer.
Mr. Scott earned his BA in 1977 and a MBA with Honors in 1980 from the
College of William and Mary. Before joining Chase in 1994, he had 15 years of
experience as an analyst and portfolio manager. He has earned the right to use
the CFA Institute Chartered Financial Analyst designation and is a member of the
Richmond Society of Financial Analysts.
MATRIX ASSET ADVISORS, INC. ("MATRIX")
747 THIRD AVENUE
NEW YORK, NY 10017
The portion of All-Star allocated to Matrix is managed by David A. Katz,
Head of the Investment Policy Committee. Mr. Katz, CFA, graduated summa cum
laude from Union College with a Bachelor of Arts degree in Economics. He
received a Master of Business Administration degree, with a concentration in
Finance, from New York University Graduate School of Business in 1987,
graduating with distinction. His numerous works on Value Investing have earned
him various awards and distinctions at the undergraduate and graduate levels.
Mr. Katz has earned the right to use the CFA Institute Chartered Financial
Analyst designation. After initially working at Management Asset Corporation
(Westport, CT), Mr. Katz co-founded Value Matrix Management with John M. Gates
in 1986. He served as the firm's Senior Vice President and Chief Investment
Officer and was Head of the Investment Policy Committee. In 1990 he merged the
Value Matrix Management organization into Matrix Asset Advisors. Mr. Katz is the
firm's President and Chief Investment Officer, chairs the Investment Policy
Committee and is a Portfolio Manager/Analyst.
PZENA INVESTMENT MANAGEMENT, LLC ("PZENA")
120 WEST 45TH STREET, 20TH FLOOR
NEW YORK, NY 10036
The portion of All-Star allocated to Pzena is managed by a team of
portfolio managers. For All-Star, Richard Pzena, John Goetz, and Antonio
DeSpirito III have joint decision-making responsibility and "veto authority"
over any portfolio management decision.
A-1
Mr. Pzena is the Founder, Managing Principal, Chief Executive Officer and
Co-Chief Investment Officer of the firm. Prior to forming Pzena Investment
Management in 1995, Mr. Pzena was the Director of U.S. Equity Investments and
Chief Research Officer for Sanford C. Bernstein & Company. He joined Bernstein
in 1986 as an oil industry analyst and was named to the Institutional Investor
All America Research Team from 1988-1990. During 1990 and 1991, Mr. Pzena served
as Chief Investment Officer, Small Cap Equities, and assumed his broader
domestic equity role in 1991. Prior to joining Bernstein, Mr. Pzena worked for
the Amoco Corporation in various financial and planning roles. He earned a B.S.
summa cum laude and an M.B.A. from the Wharton School of the University of
Pennsylvania in 1979 and 1980, respectively.
Mr. Goetz is a Managing Principal and Co-Chief Investment Officer at the
firm. Prior to joining Pzena Investment Management in 1996, Mr. Goetz held a
range of key positions at Amoco Corporation for over 14 years, most recently as
the Global Business Manager for Amoco's $1 billion polypropylene business where
he had bottom line responsibility for operations and development worldwide.
Prior positions included strategic planning, joint venture investments and
project financing in various oil and chemical businesses. Prior to joining
Amoco, Mr. Goetz had been employed by The Northern Trust Company and Bank of
America. He earned a B.A. summa cum laude in Mathematics and Economics from
Wheaton College in 1979 and an M.B.A. from the Kellogg School at Northwestern
University in 1982.
Mr. DeSpirito is a Principal and Portfolio Manager of Large Cap Value.
Previously, Mr. DeSpirito was one of the Portfolio Managers of Pzena Investment
Management's Small Cap Value service. Prior to joining Pzena Investment
Management in 1996, Mr. DeSpirito was an Associate in the Corporate Department
at the Boston based law firm of Ropes & Gray. At Ropes & Gray, he advised
clients in the direct television, financial services, fitness, packaging films,
retail, software, and wire and cable industries. Mr. DeSpirito earned a B.S.
summa cum laude from the Wharton School of the University of Pennsylvania in
1990 and a J.D. magna cum laude from Harvard Law School in 1993.
SCHNEIDER CAPITAL MANAGEMENT CORPORATION ("SCHNEIDER")
450 EAST SWEDESFORD ROAD
WAYNE, PA 19087
The portion All-Star allocated to Schneider is managed by Arnold C.
Schneider III, CFA. Mr. Schneider serves as President and Chief Investment
Officer and manages the portion of All-Star allocated to Schneider. Prior to
founding Schneider, Mr. Schneider was a Senior Vice President and Partner of the
Wellington Management Company. He has earned the right to use the CFA Institute
Chartered Financial Analyst designation. Mr. Schneider received a B.S. in
Finance from the McIntire School of Commerce of the University of Virginia.
Schneider employs a five-point investment process based on new idea
generation, independent analysis, a ranking system, portfolio construction, and
a rigorous sell discipline. Utilizing a wide range of information sources,
Schneider focuses on identifying promising new investment opportunities.
Database screening is used on a limited basis, and high-priority companies are
sent to Schneider's analysts for in-depth investigation. Schneider's analysis of
investment opportunities includes the construction of comprehensive financial
A-2
models, the identification of drivers for positive change, contacting management
as necessary and developing objective earnings and valuation estimates. The
output of Schneider's analysis is a target price and expected return for each
company under consideration. Schneider determines a target price for current
holdings and ranks expected returns from high to low. New purchases must rank
above the median in appreciation potential to merit inclusion in the portfolio.
Schneider constructs a value portfolio with the intent that the best
companies will have a meaningful performance impact. However, Schneider also
employs a rigorous sell discipline to capitalize on success and minimize damage
from mistakes. Sales are most often triggered when a stock approaches its
pre-determined price target.
TCW INVESTMENT MANAGEMENT COMPANY ("TCW")
865 SOUTH FIGUEROA STREET
LOS ANGELES, CA 90017
The portion of All-Star allocated to TCW is managed by Craig C. Blum, CFA,
Portfolio Manager, Managing Director, US Equities and Stephen A. Burlingame,
Portfolio Manager, Managing Director, US Equities.
Mr. Blum is Co-Portfolio Manager of the Concentrated Core and Select
Equities investment strategies. He joined TCW in 1999. Prior to joining TCW, Mr.
Blum was a Senior Analyst with FMAC and Capital Markets. Prior to that, he
worked in institutional sales and mortgage-backed securities analysis at Paine
Webber. Mr. Blum began his investment career in 1994 at Merrill Lynch. Mr. Blum
received his Bachelor of Science in Applied Mathematics and Computer Science
from the University of California at Los Angeles (UCLA) in 1993, and his MBA in
Finance from the UCLA Anderson Graduate School of Management in 1999. Mr. Blum
has earned the right to use the CFA Institute Chartered Financial Analyst
designation.
Mr. Burlingame is Co-Portfolio Manager of the Concentrated Core and Select
Equities investment strategies at TCW. Previously, Mr. Burlingame was a member
of the Concentrated Core/ Select Equities team, having joined TCW in 2000 as a
health care analyst in the US Equity Research group. Prior to joining TCW, Mr.
Burlingame was an analyst with Brandywine Asset Management from 1999 to 2000.
Between 1996 and 1999, Mr. Burlingame completed internships at two different
asset management firms. Mr. Burlingame graduated cum laude from Claremont
McKenna College in 1999 with a Bachelor of Arts degree in Economics and a minor
in Spanish.
A-3
[LOGO]
LIBERTY
ALL-STAR
EQUITY FUND
A MULTI-MANAGED INVESTMENT COMPANY
[__] SHARES OF
BENEFICIAL INTEREST
ISSUABLE UPON EXERCISE
OF RIGHTS TO SUBSCRIBE
FOR SUCH SHARES
------------------------------
PROSPECTUS
[________], 2007
SUBJECT TO COMPLETION, DATED [ ], 2007
---------
LIBERTY ALL-STAR EQUITY FUND
STATEMENT OF ADDITIONAL INFORMATION
[ ], 2007
---------------
This Statement of Additional Information ("SAI") is not a prospectus, and
should be read in conjunction with the Prospectus of Liberty All-Star Equity
Fund ("All-Star") dated [ ], 2007. You may obtain copy of the Prospectus
free of charge, by writing to All-Star c/o ALPS Fund Services, Inc., 1290
Broadway, Suite 1100, Denver, CO 80203, or by calling 1-800-542-3863.
TABLE OF CONTENTS
PAGE
INVESTMENT OBJECTIVE AND POLICIES............................................. 1
INVESTMENT RESTRICTIONS.......................................................11
INVESTMENT ADVISORY AND OTHER SERVICES........................................13
PROXY VOTING..................................................................15
TRUSTEES AND OFFICERS.........................................................15
PORTFOLIO SECURITY TRANSACTIONS...............................................35
TAXES.........................................................................37
PRINCIPAL SHAREHOLDERS........................................................39
FINANCIAL STATEMENTS..........................................................39
NEITHER THE U.S. SECURITIES AND EXCHANGE COMMISSION ("SEC") NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR
DETERMINED IF THIS SAI IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SEC.
THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE
TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS SAI SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL
THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION
UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
INVESTMENT OBJECTIVE AND POLICIES
A description of the investment objective of All-Star and the types of
securities in which it may invest is contained in the Prospectus under
"Investment Objective, Policies and Risks." What follows is additional
information regarding securities in which All-Star may invest and investment
practices in which it may engage, and additional risks relating thereto.
OPTIONS AND FUTURES STRATEGIES
------------------------------
The effective use of options and future strategies is dependent, among
other things, on All-Star's ability to terminate options and futures positions
at times when it or its Portfolio Managers deem it desirable to do so. Although
All-Star will not enter into an option or futures position unless it believes
that a liquid secondary market exists for such option or future, there is no
assurance that All-Star will be able to effect closing transactions at any
particular time or at an acceptable price. All-Star generally expects that its
options and futures transactions will be conducted on recognized securities
exchanges. In certain instances, however, All-Star may purchase and sell options
in the over-the-counter market. All-Star's ability to terminate option positions
established in the over-the-counter market may be more limited than in the case
of exchange-traded options and may also involve the risk that securities dealers
participating in such transactions would fail to meet their obligations to All-
Star. All-Star may not purchase or sell future contracts and related options if
immediately thereafter the sum of the amount of initial margin deposits on All-
Star's existing futures and premiums paid for such related options would exceed
5% of the market value of All-Star's net assets. Such limitation, however, will
not limit All-Star's loss on such contracts and options, which is potentially
unlimited.
WRITING COVERED PUT AND CALL OPTIONS ON SECURITIES
--------------------------------------------------
All-Star may write covered call options and covered put options on
optionable securities of the types in which it is permitted to invest from time-
to-time as its respective Portfolio Managers determine is appropriate in seeking
to attain its objectives. Call options written by All-Star give the holder the
right to buy the underlying securities from All-Star at a stated exercise price;
put options give the holder the right to sell the underlying security to All-
Star at a stated price.
All-Star may write only covered options, which means that, so long as All-
Star is obligated as the writer of a call option, it will own the underlying
securities subject to the option (or comparable securities satisfying the cover
requirements of securities exchanges). In the case of put options, All-Star will
maintain in a separate account cash or short-term U.S. Government Securities
with a value equal to or greater than the exercise price of the underlying
securities. All-Star may also write combinations or covered puts and calls on
the same underlying security.
All-Star will receive a premium from writing a put or call option, which
increases All-Star's return in the event the option expires unexercised or is
closed out at a profit. The amount of the premium will reflect, among other
things, the relationship of the market price of the underlying security to the
exercise price of the option, the term of the option and the volatility of the
market price of the underlying security. By writing a call option, All-Star
limits its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the option. By writing a put
option, All-Star assumes the risk that it may be required to purchase the
underlying security for an exercise price higher than its then current market
value, resulting in a potential capital loss if the purchase price exceeds the
market value plus the amount of the premium received, unless the security
subsequently appreciates in value.
All-Star may terminate an option that it has written prior to its
expiration by entering into a closing purchase transaction in which it purchases
an option having the same terms as the option written. All-Star will realize a
profit or loss from such transaction if the cost of such transaction is less or
more than the premium received from the writing of the option. In the case of a
put option, any loss so incurred may be partially or entirely offset by the
premium received from a simultaneous or subsequent sale of a different put
option. Because increases in the market price of a call option will generally
reflect increases in the market price of the underlying security, any loss
resulting from the repurchase of a call option is likely to be offset in whole
or in part by unrealized appreciation of the underlying security owned by All-
Star.
PURCHASING PUT AND CALL OPTIONS ON SECURITIES
---------------------------------------------
All-Star may purchase put options to protect its portfolio holdings in an
underlying security against a decline in market value. Such hedge protection is
provided during the use of the put options since All-Star, as holder of the put
option, is able to sell the underlying security at the put exercise price
regardless of any decline in the underlying security's market price. In order
for a put option to be profitable, the market price of the underlying security
must decline sufficiently below the exercise price to cover the premium and
transaction costs. By using put options in this manner, All-Star will reduce any
profit it might otherwise have realized in its underlying security by the
premium paid for the put option and by transaction costs.
All-Star may also purchase call options to hedge against an increase in
prices of securities that it wants ultimately to buy. Such hedge protection is
provided during the life of the call option since All-Star, as holder of the
call option, is able to buy the underlying security at the exercise price
regardless of any increase in the underlying security's market price. In order
for a call option to be profitable, the market price of the underlying security
must rise sufficiently above the exercise price to cover the premium and
transaction costs. By using call options in this manner, All-Star will reduce
any profit it might have realized had it bought the underlying security at the
time it purchased the call option by the premium paid for the call option and by
transaction costs.
PURCHASE AND SALE OF OPTIONS AND FUTURES ON STOCK INDICES
---------------------------------------------------------
All-Star may purchase and sell options on stock indices and stock index
futures as a hedge against movements in the equity markets.
Options on stock indices are similar to options on specific securities
except that, rather than the right to take or make delivery of the specific
security at a specified price, an option on a stock index gives the holder the
right to receive, upon exercise of the option, an amount of cash if the closing
level of that stock index is greater than, in the case of a call, or less than,
in the case of a put, the exercise price of the option. This amount of cash is
equal to such difference between the closing price of the index and the exercise
price of the option expressed in dollars times a specified multiple. The writer
2
of the option is obligated, in return for the premium received, to make delivery
of this amount. Unlike options on specific securities, all settlements of
options on stock indices are in cash and gain or loss depends on general
movements in the stocks included in the index rather than price movements in
particular stocks.
A stock index futures contract is an agreement in which one party agrees
to deliver to the other an amount of cash equal to a specific dollar amount
times the difference between the value of a specific stock index at the close of
the last trading day of the contract and the price at which the agreement is
made. No physical delivery of securities is made.
If a Portfolio Manager of All-Star expects general stock market prices to
rise, it might purchase a call option on a stock index or a futures contract on
that index as a hedge against an increase in prices of particular equity
securities it wants ultimately to buy. If in fact the stock index does rise, the
price of the particular equity securities intended to be purchased may also
increase, but that increase would be offset in part by the increase in the value
of All-Star's index option or futures contract resulting from the increase in
the index. If, on the other hand, the Portfolio Manager expects general stock
market prices to decline, it might purchase a put option or sell a futures
contract on the index. If that index does in fact decline, the value of some or
all of the equity securities in All-Star's portfolio may also be expected to
decline, but that decrease would be offset in part by the increase in the value
of All-Star's position in such put option or future. All-Star may purchase call
options on a stock index or a futures contracts on that index to enable a newly
appointed Portfolio Manager to gain immediate exposure to the underlying
securities market pending the investment in individual securities of the portion
of All-Star's portfolio assigned to it.
In connection with transactions in stock index options, futures and
related options, All-Star will be required to deposit as "initial margin" an
amount of cash and short-term U.S. Government Securities equal to from 5% to 8%
of the contract amount. Thereafter, subsequent payments (referred to as
"variation margin") are made to and from the broker to reflect changes in the
value of the futures contract.
OPTIONS ON STOCK INDEX FUTURES CONTRACTS
----------------------------------------
All-Star may purchase and write call and put options on stock index
futures contracts. All-Star may use such options on futures contracts in
connection with its hedging strategies in lieu of purchasing and writing options
directly on the underlying securities or stock indices or purchasing and selling
the underlying futures. For example, All-Star may purchase put options or write
call options on stock index futures, rather than selling futures contracts, in
anticipation of a decline in general stock market prices, or purchase call
options or write put options on stock index futures, rather than purchasing such
futures, to hedge against possible increases in the price of equity securities
which All-Star intends to purchase.
RISK FACTORS IN OPTIONS AND FUTURES TRANSACTIONS
------------------------------------------------
The effective use of options and futures strategies is dependent, among
other things, on All-Star's ability to terminate options and futures positions
at times when its respective Portfolio Managers deem it desirable to do so.
Although All-Star will not enter into an option or futures position unless its
3
Portfolio Managers believe that a liquid secondary market exists for such option
or future, there is no assurance that All-Star will be able to effect closing
transactions at any particular time or at an acceptable price. All-Star
generally expects that its option and futures transactions will be conducted on
recognized securities exchanges. In certain instances, however, All-Star may
purchase and sell options in the over-the-counter market. All-Star's ability to
terminate option positions established in the over-the-counter market may be
more limited than in the case of exchange-traded options and may also involve
the risk that securities dealers participating in such transactions would fail
to meet their obligations to All-Star.
The use of options and futures involves the risk of imperfect correlation
between movements in options and future prices and movements in the price of
securities which are the subject of the hedge. Such correlation, particularly
with respect to options on stock indices and stock index futures, is imperfect,
and such risk increases as the composition of All-Star's portfolio diverges from
the composition of the relevant index. The successful use of these strategies
also depends on the ability of the Portfolio Manager to correctly forecast
interest rate or general stock market price movements.
REGULATORY MATTERS
------------------
All-Star will conduct its purchases and sales of futures contracts and
writing of related options transactions in accordance with the rules,
regulations and any exemptions promulgated by the Commodity Futures Trading
Commission ("CFTC") and the SEC with respect to such transactions.
BANK OBLIGATIONS
----------------
Bank obligations in which All-Star may invest include certificates of
deposit, bankers' acceptances, and fixed time deposits. Certificates of deposit
are negotiable certificates issued against funds deposited in a commercial bank
for a definite period of time and earning a specified return. Bankers'
acceptances are negotiable drafts or bills of exchange, normally drawn by an
importer or exporter to pay for specific merchandise, which are "accepted" by a
bank, meaning, in effect, that the bank unconditionally agrees to pay the face
value of the instrument on maturity. Fixed time deposits are bank obligations
payable at a stated maturity date and bearing interest at a fixed rate. Fixed
time deposits may be withdrawn on demand by the investor but may be subject to
early withdrawal penalties, which vary depending upon market conditions and on
the right to transfer a beneficial interest in a fixed time deposit to a third
party, although there is no market for such deposits.
Bank obligations include foreign bank obligations, including Eurodollar
and Yankee obligations. Eurodollar bank obligations are dollar certificates of
deposits and time deposits issued outside the U.S. capital markets by foreign
branches of U.S. banks and by foreign banks. Yankee obligations are dollar-
denominated obligations issued in the U.S. capital markets by foreign banks.
Foreign bank obligations are subject to the same risks that pertain to domestic
issues, notably credit risk and interest rate risk. Additionally, foreign bank
obligations are subject to many of the same risks as investments in foreign
securities (see "Foreign Equity Securities" below). Obligations of foreign banks
involve somewhat different investment risks than those affecting obligations of
U.S. banks, including the possibilities that their liquidity could be impaired
4
because of future political and economic developments of the foreign bank's
country, that their obligations may be less marketable than comparable
obligations of U.S. banks, that a foreign jurisdiction might impose withholding
taxes on interest income payable on those obligations, that foreign deposits may
be seized or nationalized, that foreign governmental restrictions such as
exchange controls may be adopted, which might adversely affect the payment of
principal and interest on those obligations and that the selection of those
obligations may be more difficult because there may be less publicly available
information concerning foreign banks or the accounting, auditing and financial
reporting standards, practices and requirements applicable to foreign banks may
differ from those applicable to U.S. banks. Foreign banks are not generally
subject to examination by any U.S. Government agency or instrumentality.
COMMERCIAL PAPER
----------------
A1 and Prime 1 are the highest commercial paper ratings issued by Standard
& Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"), and Moody's
Investors Service, Inc. ("Moody's"), respectively. Commercial paper rated A1 by
S&P has the following characteristics: (1) liquidity ratios are adequate to meet
cash requirements; (2) long-term senior debt is rated A or better; (3) the
issuer has access to at least two additional channels of borrowing; (4) basic
earnings and cash flow have an upward trend with an allowance made for unusual
circumstances; (5) typically, the issuer's industry is well established and the
issuer has a strong position within the industry; and (6) the reliability and
quality of management are unquestioned.
Among the factors considered by Moody's in assigning ratings are the
following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of 10 years; (7) financial strength of a parent company and the
relationships that exist with the issuer; and (8) recognition by the management
of obligations that may be present or may arise as a result of public interest
questions and preparation to meet such obligations.
GOVERNMENT SECURITIES
---------------------
Government securities may be either direct obligations of the U.S.
Treasury or may be the obligations of an agency or instrumentality of the United
States.
TREASURY OBLIGATIONS. The U.S. Treasury issues a variety of marketable
securities that are direct obligations of the U.S. Government. These securities
fall into three categories - bills, notes, and bonds - distinguished primarily
by their maturity at time of issuance. Treasury bills have maturities of one
year or less at the time of issuance, while Treasury notes currently have
maturities of one to 10 years. Treasury bonds can be issued with any maturity of
more than 10 years.
OBLIGATIONS OF AGENCIES AND INSTRUMENTALITIES. Agencies and
instrumentalities of the U.S. Government are created to fill specific
governmental roles. Their activities are primarily financed through securities
whose issuance has been authorized by Congress. Agencies and instrumentalities
include the Export Import Bank, Federal Housing Administration, Government
5
National Mortgage Association, Tennessee Valley Authority, Banks for
Cooperatives, Farmers Home Administration, Federal Home Loan Banks, Federal
Intermediate Credit Banks, Federal Land Banks, Federal National Mortgage
Association, Federal Home Loan Mortgage Corp., U.S. Postal System, and Federal
Finance Bank. Although obligations of "agencies" and "instrumentalities" are not
direct obligations of the U.S. Treasury, payment of the interest or principal on
these obligations is generally backed directly or indirectly by the U.S.
Government. This support can range from backing by the full faith and credit of
the United States or U.S. Treasury guarantees to the backing solely of the
issuing instrumentality itself.
FOREIGN EQUITY SECURITIES
-------------------------
Foreign equity securities include common stock and preferred stock,
including securities convertible into equity securities, issued by foreign
companies, American Depositary Receipts ("ADRs") and Global Depositary Receipts
("GDRs"). In determining whether a company is foreign, ALPS Advisers, Inc.
("AAI") will consider various factors, including where the company is
headquartered, where the company's principal operations are located, where the
company's revenues are derived, where the principal trading market is located
and the country in which the company was legally organized. The weight given to
each of these factors will vary depending upon the circumstances.
Foreign equity securities, which are generally denominated in foreign
currencies, involve risks not typically associated with investing in domestic
securities. Foreign securities may be subject to foreign taxes that would reduce
their effective yield. Certain foreign governments levy withholding taxes
against dividend and interest income. Although in some countries a portion of
these taxes is recoverable, the unrecovered portion of any foreign withholding
taxes would reduce the income All-Star receives from its foreign investments.
Foreign investments involve other risks, including possible political or
economic instability of the country of the issuer, the difficulty of predicting
international trade patterns, and the possibility of currency exchange controls.
Foreign securities may also be subject to greater fluctuations in price than
domestic securities. There may be less publicly available information about a
foreign company than about a domestic company. Foreign companies generally are
not subject to uniform accounting, auditing, and financial reporting standards
comparable to those of domestic companies.
There is generally less government regulation of stock exchanges, brokers,
and listed companies abroad than in the United States. In addition, with respect
to certain foreign countries, there is a possibility of the adoption of a policy
to withhold (or increase existing withholding) taxes on dividends at the source,
or of expropriation, nationalization, confiscatory taxation, or diplomatic
developments that could affect investments in those countries. Finally, in the
event of default on a foreign debt obligation, it may be more difficult for All-
Star to obtain or enforce a judgment against the issuers of the obligation. All-
Star will normally execute its portfolio securities transactions on the
principal stock exchange on which the security is traded.
The considerations noted above regarding the risk of investing in foreign
securities are generally more significant for investments in emerging or
developing countries, such as countries in Eastern Europe, Latin America, South
America or Southeast Asia. These countries may have relatively unstable
6
governments and securities markets in which only a small number of securities
trade. Markets of developing or emerging countries may generally be more
volatile than markets of developed countries. Investment in these markets may
involve significantly greater risks, as well as the potential for greater gains.
ADRs in registered form are dollar-denominated securities designed for use
in the U.S. securities markets. ADRs are sponsored and issued by domestic banks
and represent and may be converted into underlying foreign securities deposited
with the domestic bank or a correspondent bank. ADRs do not eliminate the risks
inherent in investing in the securities of foreign issuers. By investing in ADRs
rather than directly in the foreign security, however, All-Star may avoid
currency risks during the settlement period for either purchases or sales. There
is a large, liquid market in the United States for most ADRs. GDRs are receipts
representing an arrangement with a major foreign bank similar to that for ADRs.
GDRs are not necessarily denominated in the currency of the underlying security.
While ADRs and GDRs will generally be considered foreign securities for purposes
of calculation of any investment limitation placed on All-Star's exposure to
foreign securities, these securities, along with the securities of foreign
companies traded on the NASDAQ Stock Market will not be subject to any of the
restrictions placed on All-Star's ability to invest in emerging market
securities.
Additional costs may be incurred in connection with All-Star's foreign
investments. Foreign brokerage commissions are generally higher than those in
the United States. Expenses may also be incurred on currency conversions when
All-Star moves investments from one country to another. Increased custodian
costs as well as administrative difficulties may be experienced in connection
with maintaining assets in foreign jurisdictions.
FOREIGN FIXED INCOME SECURITIES
-------------------------------
Foreign fixed income securities include debt securities of foreign
corporate issuers, certain foreign bank obligations (see "Bank Obligations"),
obligations of foreign governments or their subdivisions, agencies and
instrumentalities, and obligations of supranational entities such as the World
Bank, the European Investment Bank, and the Asian Development Bank. Any of these
securities may be denominated in foreign currency or U.S. dollars, or may be
traded in U.S. dollars in the United States although the underlying security is
usually denominated in a foreign currency.
The risk of investing in foreign fixed income securities is the same as
the risks of investing in foreign equity securities. Additionally, investment in
sovereign debt (debt issued by governments and their agencies and
instrumentality) can involve a high degree of risk. The governmental entity that
controls the repayment of sovereign debt may not be available or willing to
repay the principal and/or interest when due in accordance with the terms of the
debt. A governmental entity's willingness or ability to repay principal and
interest due in a timely manner may be affected by, among other factors, its
cash flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the governmental entity's
policy toward the International Monetary Fund, and the political constraints to
which a governmental entity may be subject. Governmental entities may also
depend on expected disbursements from foreign governments, multilateral agencies
and others to reduce principal and interest arrearages on their debt. The
7
commitment on the part of these governments, agencies and others to make such
disbursements may be conditioned on a governmental entity's implementation of
economic reforms and/or economic performance and the timely service of such
debtor's obligations. Failure to implement such reforms, achieve such levels of
economic performance or repay principal or interest when due may result in the
cancellation of such third parties' commitments to lend funds to the
governmental entity, which may further impair such debtor's ability or
willingness to service its debts in a timely manner. Consequently, governmental
entities may default on their sovereign debt. Holders of sovereign debt
(including All-Star) may be requested to participate in the rescheduling of such
debt and to the extent further loans to governmental entities. There is no
bankruptcy proceeding by which sovereign debt on which governmental entities
have defaulted may be collected in whole or in part.
CURRENCY CONTRACTS
------------------
The value of All-Star's investments in foreign securities will fluctuate
as a result of changes in the exchange rates between the U.S. dollar and the
currencies in which the foreign securities or bank deposits held by All-Star are
denominated. To reduce or limit exposure to changes in currency exchange rates
(referred to as "hedging") All-Star may enter into forward currency exchange
contracts that, in effect, lock in a rate of exchange during the period of the
forward contracts. Forward contracts are usually entered into with currency
traders, are not traded on securities exchanges, and usually have a term of less
than one year, but can be renewed. A default on a forward contract would deprive
All-Star of unrealized profits or force All-Star to cover its commitments for
purchase or sale of currency, if any, at the market price. All-Star will enter
into forward contracts only for hedging purposes and not for speculation. If
required by the Investment Company Act of 1940, as amended (the "1940 Act"), or
the SEC, All-Star may "cover" its commitment under forward contracts by
segregating cash or liquid securities with All-Star's custodian in an amount not
less than the current value of its total assets committed to the consummation of
the contracts. Under normal market conditions, no more than 25% of All-Star's
assets may be committed to the consummation of currency exchange contracts.
All-Star may also purchase or sell foreign currencies on a "spot" (cash)
basis or on a forward basis to lock in the U.S. dollar value of a transaction at
the exchange rate or rates then prevailing. All-Star will use this hedging
technique in an attempt to insulate itself against possible losses resulting
from a change in the relationship between the U.S. dollar and the relevant
foreign currency during the period between the date a security is purchased or
sold and the date on which payment is made or received.
Hedging against adverse changes in exchange rates will not eliminate
fluctuation in the prices of All-Star's portfolio securities or prevent loss if
the prices of those securities decline. In addition, the use of forward
contracts may limit potential gains from an appreciation in the U.S. dollar
value of a foreign currency. Forecasting short-term currency market movements is
very difficult, and there is no assurance that short-term hedging strategies
used by All-Star will be successful.
8
REPURCHASE AGREEMENTS
---------------------
All-Star may invest in repurchase agreements, which are agreements by
which All-Star purchases a security and simultaneously commits to resell that
security to the seller (a commercial bank or securities dealer) at a stated
price within a number of days (usually not more than seven) from the date of
purchase. The resale price reflects the purchase price plus a rate of interest
that is unrelated to the coupon rate or maturity of the purchased security.
Repurchase agreements may be considered loans by All-Star collateralized by the
underlying security. The obligation of the seller to pay the stated price is in
effect secured by the underlying security. The seller will be required to
maintain the value of the collateral underlying any repurchase agreement at a
level at least equal to the price of the repurchase agreement. In the case of
default by the seller, All-Star could incur a loss. In the event of a bankruptcy
proceeding commenced against the seller, All-Star may incur costs and delays in
realizing upon the collateral. All-Star will enter into repurchase agreements
only with those banks or securities dealers that are deemed creditworthy
pursuant to criteria adopted by AAI. There is no limit on the portion of
All-Star's assets that may be invested in repurchase agreements with maturities
of seven days or less. Not more than 10% of All-Star's net assets will be
invested in repurchase agreements maturing in more than seven days.
BORROWING
---------
All-Star may borrow from banks for temporary administrative purposes.
All-Star also may enter into certain transactions, including reverse repurchase
agreements, mortgage dollar rolls, and sale-buybacks, that can be viewed as
constituting a form of borrowing or financing transaction by All-Star. To the
extent All-Star covers its commitment under such transactions (or economically
similar transaction) by the segregation of assets determined in accordance with
procedures adopted by All-Star's Board of Trustees ("Board of Trustees"), equal
in value to the amount of All-Star's commitment to repurchase, such an agreement
will not be considered a "senior security" by All-Star and therefore will not be
subject to the 300% asset coverage requirement otherwise applicable to
borrowings by All-Star. Borrowing will tend to exaggerate the effect on net
asset value of any increase or decrease in the market value of All-Star's
portfolio. Money borrowed will be subject to interest costs that may or may not
be recovered by appreciation of the securities purchased. All-Star also may be
required to maintain minimum average balances in connection with such borrowing
or to pay a commitment or other fee to maintain a line of credit; either of
these requirements would increase the cost of borrowing over the stated interest
rate.
ILLIQUID SECURITIES
-------------------
Illiquid securities are securities that may not be sold or disposed of in
the ordinary course of business within seven days at approximately the price
used to determine All-Star's net asset value. Under current interpretations of
the Staff of the SEC, the following instruments in which All-Star may invest
will be considered illiquid: (1) repurchase agreements maturing in more than
seven days; (2) restricted securities (securities whose public resale is subject
to legal restrictions, except as described in the following paragraph); (3)
options, with respect to specific securities, not traded on a national
securities exchange that are not readily marketable; and (4) any other
securities in which All-Star may invest that are not readily marketable.
9
All-Star may also purchase without limit certain restricted securities
that can be resold to qualifying institutions pursuant to a regulatory exemption
under Rule 144A ("Rule 144A securities"). If a dealer or institutional trading
market exists for Rule 144A securities, such securities are deemed to be liquid.
PREFERRED STOCK
---------------
All-Star may invest in preferred stock. Unlike interest payments on debt
securities, dividends on preferred stock are generally payable at the discretion
of the issuer's board of directors. Preferred shareholders may have certain
rights if dividends are not paid but generally have no legal recourse against
the issuer. Shareholders may suffer a loss of value if dividends are not paid.
The market prices of preferred stocks are generally more sensitive to changes in
the issuer's creditworthiness than are the prices of debt securities.
CONVERTIBLE SECURITIES AND WARRANTS
-----------------------------------
Convertible debentures are interest-bearing debt securities, typically
unsecured, that represent an obligation of the issuer providing the owner with
claims to the issuer's earnings and assets before common and preferred stock
owners, generally on par with unsecured creditors. If unsecured, claims of
convertible debenture owners would be inferior to claims of secured debt
holders. Convertible preferred stocks are securities that represent an ownership
interest in a corporation providing the owner with claims to the corporation's
earnings and assets before common stock owners, but after bond owners.
Investments by All-Star in convertible debentures or convertible preferred stock
would be a substitute for an investment in the common stock into which the
debentures or preferred stock are convertible if available in quantities
necessary to satisfy All-Star's investment needs (for example, in the case of a
new issuance of convertible securities) or where, because of financial market
conditions, the conversion price of the convertible security is comparable to
the price of the underlying common stock, in which case a preferred position
with respect to the corporation's earnings and assets may be preferable to
holding common stock.
Warrants are options to buy a stated number of underlying securities at a
specified price any time during the life of the warrants. The securities
underlying these warrants will be the same types of securities that All-Star
will invest in to achieve its investment objective of capital appreciation. The
purchaser of a warrant expects the market price of the underlying security will
exceed the purchase price of the warrant plus the exercise price of the warrant,
thus resulting in a profit. If the market price never exceeds the purchase price
plus the exercise price of the warrant before the expiration date of the
warrant, the purchaser will suffer a loss equal to the purchase price of the
warrant.
INVESTMENTS IN SMALL AND UNSEASONED COMPANIES
---------------------------------------------
An unseasoned company is an entity with a limited operating history.
Unseasoned and small companies may have unprofitable operating histories,
limited financial resources, and inexperienced management. In addition, they
often face competition from larger or more established firms that have greater
resources. Securities of small and unseasoned companies are frequently traded in
the over-the-counter market or on regional exchanges where low trading volumes
10
may result in erratic or abrupt price movements. To dispose of these securities,
All-Star may need to sell them over an extended period or below the original
purchase price. Investments by All-Star in these small or unseasoned companies
may be regarded as speculative.
ZERO-COUPON AND PAY-IN-KIND SECURITIES
--------------------------------------
A zero-coupon security has no cash coupon payments. Instead, the issuer
sells the security at a substantial discount from its maturity value. The
interest equivalent received by the investor from holding this security to
maturity is the difference between the maturity value and the purchase price.
Pay-in-kind securities are securities that pay interest in either cash or
additional securities, at the issuer's option, for a specified period. The price
of pay-in-kind securities is expected to reflect the market value of the
underlying accrued interest since the last payment. Zero-coupon and pay-in-kind
securities are more volatile than cash pay securities. All-Star accrues income
on these securities prior to the receipt of cash payments. All-Star intends to
distribute substantially all of its income to its shareholders to qualify for
pass-through treatment under the tax laws and may, therefore, need to use its
cash reserves to satisfy distribution requirements.
INVESTMENT RESTRICTIONS
Except as indicated otherwise, the following investment restrictions have
been adopted for All-Star as fundamental policies and may be changed only by a
majority vote (as defined under "Investment Objective, Policies and Risks" in
the Prospectus) of All-Star's outstanding shares. Non fundamental policies may
be changed by the Board of Trustees without shareholder approval.
All-Star may not:
(1) Issue senior securities, except as permitted by (2) below.
(2) Borrow money, except that it may borrow in an amount not exceeding
7% of its total assets (including the amount borrowed) taken at market value at
the time of such borrowing, and except that it may make borrowings in amounts up
to an additional 5% of its total assets (including the amount borrowed) taken at
market value at the time of such borrowing to finance the repurchase of its
shares, to obtain such short-term credits as are necessary for the clearance of
securities transactions, or for temporary or emergency purposes, and may
maintain and renew any of the foregoing borrowings, provided that All-Star
maintains asset coverage of 300% with respect to all such borrowings. As a non-
fundamental policy, All-Star will not borrow in an amount in excess of 5% of its
total assets (including the amount borrowed).
(3) Pledge, mortgage or hypothecate its assets, except to secure
indebtedness permitted by paragraph (2) above and then only if such pledging,
mortgaging or hypothecating does not exceed 12% of All-Star's total assets taken
at market value at the time of such pledge, mortgage or hypothecation. The
deposit in escrow of securities in connection with the writing of put and call
options and collateral arrangements with respect to margin for futures contracts
are not deemed to be pledges or hypothecation for this purpose.
11
(4) Act as an underwriter of securities of other issuers, except to the
extent that, in connection with the disposition of portfolio securities, All-
Star may be deemed to be an underwriter for purposes of the Securities Act of
1933.
(5) Purchase or sell real estate or any interest therein, except that
All-Star may invest in securities issued or guaranteed by corporate or
governmental entities secured by real estate or interests therein, such as
mortgage pass-throughs and collateralized mortgage obligations, or issued by
companies that invest in real estate or interests therein.
(6) Make loans to other persons except for loans of portfolio securities
(up to 30% of total assets) and except through the use of repurchase agreements,
the purchase of commercial paper or the purchase of all or a portion of an issue
of debt securities in accordance with its investment objective, policies and
restrictions, and provided that not more than 10% of All-Star's net assets will
be invested in repurchase agreements maturing in more than seven days.
(7) Invest in commodities or in commodity contracts (except stock index
futures and options).
(8) Purchase securities on margin (except to the extent that the
purchase of options and futures may involve margin and except that it may obtain
such short-term credits as may be necessary for the clearance of purchases or
sales of securities), or make short sales of securities.
(9) Purchase the securities of issuers conducting their principal
business activity in the same industry (other than securities issued or
guaranteed by the United States, its agencies and instrumentalities) if,
immediately after such purchase, the value of its investments in such industry
would comprise 25% or more of the value of its total assets taken at market
value at the time of each investment.
(10) Purchase securities of any one issuer, if (a) more than 5% of All-
Star's total assets taken at market value would at the time be invested in the
securities of such issuer, except that such restriction does not apply to
securities issued or guaranteed by the United States Government or its agencies
or instrumentalities or corporations sponsored thereby, and except that up to
25% or All-Star's total assets may be invested without regard to this
limitation; or (b) such purchase would at the time result in more than 10% of
the outstanding voting securities of such issuer being held by All-Star, except
that up to 25% of All-Star's total assets may be invested without regard to this
limitation.
(11) Invest in securities of another registered investment company,
except (i) as permitted by the Investment Company Act of 1940, as amended from
time to time, or any rule or order thereunder, or (ii) in connection with a
merger, consolidation, acquisition or reorganization.
(12) Purchase any security, including any repurchase agreement maturing
in more than seven days, which is subject to legal or contractual delays in or
restrictions on resale (including unregistered securities that are eligible for
resale pursuant to Rule 144A under the Securities Act of 1933), or which is not
readily marketable, if more than 10% of the net assets of All-Star, taken at
market value, would be invested in such securities.
12
(13) Invest for the purpose of exercising control over or management of
any company.
(14) Purchase securities unless the issuer thereof or any company on
whose credit the purchase was based, together with its predecessors, has a
record of at least three years' continuous operations prior to the purchase,
except for investments which, in the aggregate, taken at cost do not exceed 5%
of All-Star's total assets.
If a percentage restriction on investment or utilization of assets as set
forth above is adhered to at the time an investment is made, a later change in
percentage resulting from a change in the market values of All-Star's assets
will not be considered a violation of the restriction.
INVESTMENT ADVISORY AND OTHER SERVICES
As stated under "Management of All-Star" in the prospectus, ALPS Advisers,
Inc., 1290 Broadway, Suite 1100, Denver, CO 80203, is All-Star's investment
adviser. Pursuant to its Fund Management Agreements with All-Star, AAI
implements and operates All-Star's multi-manager methodology and has overall
supervisory responsibility for the general management and investment of All-
Star's assets, subject to All Star's investment objectives and policies and any
directions of the Board of Trustees. AAI recommends to the Board of Trustees the
investment management firms (currently five) for appointment as Portfolio
Managers of All-Star. ALPS Fund Services, Inc. ("AFS"), 1290 Broadway, Suite
1100, Denver, Colorado, 80203, an affiliate of AAI, provides administrative
services to All-Star under an Administration, Bookkeeping and Pricing Services
Agreement with All-Star.
The names and addresses of All-Star's current Portfolio Managers are as
follows:
Chase Investment Counsel Corporation
300 Preston Avenue
Charlottesville, VA 22902-5091
Matrix Asset Advisors, Inc.
747 Third Avenue
New York, NY 10017
Pzena Investment Management, LLC
120 West 45th Street
New York, NY 10036
Schneider Capital Management Corporation
460 East Swedesford Road
Wayne, PA 19087
TCW Investment Management Company
865 South Figueroa Street
Los Angeles, CA 90017
13
AAI
---
As described under "Management of All-Star" in the Prospectus, All-Star
pays AAI a fund management fee for its investment management services (from
which AAI pays the Portfolio Managers' fee).
Prior to December 18, 2006, All-Star was managed by Banc of America
Investment Advisors, Inc. ("BAIA"). For the period ended December 18, 2006 and
the years ended December 31, 2005 and 2004 the total fund management fees paid
to BAIA were $[9,078,397], $[9,339,478] and $[8,664,829], respectively, of which
an aggregate of $[4,539,199], $[4,669,739] and $[4,332,415], respectively, was
paid to the Portfolio Managers.
For the period December 18, 2006 to December 30, 2006, the total fund
management fees paid to AAI were $[421,854] of which an aggregate of
$[210,927] was paid to the Portfolio Managers
All-Star's current Fund Management Agreement and Portfolio Management
Agreements provides that they will continue in effect until December 2008 and
will continue in effect thereafter so long as such continuance is specifically
approved annually by (a) the Board of Trustees or (b) the majority vote of All-
Star's outstanding shares (as defined under "Investment Objective, Policies and
Risks" in the Prospectus), provided that, in either event, the continuance is
also approved by a majority of the Trustees who are not "interested persons" (as
defined in the 1940 Act) of All-Star (the "Disinterested Trustees"), AAI or the
Portfolio Managers by a vote cast in person at a meeting called for the purpose
of voting on such approval. All-Star's Management Agreement may be terminated
on 60 days written notice by either party, and the Portfolio Management
Agreements may be terminated on 30 days' notice by any party, and any such
agreements will terminate automatically if assigned.
All-Star, AAI and the Portfolio Managers have adopted Codes of Ethics
pursuant to the requirements of the 1940 Act. These Codes of Ethics permit
personnel subject to the Codes to invest in securities, including securities
that may be purchased or held by All-Star. Copies of the Codes of Ethics of
All-Star and AAI can be reviewed and copied at the SEC's Public Reference Room
in Washington, D.C. Information on the operation of the Public Reference Room
may be obtained by calling the SEC at 1-202-942-8090. The Codes of Ethics are
also available on the EDGAR database on the SEC's Internet site at www.sec.gov,
or may be obtained, after paying a duplicating fee, by electronic request at
publicinfo@sec.gov, or by writing the SEC's Public Reference Section,
Washington, D.C. 20549-0102.
CUSTODIAN; ADMINISTRATION, BOOKKEEPING, AND PRICING AGENT
---------------------------------------------------------
State Street Bank and Trust Company (the "Custodian"), One Lincoln Street,
Boston, Massachusetts 02111, is the custodian of the portfolio securities and
cash of All-Star. As such, the Custodian holds All-Star's portfolio securities
and cash in separate accounts on All-Star's behalf and receives and delivers
portfolio securities and cash in connection with portfolio transactions
initiated by All-Star's Portfolio Managers, collects income due on the portfolio
securities and disburses funds in connection with the payment of distributions
and expenses.
14
AFS, an affiliate of AAI, performs administrative, bookkeeping and pricing
services for All-Star. Prior to December 18, 2006, Columbia Management
Advisors, LLC ("Columbia") an affiliate of BAIA provided administrative,
bookkeeping and pricing services to All-Star. For the period ended December 18,
2006, and the years ended December 31, 2005 and 2004, All-Star paid
administrative, bookkeeping and pricing fees to Columbia of $[2,425,303],
$[2,537,584] and $[2,378,612] respectively.
For the period December 18, 2006 to December 30, 2006, All-Star paid
administrative, bookkeeping and pricing fees to AFS of $[116,712].
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
---------------------------------------------
PricewaterhouseCoopers LLP, 125 High Street, Boston, Massachusetts 02110,
serves as the independent registered public accounting firm of All-Star. The
independent registered public accounting firm provides audit services, audit-
related services, tax services and/or other services to All-Star.
PROXY VOTING
All-Star has delegated to AAI (and not the Portfolio Managers) the
responsibility to vote proxies relating to portfolio securities held by All-
Star. In deciding to delegate this responsibility, the Board of Trustees
reviewed and approved the policies and procedures adopted by AAI. These include
the procedures that AAI follows when a vote presents a conflict between the
interests of All-Star and its shareholders and AAI, its affiliates, its other
clients, or other persons.
The proxy voting guidelines and procedures applicable to All-Star are
included in this Statement of Additional Information as Appendix A. Information
regarding how All-Star voted proxies relating to portfolio securities during the
12-month period ending June 30, 2006 is available without charge, upon request,
by calling 1-800-542-3863 and on the SEC website at http://www.sec.gov.
TRUSTEES AND OFFICERS
The names of the Trustees and Officers of All-Star, the date each was
first elected or appointed to office, their term of office, their principal
business occupations and other directorships they have held during at least the
last five years, are shown below.
DISINTERESTED TRUSTEES
----------------------
NUMBER OF
POSITION WITH PORTFOLIOS
EQUITY FUND, IN FUND
TERM OF COMPLEX
OFFICE AND OVERSEEN OTHER
NAME AND LENGTH OF PRINCIPAL OCCUPATION(S) BY DIRECTORSHIPS
ADDRESS* SERVICE DURING PAST FIVE YEARS TRUSTEE HELD
---------------- -------------------- ------------------------------------ ------------ -------------------
John A. Benning Trustee Retired since December, 1999; 2 Director, Liberty
(Age 72) Since 2002; Term Senior Vice President, General All-Star Growth
15
NUMBER OF
POSITION WITH PORTFOLIOS
EQUITY FUND, IN FUND
TERM OF COMPLEX
OFFICE AND OVERSEEN OTHER
NAME AND LENGTH OF PRINCIPAL OCCUPATION(S) BY DIRECTORSHIPS
ADDRESS* SERVICE DURING PAST FIVE YEARS TRUSTEE HELD
---------------- -------------------- ------------------------------------ ------------ -------------------
expires 2009 Counsel and Secretary, Liberty Fund (since 2002).
Financial Companies Inc. (July, 1985
to December, 1999); Vice President,
Secretary and Director, Liberty Asset
Management Company (August,
1985 to December, 1999).
Thomas W. Brock Trustee CEO, StoneHarbor Investment 2 Director,
(Age 59) Since 2005; Term Partners LP (since April 2006); Liberty
expires 2008 Adjunct Professor, Columbia All-Star Growth
University Graduate School of Fund (since
Business (since September, 1998). 2005);
Trustee, Stone
Harbor Local
Markets Income
Fund (closed end
fund) (since
2007);
Trustee, Stone
Harbor
Investment
Funds (2
Portfolios)
(since 2007);
Director,
Columbia
Management
Multi-
Strategy Fund
LLC
(Hedge Fund);
Manager, BACAP
Alternative
Multi-
Strategy Fund,
LLC
George R. Gaspari Trustee Financial Services Consultant 2 Trustee and
(Age 66) Since 2006, (since 1996). Chairman, The
Term Expires 2008 Select Sector
SPDR
Trust (since
1998);
Director,
Liberty
All-Star Growth
Fund (since
2006).
Richard W. Lowry Chairman; Trustee Private Investor since 1987. 2 Director and
(Age 70) Since 1986; Term Expires Chairman,
2007 Liberty
All-Star Growth
Fund (since
1994);
Trustee,
Columbia
Fund Complex (81
portfolios).
John J. Neuhauser Trustee President, Saint Michael's College 2 Director,
(Age 63) Since 1998; Term Expires (since 2007); formerly, University Liberty
2007 Professor, Boston College (from All-Star Growth
December 2005 to 2007); formerly Fund (since
Academic Vice President and Dean 1998);
of Faculties, Boston College (from Trustee,
August 1999 to December 2005). Columbia
Fund Complex (81
Portfolios).
Richard C. Rantzow Trustee Chairman of the Board of First Funds 2 Trustee, Clough
(Age 68) Since 2006, (from 1992 to July 2006). Global
Term expires 2007 Allocation
Fund (since
2004),
Clough Global
16
NUMBER OF
POSITION WITH PORTFOLIOS
EQUITY FUND, IN FUND
TERM OF COMPLEX
OFFICE AND OVERSEEN OTHER
NAME AND LENGTH OF PRINCIPAL OCCUPATION(S) BY DIRECTORSHIPS
ADDRESS* SERVICE DURING PAST FIVE YEARS TRUSTEE HELD
---------------- -------------------- ------------------------------------ ------------ -------------------
Equity Fund
(since
2005) and Clough
Global
Opportunities
Fund
(since 2006);
Director,
Liberty
All-Star Growth
Fund (since
2006).
-----------------
* The address for all Trustees and Officers is: c/o ALPS Advisers, Inc., 1290
Broadway, Suite 1100; Denver, CO 80203.
INTERESTED TRUSTEES
-------------------
NUMBER OF
POSITION WITH PORTFOLIOS
EQUITY FUND, IN FUND
TERM OF COMPLEX
OFFICE AND OVERSEEN OTHER
NAME AND LENGTH OF PRINCIPAL OCCUPATION(S) BY DIRECTORSHIPS
ADDRESS* SERVICE DURING PAST FIVE YEARS TRUSTEE HELD
---------------- -------------------- ------------------------------------ ------------ -------------------
Edmund J. Burke Trustee President and a Director of ALPS 2 President, Financial
(Age 45)** Since 2006, (since 2005), President and a Investors Trust
Term expires 2009 Director of ALPS Advisers (since (since 2001);
2001), President and a Director of President, Reaves
ALPS Financial Services, Inc. (1991- Utility Income Fund
2005). (since 2004);
President, Financial
Investors Variable
Trust (since 2006);
Trustee and
President, Clough
Global Allocation
Fund (Trustee since
2006, President
since 2004); Trustee
and President,
Clough Global
Equity Fund
(Trustee since 2006,
President since
2005); Trustee and
President Clough
Global
Opportunities Fund
(since 2006);
Director, Liberty
All-Star Growth
Fund (since 2006);
President and
Trustee, Stone
Harbor Local
Markets Income
Fund (since 2007).
OFFICERS
--------
YEAR FIRST
ELECTED
OR
NAME AND POSITION WITH LIBERTY APPOINTED PRINCIPAL OCCUPATION(S)
ADDRESS* ALL-STAR EQUITY FUND TO OFFICE DURING PAST FIVE YEARS
----------------- --------------------------------- ----------------- ----------------------------------------
William R. President and Chief Executive 1999 Chief Investment Officer, ALPS Advisers,
Parmentier, Officer Inc. (since 2006); President and Chief
Jr. (Age 55) Executive Officer of the Liberty All-Star
Funds (since April 1999); Senior Vice
President (2005-2006), Banc of America
Investment Advisors, Inc.
Mark T. Haley, CFA Senior Vice President 1999 Senior Vice President of the Liberty All-
(Age 42) Star Funds (since January 1999). Vice
President, ALPS Advisers, Inc. (since
2006); Vice President, Banc of America
Investment Advisors (1999-2006).
Edmund J. Burke Vice President 2006 President and a Director of ALPS (since
(Age 45) 2005), President and a Director of ALPS
Advisers (since 2001), President and a
Director of ALPS Financial Services, Inc.
(1991-2005). See above for other
Directorships held.
--------------------
* The address for all Trustees and Officers is: c/o ALPS Advisers, Inc., 1290
Broadway, Suite 1100; Denver, CO 80203.
** Mr. Burke is an "interested person" of All-Star as defined in the Investment
Company Act, because he is an officer of ALPS and ALPS Advisers.
YEAR FIRST
ELECTED
OR
NAME AND POSITION WITH LIBERTY APPOINTED PRINCIPAL OCCUPATION(S)
ADDRESS* ALL-STAR EQUITY FUND TO OFFICE DURING PAST FIVE YEARS
----------------- --------------------------------- ----------------- ----------------------------------------
Jeremy O. May Treasurer 2006 Mr. May is Managing Director of ALPS.
(Age 36) Mr. May joined ALPS in 1995. Because of
his position with ALPS, Mr. May is deemed
an affiliate of All-Star as defined under the
1940 Act. Mr. May is currently the
Treasurer of Liberty All-Star Growth Fund,
Inc., Reaves Utility Income Fund, Clough
Global Equity Fund, Clough Global
Allocation Fund, Clough Global
Opportunities Fund, Financial Investors
Trust, and Financial Investors Variable
Insurance Trust. Mr. May is also on the
Board of Directors, and is Chairman of the
Audit Committee, of the University of
Colorado Foundation.
Kimberly R. Storms Assistant Treasurer 2006 Ms. Storms is Director of Fund
18
YEAR FIRST
ELECTED
OR
NAME AND POSITION WITH LIBERTY APPOINTED PRINCIPAL OCCUPATION(S)
ADDRESS* ALL-STAR EQUITY FUND TO OFFICE DURING PAST FIVE YEARS
----------------- --------------------------------- ----------------- ----------------------------------------
(Age 34) Administration and Vice- President of
ALPS. Ms. Storms joined ALPS in 1998 as
Assistant Controller. Because of her
position with ALPS, Ms. Storms is deemed
an affiliate of All-Star as defined under the
1940 Act. Ms. Storms is also Assistant
Treasurer of the Clough Global Equity
Fund, Clough Global Allocation Fund,
Clough Global Opportunities Fund, Liberty
All-Star Growth Fund, Inc., Reaves Utility
Income Fund and Financial Investors Trust
and Assistant Secretary of Ameristock
Mutual Fund, Inc.
Bradley J. Swenson Chief Compliance Officer 2006 Chief Compliance Officer ("CCO"), ALPS
(Age 34) Fund Services, Inc. and ALPS Distributors,
Inc., since 2004; CCO ALPS Advisers, Inc.
since 2006; Mr. Swenson currently acts in
the capacity of Fund CCO for Financial
Investors Variable Insurance Trust, Liberty
All-Star Growth Fund, Inc., the SPDR
Trust, MidCap SPDR Trust, DIAMONDS
Trust, NASDAQ-100 Trust, BLDRS Index
Funds Trust, WisdomTree Funds Trust, and
Healthshares, Inc.; Senior Audit Manager,
Janus Capital Group, Inc.; Senior Internal
Auditor, Oppenheimer Funds, Inc.
Tane T. Tyler Secretary 2006 Assistant Secretary, ALPS Funds Services,
(Age 41) Inc. and ALPS Distributors, Inc., since
September 2004; Secretary, ALPS
Holdings, Inc., since August 2005; Assistant
Secretary, ALPS Advisers, Inc., since
August 2006; Secretary, Liberty All-Star
Equity Fund and Liberty All-Star Growth
Fund, Inc., since December 2006; Secretary,
Reaves Utility Income Fund, December
2004 to May 2007; Secretary, Westcore
Funds, February 2005 to May 2007;
Secretary, First Fund, from November 2004
to January 2007; Secretary, Financial
Investors Variable Insurance Trust, from
December 2004 - December 2006; Vice
President and Associate Counsel,
Oppenheimer Funds, from January 2004 to
August 2004; Vice President and Assistant
General Counsel, INVESCO Funds, from
September 1991 to December 2003.
------------------
* The address for all Trustees and Officers is: c/o ALPS Advisers, Inc., 1290
Broadway, Suite 1100; Denver, CO 80203.
19
ROLE OF THE BOARD OF TRUSTEES
-----------------------------
The Board of Trustees is responsible for the overall management and
supervision of All-Star's affairs and for protecting the interests of the
shareholders. The Board of Trustees meets periodically throughout the year to
oversee All-Star's activities, review contractual arrangements with service
providers for All-Star and review All-Star's performance.
AUDIT COMMITTEE
---------------
Messrs. Benning, Brock, Gaspari, Lowry, Neuhauser and Rantzow (Committee
Chairman) are members of the Audit Committee of All-Star. All-Star's Audit
Committee is comprised only of members who are "Independent Trustees" (as
defined in the New York Stock Exchange (NYSE) Listing Standards for
trustees/directors of closed-end investment companies) of All-Star and who are
also not "interested persons" (as defined in the Investment Company Act) of All-
Star. The Board of Trustees has determined, in accordance with NYSE Listing
Standards, that each member of the Audit Committee is financially literate and
that one of its members has prior accounting experience or related financial
management expertise.
The Audit Committee has adopted a written Audit Committee charter that
sets forth the Audit Committee's structure, duties and powers, and methods of
operation. The principal functions of the Audit Committee are to assist the
Board of Trustee's oversight of: (1) the integrity of All-Star's financial
statements, (2) All-Star's compliance with legal and regulatory requirements,
(3) the qualifications and independence of the independent registered public
accounting firm (also referred to herein as the independent accountants), (4)
the performance of AAI's internal audit function, and (5) the performance of the
independent accountants. The Audit Committee is directly responsible for the
appointment, compensation, retention and oversight of the work of the
independent accountants (including the resolution of disagreements between
management and the independent accountants regarding financial reporting) for
the purpose of preparing or issuing an audit report or performing other review
or attest services for All-Star.
SHARE OWNERSHIP
---------------
The following table shows the dollar range of equity securities
beneficially owned by each Trustee in All-Star as of December 31, 2006 (i) in
All-Star, and (ii) in all funds overseen by the Trustee in the Fund Complex.
Equity Securities Owned in
Aggregate Dollar Range of All Funds Overseen by
Dollar Range of Equity Securities Owned in the Trustee/Director in Fund
Name of Trustee/Director All-Star Complex
----------------------------------------------------------------------------------------------------
DISINTERESTED TRUSTEES/DIRECTORS
John A. Benning Over $100,000 Over $100,000
Thomas W. Brock Over $100,000 Over $100,000
George R. Gaspari None None
20
Richard W. Lowry Over $100,000 Over $100,000
John J. Neuhauser $1 - $10,000 $1 - $10,000
Richard C. Rantzow None None
INTERESTED TRUSTEE/DIRECTOR
Edmund J. Burke None None
During the past five calendar years, Mr. Lowry has had a material interest
in a trust (approximately $4,511,797 as of December 31, 2006) which owns units
of a limited partnership whose investments are managed by M.A. Weatherbie & Co.,
Inc., a portfolio manager of the Liberty All-Star Growth Fund, and whose general
partner is Weatherbie Limited Partnership. Mr. Benning also has had a material
interest in that trust (approximately $1,373,570 as of December 31, 2006).
During the most recent fiscal year-end, Mr. Burke purchased shares of ALPS
Holdings, Inc., the parent company of AAI, totaling 1.85% of the outstanding
preferred shares of ALPS Holdings, Inc.
As of December 31, 2006, no disinterested Trustee or any of their
immediate family members owned beneficially or of record any class of securities
of AAI, a Portfolio Manager or any person controlling, controlled by or under
common control with AAI or a Portfolio Manager.
During the calendar years ended December 31, 2006 and December 31, 2005,
no disinterested Trustee (or their immediate family members) had any direct or
indirect interest in AAI, a Portfolio Manager or any person controlling,
controlled by or under common control with AAI or a Portfolio Manager.
During the calendar years ended December 31, 2006 and December 31, 2005,
no disinterested Trustee (or their immediate family members) had any direct or
indirect material interest in any transaction or series of similar transactions
with (i) All-Star; (ii) another fund managed by AAI, a Portfolio Manager or a
person controlling, controlled by or under common control with AAI or a
Portfolio Manager; (iii) AAI or a Portfolio Manager; (iv) any person
controlling, controlled by or under common control with AAI or a Portfolio
Manager; or (v) an officer of any of the above.
During the calendar years ended December 31, 2006 and December 31, 2005,
no disinterested Trustee (or their immediate family members) had any direct or
indirect relationship with (i) All-Star; (ii) another fund managed by AAI, a
21
Portfolio Manager or a person controlling, controlled by or under common control
with AAI or a Portfolio Manager; (iii) AAI or a Portfolio Manager; (iv) a person
controlling, controlled by or under common control with AAI or a Portfolio
Manager; or (v) an officer of any of the above.
During the calendar years ended December 31, 2006 and December 31, 2005,
no officer of AAI, a Portfolio Manager or any person controlling, controlled by
or under common control with AAI or a Portfolio Manager served on the board of
directors of a company where a disinterested Trustee of All-Star or any of their
immediate family members served as an officer.
APPROVING THE INVESTMENT ADVISORY CONTRACTS
-------------------------------------------
A discussion of the factors considered by the Board of Trustees in
approving the current Fund Management Agreement and Portfolio Management
Agreements may be found in All-Star's annual shareholder report for the year
ended December 31, 2006.
GENERAL
-------
The Board of Trustees is divided into three classes, each of which serves
for three years. The term of office of one of the classes expires at the final
adjournment of the annual meeting of shareholders (or special meeting in lieu
thereof) each year or such later date as his successor shall have been elected
and shall have qualified. All-Star holds annual meetings of shareholders to vote
on, among other things, the election or re-election of the Trustees whose terms
are expiring with that meeting. Unless each is elected at that meeting, the term
of office of Mssrs. Lowry, Neuhauser and Rantzow will expire upon the final
adjournment of the 2007 annual meeting; the term of office of Messrs. Brock and
Gaspari will expire upon final adjournment of the annual meeting for the year
2008 and the term of office of Mssrs. Benning and Burke will expire upon the
final adjournment of the 2009 annual meeting. All-Star's Trustees are also
Directors of Liberty All-Star Growth Fund, Inc., another closed-end multi-
managed fund managed by AAI.
TRUSTEE COMPENSATION
--------------------
The following table shows, for the year ended December 31, 2006, the
compensation received from All-Star by each Trustee, and the aggregate
compensation paid to each Trustee for service on the Boards of funds within the
Fund Complex. All-Star has no bonus, profit sharing or retirement plans.
COMPENSATION TABLE
------------------
Aggregate Compensation Total Compensation from
from All-Star the Fund Complex(1)(2)
-------------------------------------------------------------------------------
DISINTERESTED TRUSTEES
John A. Benning $33,902.96 $44,500.00
Thomas W. Brock(2) $29,709.33 $39,000.00
George R. Gaspari None None
Richard W. Lowry(2) $45,335.40 $59,500.00
John J. Neuhauser(2) $37,713.79 $49,500.00
22
Richard C. Rantzow None None
INTERESTED TRUSTEE
William E. Mayer(2)(3) $10,296.90 $13,500.00
Edmund J. Burke None None
(1) Prior to December 2006, in addition to receiving compensation for their
services as Trustees of the Liberty All-Star Equity Fund and Liberty All-
Star Growth Fund, Inc. ("Funds"), Messrs. Lowry, Neuhauser and Mayer
received compensation for service as Trustees of the Columbia Funds group
of funds, and Mr. Brock received compensation for service as
Director/Manager of the Registered Hedge Funds as defined below. As of
December 18, 2006, the Fund became part of the ALPS Advisers, Inc., fund
complex ("Fund Complex"). At this time, the Funds are the only two funds
in the Fund Complex.
(2) At December 31, 2006, Messrs. Lowry, Mayer and Neuhauser also served as
trustees of 78 open-end and 7 closed-end management investment company
portfolios within the Columbia Funds group of funds. As of December 31,
2006, Mr. Brock also served as manager or director of BACAP Alternative
Multi-Strategy Fund, LLC and Columbia Management Multi-Strategy Hedge
Fund, LLC (the "Registered Hedge Funds").
(3) Mr. Mayer resigned from the Boards effective April 2006.
PORTFOLIO MANAGERS
------------------
CHASE INVESTMENT COUNSEL CORPORATION ("CHASE")
MANAGEMENT. The portion of All-Star allocated to Chase is managed by a
team of investment professionals directed by David B. Scott, Chief Investment
Officer and including Derwood S. Chase, Jr., President, Brian J. Lazorishak,
Vice President, Peter W. Tuz, Vice President, and Peter C. Wood, Vice President.
All Chase accounts are managed on a team basis by this team.
DERWOOD S. CHASE, JR., CIC
PRESIDENT, FOUNDER AND DIRECTOR
Mr. Chase earned a BS with Distinction from the University of Virginia in
1952 and a MBA from Harvard University in 1954. His speeches, articles and
comments on investing and economic policy have been quoted in Barron's, Business
Week, The Wall Street Journal, Pensions & Investments, Kiplinger's Personal
Finance, The New York Times, and Value Line Mutual Fund Survey. He has appeared
on CNBC, The Nightly Business Report (PBS) and Bloomberg. Derwood is a
Chartered Investment Counselor, a member of the Analysts Club (N.Y.C.), the New
York and Richmond Societies of Financial Analysts, a former Governor of the
Investment Counsel Association of America, a member of the Mont Pelerin Society,
President of the Chase Foundation of Virginia, and a trustee of the Reason
Foundation.
DAVID B. SCOTT, CFA, CIC
SENIOR VICE PRESIDENT AND DIRECTOR
CHIEF INVESTMENT OFFICER
Mr. Scott earned his BA in 1977 and a MBA with Honors in 1980 from the
College of William and Mary. Before joining us in 1994, he had 15 years of
experience as an analyst and portfolio manager. He is a CFA charter holder and
a member of The Richmond Society of Financial Analysts. He has been quoted in
Barron's, Business Week, Kiplinger's Personal Finance, The New York Times, and
Value Line Mutual Fund Survey. He has been a guest speaker on CNBC.
23
BRIAN J. LAZORISHAK, CFA, CIC, CIPM, CMT
VICE PRESIDENT
PORTFOLIO MANAGER & QUANTITATIVE ANALYST
Mr. Lazorishak earned a BS in Psychology and Business Cum Laude from the
University of Pittsburgh in 1994. Brian joined us in 1997. He serves as a
portfolio manager and concentrates on quantitative and technical research.
Brian is a CFA charter holder, a CIPM certificate holder and a Chartered Market
Technician. He is a member of the Richmond Society of Financial Analysts.
PETER W. TUZ, CFA
VICE PRESIDENT
SENIOR SECURITY ANALYST & PORTFOLIO MANAGER
Mr. Tuz earned his BA from Ripon College in 1976, a MA from the University
of Missouri in 1979, and a MBA from Tulane University in 1984. Peter is a CFA
charter holder. Before joining us in 1997 he had 10 years experience as a
senior analyst and officer with two NYSE member firms. He is a member of the
Richmond & Washington Societies of Financial Analysts.
PETER C. WOOD, CFA
VICE PRESIDENT
SENIOR SECURITY ANALYST & PORTFOLIO MANAGER
Mr. Wood earned his BA from Duke University in 1979 and a MBA from Indiana
University in 1985. Peter is a CFA charter holder. Before joining us in 1997
he had 10 years experience as a senior security analyst concentrating in
technology. He is a member of the New York and Richmond Societies of Financial
Analysts.
OTHER ACCOUNTS. The table below provides information regarding the other
accounts managed by the team of investment professionals listed above as of
December 31, 2006:
NUMBER OF
ACCOUNTS
MANAGED FOR
WHICH ADVISORY ASSETS MANAGED FOR
NUMBER OF FEE IS WHICH ADVISORY FEE
ACCOUNTS TOTAL ASSETS PERFORMANCE- IS PERFORMANCE-
TYPE OF ACCOUNT MANAGED MANAGED BASED BASED
---------------------- ------------- ----------------- ----------------- -------------------
Registered Investment 2 $618 million 0 N/A
Companies
Other pooled investment 0 0 0 N/A
vehicles
Other accounts 226 $5,854 million 0 N/A
24
COMPENSATION STRUCTURE. In addition to competitive salary (including 401K
and profit-sharing), all investment professionals are equity shareholders of the
firm and participate in the overall success of the firm through distributions
from the corporation. Distributions are directly related to the individual's
percentage ownership of the corporation. No portion of the fixed base salary of
the portfolio managers is tied to the management or the performance of the Fund
or to the performance of the Advisor's separately managed accounts. The
portfolio managers as equity owners of the Advisor do not receive a salary
bonus. As the firm is a subchapter S corporation, all net earnings are
distributed to the portfolio managers and the firm's other equity owners. Mr.
Chase also receives a portion of the consulting fees received by the firm for
work he performs on alternative oil and gas investments.
OWNERSHIP BY PORTFOLIO MANAGERS. None of the individuals responsible for
the day-to-day management of All-Star own any shares of All-Star.
MATRIX ASSET ADVISORS, INC. ("MATRIX")
--------------------------------------
MANAGEMENT. The portion of All-Star allocated to Matrix is managed by
David A. Katz, Head of the Investment Policy Committee. Mr. Katz, CFA, graduated
summa cum laude from Union College with a Bachelor of Arts degree in Economics.
He received a Master of Business Administration degree, with a concentration in
Finance, from New York University Graduate School of Business in 1987,
graduating with distinction. His numerous works on Value Investing have earned
him various awards and distinctions at the undergraduate and graduate levels.
Mr. Katz is a Chartered Financial Analyst. After initially working at Management
Asset Corporation (Westport, CT), Mr. Katz co-founded Value Matrix Management
with John M. Gates in 1986. He served as the firm's Senior Vice President and
Chief Investment Officer and was Head of the Investment Policy Committee. In
1990 he merged the Value Matrix Management organization into Matrix Asset
Advisors. Mr. Katz is the firm's President and Chief Investment Officer, chairs
the Investment Policy Committee and is a Portfolio Manager/Analyst.
OTHER ACCOUNTS. The table below provides information regarding the other
accounts managed by Mr. Katz as of December 31, 2006:
NUMBER OF
ACCOUNTS
MANAGED FOR
WHICH ADVISORY ASSETS MANAGED FOR
NUMBER OF FEE IS WHICH ADVISORY FEE
ACCOUNTS TOTAL ASSETS PERFORMANCE- IS PERFORMANCE-
TYPE OF ACCOUNT MANAGED MANAGED BASED BASED
---------------------- ------------- ----------------- ----------------- -------------------
DAVID A. KATZ
Registered Investment 4 $586 million 0 N/A
Companies
Other pooled investment 1 $10 million 1 $10 million
vehicles
Other accounts 445 $812 million 4 $6 million
25
COMPENSATION STRUCTURE. Matrix Portfolio Managers, including Mr. Katz, are
paid competitively with meaningful potential bonuses based on individual
performance and firm success. Base salary is approximately 50-75% of total
compensation, with bonus, equity and profit sharing participation. Discretionary
bonus is based on overall performance of the firm, and not performance of any
particular account. Portfolio Managers are incented through competitive
compensation and benefits, as well as high degrees of responsibility, input and
autonomy. The firm has created a "stakeholder" program and profit sharing plan,
in which key personnel are granted participation in the profitability of the
firm in a parallel fashion as the owners of the firm.
Such participation is contingent on continued employment. In addition, the
firm has offered equity ownership to retain key investment professionals.
OWNERSHIP BY PORTFOLIO MANAGERS. Mr. Katz does not own any shares of All-
Star.
PZENA INVESTMENT MANAGEMENT, LLC ("PZENA")
------------------------------------------
MANAGEMENT. The portion of All-Star allocated to Pzena is managed by a
team of portfolio managers. Individual portfolio managers on the team do not
have any latitude to make independent portfolio decisions. All decisions require
unanimous consent of a three-person portfolio management team. For the Fund,
Rich Pzena, John Goetz, and Tony DeSpirito have joint decision-making
responsibility and "veto authority" over any decision.
Richard S. Pzena - Mr. Pzena is the Founder, Managing Principal, Chief
Executive Officer and Co-Chief Investment Officer of the firm. Prior to forming
Pzena Investment Management in 1995, Mr. Pzena was the Director of U.S. Equity
Investments and Chief Research Officer for Sanford C. Bernstein & Company. He
joined Bernstein in 1986 as an oil industry analyst and was named to the
Institutional Investor All America Research Team from 1988-1990. During 1990 and
1991, Mr. Pzena served as Chief Investment Officer, Small Cap Equities, and
assumed his broader domestic equity role in 1991. Prior to joining Bernstein,
Mr. Pzena worked for the Amoco Corporation in various financial and planning
roles. He earned a B.S. summa cum laude and an M.B.A. from the Wharton School of
the University of Pennsylvania in 1979 and 1980 respectively.
John P. Goetz - Mr. Goetz is a Managing Principal and Co-Chief Investment
Officer at the firm. Prior to joining Pzena Investment Management in 1996, Mr.
Goetz held a range of key positions at Amoco Corporation for over 14 years, most
recently as the Global Business Manager for Amoco's $1 billion polypropylene
business where he had bottom line responsibility for operations and development
worldwide. Prior positions included strategic planning, joint venture
investments and project financing in various oil and chemical businesses. Prior
to joining Amoco, Mr. Goetz had been employed by The Northern Trust Company and
Bank of America. He earned a B.A. summa cum laude in Mathematics and Economics
from Wheaton College in 1979 and an M.B.A. from the Kellogg School at
Northwestern University in 1982.
Antonio DeSpirito, III - Mr. DeSpirito is a Principal and Portfolio
Manager of Large Cap Value. Previously, Mr. Despirito was one of the Portfolio
Managers of Pzena Investment Management's Small Cap Value service. Prior to
26
joining Pzena Investment Management in 1996, Mr. DeSpirito was an Associate in
the Corporate Department at the Boston based law firm of Ropes & Gray. At Ropes
& Gray, he advised clients in the direct television, financial services,
fitness, packaging films, retail, software, and wire and cable industries. Mr.
DeSpirito earned a B.S. summa cum laude from the Wharton School of the
University of Pennsylvania in 1990 and a J.D. magna cum laude from Harvard Law
School in 1993.
OTHER ACCOUNTS. The table below provides information regarding the other
accounts managed by Messrs. Pzena, Goetz and DeSpiritio, as of December 31,
2006.
NUMBER OF
ACCOUNTS
MANAGED FOR
WHICH ADVISORY ASSETS MANAGED FOR
NUMBER OF FEE IS WHICH ADVISORY FEE
ACCOUNTS TOTAL ASSETS PERFORMANCE- IS PERFORMANCE-
TYPE OF ACCOUNT MANAGED MANAGED BASED BASED
---------------------- ------------- ----------------- ----------------- -------------------
RICHARD S. PZENA
Registered Investment 9 $9,641 million 0 N/A
Companies
Other pooled investment 109 $3,314 million 1 $12 million
vehicles
Other accounts 440 $12,802 million 12 $1,961 million
JOHN GOETZ
Registered Investment 11 $9,696 million 0 N/A
Companies
Other pooled investment 119 $4,400 million 1 $12 million
vehicles
Other accounts 441 $12,935 million 12 $1,961 million
ANTONIO DESPIRITO, III
Registered Investment 7 $9,529 million 0 N/A
Companies
Other pooled investment 45 $2,590 million 0 N/A
vehicles
Other accounts 135 $5,626 million 8 $1,088 million
COMPENSATION STRUCTURE. Pzena portfolio managers, including Messrs Pzena,
Goetz and DeSpirito, and other investment professionals at Pzena are compensated
through a combination of a fixed base salary, performance bonus and equity
ownership, if appropriate due to superior personal performance. Pzena avoids a
27
compensation model that is driven by individual security performance, as it
believes this can lead to short-term thinking which is contrary to the firm's
value investment philosophy. Pzena considers both quantitative and qualitative
factors when determining performance bonuses; however, performance bonuses are
not based directly on the performance of the Fund or other clients. For
investment professionals, Pzena examines such things as effort, efficiency,
ability to focus on the correct issues, stock modeling ability, and ability to
successfully interact with company management. However, Pzena always looks at
the person as a whole and the contributions that he/she has made and is likely
to make in the future. Pzena annually evaluates employees' eligibility for
performance bonus compensation.
OWNERSHIP BY PORTFOLIO MANAGERS. None of the individuals at the firm
responsible for the day-to-day management of All-Star owns any shares of the
Fund.
SCHNEIDER CAPITAL MANAGEMENT CORPORATION ("SCHNEIDER")
------------------------------------------------------
MANAGEMENT: The portion of All-Star allocated to Schneider is managed by
Arnold C. Schneider III, CFA. Mr. Schneider serves as President and Chief
Investment Officer and manages the portion of All-Star allocated to Schneider.
Prior to founding Schneider, Mr. Schneider was a Senior Vice President and
Partner of the Wellington Management Company. He has earned the right to use the
CFA Institute Chartered Financial Analyst designation. Mr. Schneider received a
B.S. in Finance from the McIntire School of Commerce of the University of
Virginia.
OTHER ACCOUNTS. The table below provides information about the other
accounts managed by Mr. Schneider as of December 31, 2006:
NUMBER OF
ACCOUNTS
MANAGED FOR
WHICH ADVISORY ASSETS MANAGED FOR
NUMBER OF FEE IS WHICH ADVISORY FEE
ACCOUNTS TOTAL ASSETS PERFORMANCE- IS PERFORMANCE-
TYPE OF ACCOUNT MANAGED MANAGED BASED BASED
---------------------- ------------- ----------------- ----------------- -------------------
ARNOLD C. SCHNEIDER III
Registered Investment 7 $1.222 million 0 N/A
Companies
Other pooled investment 6 $901 million 0 N/A
vehicles
Other accounts 40 $3,320 million 0 N/A
COMPENSATION STRUCTURE. Mr. Schneider's compensation consists of a fixed
base salary and a bonus. A portion of his bonus may be deferred. Generally, his
salary is fixed at the beginning of each year; his bonus and any deferred
compensation are discretionary and based on the overall profitability of the
firm.
28
OWNERSHIP BY PORTFOLIO MANAGER. Mr. Schneider does not own any shares of
All-Star.
TCW INVESTMENT MANAGEMENT COMPANY ("TCW")
-----------------------------------------
MANAGEMENT. The portion of All-Star allocated to TCW is managed by Craig
C. Blum and Stephen A. Burlingame.
Craig C. Blum, CFA, Portfolio Manager, Managing Director US Equities - Mr.
Blum is Co-Portfolio Manager of the Concentrated Core and Select Equities
investment strategies. He joined TCW in 1999 as part of a program designed to
fast-track high potential individuals, providing them with in-depth knowledge of
the firm's various investment groups. After gaining experience in the High Yield
and Mortgage-Backed Securities Groups, in 2000 Mr. Blum joined the US Equity
Research Group as an Analyst covering data networking, communications equipment,
and enterprise hardware and software companies. In 2002, Mr. Blum became a
member of the Concentrated Core / Select Equities Group, and in 2004 he was
promoted to Co-Portfolio Manager. Prior to joining TCW, Mr. Blum focused on
commercial mortgage-backed securities cash flow modeling and deal structuring as
a Senior Analyst with FMAC Capital Markets. Prior to that, he worked in
institutional sales and mortgage-backed securities analysis at PaineWebber. Mr.
Blum began his investment career in 1994 at Merrill Lynch where he developed a
financial advisory business focused on high net worth and corporate clients. He
has more than 10 years experience in the investment management industry. Mr.
Blum received his Bachelor of Science in Applied Mathematics and Computer
Science from the University of California at Los Angeles (UCLA) in 1993, and his
MBA in Finance from the UCLA Anderson Graduate School of Management in 1999. Mr.
Blum is a CFA charterholder.
Stephen A. Burlingame, Portfolio Manager, Managing Director, US Equities -
Mr. Burlingame is Co-Portfolio Manager of the Concentrated Core and Select
Equities investment strategies at TCW. Previously, Mr. Burlingame was a member
of the Concentrated Core/ Select Equities team, having joined TCW in 2000 as a
health care analyst in the US Equity Research group. Prior to joining TCW, Mr.
Burlingame was an analyst with Brandywine Asset Management from 1999 to 2000.
Between 1996 and 1999, Mr. Burlingame completed internships at two different
asset management firms. Mr. Burlingame graduated cum laude from Claremont
McKenna College in 1999 with a Bachelor of Arts degree in Economics and a minor
in Spanish.
OTHER ACCOUNTS. The table below provides information about the other
accounts managed by Messrs. Blum and Burlingame as of December 31, 2006:
NUMBER OF
ACCOUNTS
MANAGED FOR
WHICH ADVISORY ASSETS MANAGED FOR
NUMBER OF FEE IS WHICH ADVISORY FEE
ACCOUNTS TOTAL ASSETS PERFORMANCE- IS PERFORMANCE-
TYPE OF ACCOUNT MANAGED MANAGED BASED BASED
---------------------- ------------- ----------------- ----------------- -------------------
CRAIG C. BLUM
Registered Investment 9 $4,639.4 million 0 N/A
Companies
29
Other pooled investment 5 $1,871.2 million 1 $601.4 million
vehicles
Other accounts 137 $10,399.6 million 6 $1,349.2 million
STEPHEN A. BURLINGAME
Registered Investment 9 $4,639.4 million 0 N/A
Companies
Other pooled investment 5 $1,871.2 million 1 $601.4 million
vehicles
Other accounts 137 $10,399.6 million 6 $1,349.2 million
COMPENSATION STRUCTURE. The overall objective of the compensation program
for portfolio managers is for TCW Investment Management Company (the "Advisor")
to attract what it considers competent and expert investment professionals and
to retain them over the long-term. Compensation is comprised of several
components which, in the aggregate, are designed to achieve these objectives and
to reward the portfolio managers for their contribution to the success of their
clients and the Advisor and its affiliates within The TCW Group (collectively,
"TCW"). Portfolio managers are compensated through a combination of base salary,
profit sharing based compensation ("profit sharing"), bonus and equity incentive
participation in the Advisor's immediate parent, The TCW Group, Inc. and/or
ultimate parent, Societe Generale ("equity incentives"). Profit sharing and
equity incentives generally represent most of the portfolio managers'
compensation. In some cases, portfolio managers are eligible for discretionary
bonuses.
SALARY. Salary is agreed to with managers at time of employment and is reviewed
from time to time. It does not change significantly and often does not
constitute a significant part of the portfolio manager's compensation.
PROFIT SHARING. Profit sharing is linked quantitatively to a fixed percentage of
income relating to accounts in the investment strategy area for which the
portfolio managers are responsible and is paid quarterly. Profit sharing may be
determined on a gross basis, without the deduction of expenses; in most cases,
revenues are allocated to a pool and profit sharing compensation is paid out
after the deduction of group expenses. The profit sharing percentage used to
compensate a portfolio manager for management of the Fund is generally the same
as that used to compensate them for all other client accounts they manage in the
same strategy for TCW, with limited exceptions involving grandfathered accounts
(accounts that become clients of TCW before or after a specified date or former
clients of a manager that joined TCW from another firm), firm capital of TCW or
accounts sourced through a distinct distribution channel. Income included in a
profit sharing pool will relate to the products managed by the portfolio
manager. In some cases, the pool includes revenues related to more than one
equity or fixed income product where the portfolio managers work together as a
team, in which case each participant in the pool is entitled to profit sharing
derived from all the included products. In certain cases, a portfolio manager
may also participate in a profit sharing pool that includes revenues from
products besides the strategies offered in the TCW Funds, including alternative
30
investment products (as described below); the portfolio manger would be entitled
to participate in such pool where he or she supervises, is involved in the
management of, or is associated with a group, other members of which manage,
such products. Profit sharing arrangements are generally the result of agreement
between the portfolio manager and TCW, although in some cases they may be
discretionary based on supervisor allocation.
In some cases, the profit sharing percentage is subject to increase based on the
relative pre-tax performance of the investment strategy composite returns, net
of fees and expenses, to that of the benchmark. The measurement of performance
relative to the benchmark can be based on single year or multiple year metrics,
or a combination thereof. The benchmark used is the one associated with the Fund
managed by the portfolio manager as disclosed in the prospectus, except in the
case of the Growth Insights Fund where profit sharing of managers is tied to the
full menu of TCW-managed equity products that outperform their associated
benchmarks. Benchmarks vary from strategy to strategy but, within a given
strategy, the same benchmark applies to all accounts, including All-Star. In the
case of the Equities and Focused Equities Funds, which have two benchmarks, the
Russell 1000 Value is used.
Certain accounts of TCW (but not All-Star) have a performance (or incentive) fee
in addition to or in lieu of an asset-based fee. For these accounts, the profit
sharing pool from which the portfolio managers' profit sharing compensation is
paid will include the performance fees. For investment strategies investing in
marketable securities such as those employed in All-Star, the performance fee
normally consists of an increased asset-based fee, the increased percentage of
which is tied to the performance of the account relative to a benchmark (usually
the benchmark associated with the strategy). In these marketable securities
strategies, the profit sharing percentage applied relative to performance fees
is generally the same as it is for the asset-based fees chargeable to the Fund.
In the case of alternative investment strategies and TCW's "alpha" strategies,"
performance fees are based on the account achieving net gains over a specified
rate of return to the account or to a class of securities in the account. Profit
sharing for alternative investment strategies may also include structuring or
transaction fees. "Alpha strategies" are those in which the strategy seeks to
provide incremental risk-adjusted return relative to a LIBOR rate of return
through alpha and beta isolation techniques, that include the use of options,
forwards and derivative instruments. "Alternative investment strategies" include
(a) mezzanine or other forms of privately placed financing, distressed
investing, private equity, project finance, real estate investments, leveraged
strategies (including short sales) and other similar strategies not employed by
All-Star or (b) strategies employed by the Funds that are offered in structured
vehicles, such as collateralized loan obligations or collateralized debt
obligations or in private funds (sometimes referred to as hedge funds). In the
case of certain alternative investment products in which a portfolio manager may
be entitled to profit sharing compensation, the profit sharing percentage for
performance fees may be lower or higher than the percentage applicable to the
asset-based fees.
DISCRETIONARY BONUS/GUARANTEED MINIMUMS. In general, portfolio managers do not
receive discretionary bonuses. However, in some cases where portfolio managers
do not receive profit sharing or where the company has determined the
combination of salary and profit sharing does not adequately compensate the
portfolio manager, discretionary bonuses may be paid by TCW. Also, pursuant to
contractual arrangements, some portfolio managers may be entitled to a mandatory
bonus if the sum of their salary and profit sharing does not meet certain
minimum thresholds.
31
EQUITY INCENTIVES. All portfolio managers participate in equity incentives based
on overall firm performance of TCW and its affiliates, through stock ownership
or participation in stock option or stock appreciation plans of TCW and/or
Societe Generale. The TCW 2001 and 2005 TCW Stock Option Plans provide eligible
portfolio managers the opportunity to participate in an effective economic
interest in TCW, the value of which is tied to TCW's annual financial
performance as a whole. Participation is generally determined in the discretion
of TCW, taking into account factors relevant to the portfolio manager's
contribution to the success of TCW. Portfolio managers participating in the TCW
2001 or 2005 TCW Stock Option Plan will also generally participate in Societe
Generale's Stock Option Plan which grants options on its common stock, the value
of which may be realized after certain vesting requirements are met. Some
portfolio managers are direct stockholders of TCW and/or Societe Generale, as
well.
OTHER PLANS AND COMPENSATION VEHICLES. Portfolio managers may also participate
in a deferred compensation plan that is generally available to a wide-range of
officers of TCW, the purpose of which is to allow the participant to defer
portions of income to a later date while accruing earnings on a tax-deferred
basis based on performance of TCW-managed products selected by the participant.
Portfolio managers may also elect to participate in TCW's 401(k) plan, to which
they may contribute a portion of their pre- and post-tax compensation to the
plan for investment on a tax-deferred basis.
Following the sale of TCW to Societe Generale in 2001, a retention plan was put
in place in which most portfolio managers then at TCW were entitled to
participate. The retention plan provides for payout of fixed bonus compensation
to participants at various milestones over the course of five years, the last of
which was paid in February 2007.
OWNERSHIP BY PORTFOLIO MANAGERS. None of the individuals at the firm
responsible for the day-to-day management of All-Star owns any shares of All-
Star.
DESCRIPTION OF CERTAIN MATERIAL CONFLICTS OF INTEREST
-----------------------------------------------------
Material conflicts of interest may arise when an individual with day-to-
day management responsibilities for All-Star also manages other funds or
accounts. (Information regarding other funds, pooled investment vehicles and
accounts managed by the Portfolio Managers is set forth in tables above.) These
potential material conflicts of interest include the following conflicts:
ALLOCATION OF LIMITED INVESTMENT OPPORTUNITIES. From time to time an
investment opportunity that is suitable for multiple funds and/or accounts may
be limited. In such circumstances the opportunity will have to be allocated
among the funds and/or accounts managed by a portfolio manager, decreasing All-
Star's ability to participate in the investment opportunity.
TIME AND FOCUS. A portfolio manager who manages several funds and/or
accounts may not devote equal time and attention to all of these funds and/or
accounts. This may adversely affect the portfolio manager's performance with
respect to the funds and/or accounts to which he or she devotes less time.
32
BROKER-DEALER SELECTION. Some broker-dealers provide portfolio managers
with brokerage and research services (as those terms are defined in Section
28(e) of the Securities Exchange Act of 1934), which may result in higher
brokerage fees. (See "Portfolio Security Transactions" below.) These services
may benefit certain funds or accounts more than others. Although the payment of
commissions is subject to the requirement that a portfolio manager determines in
good faith that the commissions are reasonable in relation to the value of the
brokerage and research services provided to the fund, a portfolio manager's
decision as to the selection of brokers and dealers could yield disproportionate
costs and benefits among the funds and/or accounts that he or she manages.
COMPENSATION DIFFERENCES. To the extent a fund or account compensates a
portfolio manager (either directly or indirectly by paying the portfolio
manager's firm) more than other funds or accounts, the portfolio manager might
have an economic incentive for certain funds or accounts to succeed more than
others. This may be the case where an advisory fee is greater, where a fund or
account pays a performance-based fee or where the portfolio manager or his or
her firm has an interest in the fund or account.
ADDITIONAL BUSINESS. AAI, the Portfolio Managers or their affiliates may
provide more service for some funds or accounts than for others. For example,
an affiliate may provide distribution, recordkeeping or administration services
for one fund but not for others. This may result in a portfolio manager
benefiting, either directly or indirectly, from some funds over others.
Each of the Portfolio Managers has trade allocation and other policies and
procedures that it believes are reasonably designed to address these and other
conflicts of interest.
None of the Portfolio Managers' own any equity securities issued by All-
Star.
POTENTIAL CONFLICTS OF INTEREST IN MANAGING MULTIPLE ACCOUNTS
-------------------------------------------------------------
Like other investment professionals with multiple clients, a portfolio
manager for a Fund may face certain potential conflicts of interest in
connection with managing both the Fund and other accounts at the same time. The
paragraphs below describe some of these potential conflicts, which may be faced
by investment professionals at most major financial firms. ALPS Advisors, Inc.
and the Fund have adopted compliance policies and procedures that attempt to
address certain of these potential conflicts.
The management of accounts with different advisory fee rates and/or fee
structures, including accounts that pay advisory fees based on account
performance ("performance fee accounts"), may raise potential conflicts of
interest by creating an incentive to favor higher-fee accounts. These potential
conflicts may include, among others:
o The most attractive investments could be allocated to higher-fee
accounts or performance fee accounts.
o The trading of higher-fee accounts could be favored as to timing
and/or execution price. For example, higher-fee accounts could be
permitted to sell securities earlier than other accounts when a
33
prompt sale is desirable or to buy securities at an earlier and more
opportune time.
o The trading of other accounts could be used to benefit higher-fee
accounts (front- running).
o The investment management team could focus their time and efforts
primarily on higher-fee accounts due to a personal stake in
compensation.
Potential conflicts of interest may also arise when the portfolio managers
have personal investments in other accounts that may create an incentive to
favor those accounts.
A potential conflict of interest may arise when All-Star and other
accounts purchase or sell the same securities. On occasions when a Portfolio
Manager considers the purchase or sale of a security to be in the best interests
of All-Star as well as other accounts, the adviser's trading desk may, to the
extent permitted by applicable laws and regulations, aggregate the securities to
be sold or purchased in order to obtain the best execution and lower brokerage
commissions, if any. Aggregation of trades may create the potential for
unfairness to All-Star or another account if one account is favored over another
in allocating the securities purchased or sold - for example, by allocating a
disproportionate amount of a security that is likely to increase in value to a
favored account.
"Cross trades," in which one account sells a particular security to
another account (potentially saving transaction costs for both accounts), may
also pose a potential conflict of interest. Cross trades may be seen to involve
a potential conflict of interest if, for example, one account is permitted to
sell a security to another account at a higher price than an independent third
party would pay. All-Star has adopted compliance procedures that provide that
any transactions between All-Star and another advised account are to be made at
an independent current market price, as required by law.
Another potential conflict of interest may arise based on the different
investment objectives and strategies of All-Star and other accounts. For
example, another account may have a shorter-term investment horizon or different
investment objectives, policies or restrictions than All-Star. Depending on
another account's objectives or other factors, a portfolio manager may give
advice and make decisions that may differ from advice given, or the timing or
nature of decisions made, with respect to All-Star. In addition, investment
decisions are the product of many factors in addition to basic suitability for
the particular account involved. Thus, a particular security may be bought or
sold for certain accounts even though it could have been bought or sold for
other accounts at the same time. More rarely, a particular security may be
bought for one or more accounts managed by a portfolio manager when one or more
other accounts are selling the security (including short sales). There may be
circumstances when purchases or sales of portfolio securities for one or more
accounts may have an adverse effect on other accounts.
A Portfolio Manager who is responsible for managing multiple funds and/or
accounts may devote unequal time and attention to the management of those funds
and/or accounts. As a result, the portfolio manager may not be able to formulate
as complete a strategy or identify equally attractive investment opportunities
for each of those accounts as might be the case if he or she were to devote
34
substantially more attention to the management of a single fund. The effects of
this potential conflict may be more pronounced where funds and/or accounts
overseen by a particular portfolio manager have different investment strategies.
A Portfolio Manager may be able to select or influence the selection of
the brokers and dealers that are used to execute securities transactions for
All-Star. In addition to executing trades, some brokers and dealers provide
portfolio managers with brokerage and research services (as those terms are
defined in Section 28(e) of the Securities Exchange Act of 1934), which may
result in the payment of higher brokerage fees than might have otherwise be
available. These services may be more beneficial to certain funds or accounts
than to others. Although the payment of brokerage commissions is subject to the
requirement that the portfolio manager determine in good faith that the
commissions are reasonable in relation to the value of the brokerage and
research services provided to the fund, a Portfolio Manager's decision as to the
selection of brokers and dealers could yield disproportionate costs and benefits
among the funds and/or accounts that he or she manages.
AAI or an affiliate may provide more services (such as distribution or
recordkeeping) for some types of funds or accounts than for others. In such
cases, a Portfolio Manager may benefit, either directly or indirectly, by
devoting disproportionate attention to the management of fund and/or accounts
that provide greater overall returns to the investment manager and its
affiliates.
A Portfolio Manager may also face other potential conflicts of interest in
managing All-Star, and the description above is not a complete description of
every conflict that could be deemed to exist in managing both All-Star and other
accounts. In addition, a Fund's portfolio manager may also manage other accounts
(including their personal assets or the assets of family members) in their
personal capacity. The management of these accounts may also involve certain of
the potential conflicts described above. Investment personnel at AAI, including
each Portfolio Manager, are subject to restrictions on engaging in personal
securities transactions pursuant to Codes of Ethics adopted by AAI.
Each Portfolio Manager has trade allocation and other policies and
procedures that it believes are reasonably designed to address these and other
potential conflicts of interest.
PORTFOLIO SECURITY TRANSACTIONS
Each Portfolio Manager has discretion to select brokers and dealers to
execute portfolio transactions initiated by that Portfolio Manager for the
portion of All-Star's portfolio assets allocated to it, and to select the
markets in which such transactions are to be executed. The Portfolio Management
Agreements provide, in substance, that in executing portfolio transactions and
selecting brokers or dealers, the primary responsibility of the Portfolio
Manager is to seek to obtain best net price and execution for All-Star.
The Portfolio Managers are authorized to cause All-Star to pay a
commission to a broker or dealer who provides research products and services to
the Portfolio Manager for executing a portfolio transaction which is in excess
of the amount of commission another broker or dealer would have charged for
effecting the same transaction. The Portfolio Managers must determine in good
faith, however, that such commission was reasonable in relation to the value of
the research products and services provided to them, viewed in terms of that
35
particular transaction or in terms of all the client accounts (including All-
Star) over which the Portfolio Manager exercises investment discretion. It is
possible that certain of the services received by a Portfolio Manager
attributable to a particular transaction will primarily benefit one or more
other accounts for which investment discretion is exercised by the Portfolio
Manager.
In addition, under their Portfolio Management Agreements with All-Star and
AAI the Portfolio Managers, in selecting brokers or dealers to execute portfolio
transactions for All-Star, are authorized to consider (and AAI may request them
to consider) brokers or dealers that provide to AAI, directly or through third
parties, research products or services such as research reports; portfolio
analyses; compilations of securities prices, earnings, dividends and other data;
computer software, and services of one or more consultants. The commissions paid
on such transactions may exceed the amount of commission another broker would
have charged for effecting that transaction. Research products and services made
available to AAI include performance and other qualitative and quantitative data
relating to investment managers in general and the Portfolio Managers in
particular; data relating to the historic performance of categories of
securities associated with particular investment styles; mutual fund portfolio
and performance data; data relating to portfolio manager changes by pension plan
fiduciaries; and related computer software, all of which are used by AAI in
connection with its selection and monitoring of Portfolio Managers, the assembly
of an appropriate mix of investment styles, and the determination of overall
portfolio strategies.
AAI from time to time reaches understandings with each of the Portfolio
Managers as to the amounts of All-Star's portfolio transactions initiated by
such Portfolio Manager that are to be directed to brokers and dealers which
provide or make available research products and services to AAI and the
commissions to be charged to the Funds in connection therewith. These amounts
may differ among the Portfolio Managers based on the nature of the market for
the types of securities managed by them and other factors.
Although All-Star does not permit a Portfolio Manager to act or to have a
broker-dealer affiliate act as broker for portfolio transactions initiated by
it, the Portfolio Managers are permitted to place portfolio transactions
initiated by them with another Portfolio Manager or its broker-dealer affiliate
for execution on an agency basis, provided that the commission does not exceed
the usual and customary broker's commission being paid to other brokers for
comparable transactions and is otherwise in accordance with All-Star's
procedures adopted pursuant to Rule 17e-1 under the 1940 Act.
During 2006, 2005 and 2004, All-Star paid total brokerage commissions of
$2,036,245, $1,732,272 and $2,068,207, respectively. Approximately $475,820,
$337,576 and $393,454, respectively, of the commissions paid in 2006, 2005 and
2004 on transactions aggregating approximately $468,489,986, $267,946,166 and
$282,755,530, respectively, were paid to brokerage firms which provided or made
available to the Portfolio Managers or to AAI research products and services as
described above.
36
TAXES
The following discussion of federal income tax matters is based on the
advice of Kirkpatrick & Lockhart Preston Gates Ellis LLP, counsel to All-Star.
All-Star has elected to be, and intends to continue to qualify each year for
treatment as a regulated investment company (a "RIC") under the Internal Revenue
Code of 1986, as amended (the "Code"). Accordingly, All-Star intends to satisfy
certain requirements relating to sources of its income and diversification of
its assets and to distribute substantially all of its net income and net short-
term and long-term capital gains (after reduction by any available capital loss
carryforwards) in accordance with the timing requirements imposed by the Code,
so as to maintain its RIC status and to avoid paying any federal income or
excise tax. To the extent it qualifies for treatment as a RIC which includes
satisfying the above-mentioned distribution requirements, All-Star will not be
subject to federal income tax on income and gains it distributes to its
shareholders.
All-Star's investments in options, futures contracts, hedging
transactions, forward contracts (to the extent permitted) and certain other
transactions will be subject to special tax rules (including mark-to-market,
constructive sale, straddle, wash sale, short sale and other rules), the effect
of which may be to accelerate income to All-Star, defer losses, cause
adjustments in the holding periods of securities it holds, convert capital gain
into ordinary income and convert short-term capital losses into long-term
capital losses. These rules could therefore affect the amount, timing and
character of distributions to shareholders. All-Star may be required to limit
its activities in options and futures contracts to enable it to maintain its RIC
status.
Some futures contracts (other than "securities futures contracts," as
defined in Code section 1234B(c)), foreign currency contracts, and "nonequity"
options (i.e., certain listed options, such as those on a "broad-based"
securities index) in which All-Star invests may be subject to Code section 1256
(collectively "section 1256 contracts"). Any section 1256 contracts All-Star
holds at the end of its taxable year generally must be "marked-to-market" (that
is, treated as having been sold at that time for their fair market value) for
federal income tax purposes, with the result that unrealized gains or losses
will be treated as though they were realized. Sixty percent of any net gain or
loss recognized on these deemed sales, and 60% of any net realized gain or loss
from any actual sales of section 1256 contracts, will be treated as long-term
capital gain or loss, and the balance will be treated as short-term capital gain
or loss. These rules may operate to increase the amount that All-Star must
distribute to satisfy the distribution requirement applicable to RICs (i.e.,
with respect to the portion treated as short-term capital gain), which will be
taxable to its shareholders as ordinary income, and to increase the net capital
gain (the excess of net long-term capital gain over net short-term capital loss)
All-Star recognizes, without in either case increasing the cash available to it.
Section 1256 contracts also are marked-to-market for purposes of the 4% excise
tax described in the Prospectus.
Dividends and interest All-Star receives, and gains it realizes, on
foreign securities may be subject to income, withholding, or other taxes foreign
countries and U.S. possessions impose that would reduce the yield and/or total
return on its investments. Tax conventions between certain countries and the
United States may reduce or eliminate these taxes, however, and many foreign
countries do not impose taxes on capital gains in respect of investments by
foreign investors.
37
All-Star may invest in the stock of "passive foreign investment companies"
("PFICs"). A PFIC is any foreign corporation (with certain exceptions) that, in
general, meets either of the following tests: (1) at least 75% of its gross
income for the taxable year is passive or (2) an average of at least 50% of its
assets produce, or are held for the production of, passive income. Under
certain circumstances, All-Star will be subject to federal income tax on a
portion of any "excess distribution" it receives on the stock of a PFIC or of
any gain on its disposition of that stock (collectively "PFIC income"), plus
interest thereon, even if All-Star distributes the PFIC income as a dividend to
its shareholders. The balance of the PFIC income will be included in All-Star's
investment company taxable income and, accordingly, will not be taxable to it to
the extent it distributes that income to its shareholders. All-Star's
distributions thereof will not be eligible for the 15% maximum federal income
tax rate on individuals' "qualified dividend income" described in the
Prospectus.
If All-Star invests in a PFIC and elects to treat the PFIC as a "qualified
electing fund" ("QEF"), then in lieu of the foregoing tax and interest
obligation, All-Star would be required to include in income each taxable year
its pro rata share of the QEF's annual ordinary earnings and net capital gain
which All-Star likely would have to distribute to satisfy the distribution
requirement and avoid imposition of the 4% excise tax mentioned in the
Prospectus even if All-Star did not receive those earnings and gain from the
QEF. In most instances it will be very difficult, if not impossible, to make
this election because some of the information required to make this election may
not be easily obtainable.
All-Star may elect to "mark to market" any stock in a PFIC it owns at the
end of its taxable year. "Marking-to-market," in this context, means including
in gross income each taxable year (and treating as ordinary income) the excess,
if any, of the fair market value of the stock over All-Star's adjusted basis
therein (including mark-to-market gain for each prior year for which an election
was in effect) as of the end of that year. Pursuant to the election, All-Star
also would be allowed to deduct (as an ordinary, not capital, loss) the excess,
if any, of its adjusted basis in PFIC stock over the fair market value thereof
as of the taxable year-end, but only to the extent of any net mark-to-market
gains with respect to that stock All-Star included in income for prior taxable
years under the election. All-Star's adjusted basis in each PFIC's stock
subject to the election would be adjusted to reflect the amounts of income
included and deductions taken thereunder.
Investors should be aware that All-Star may not be able, at the time it
acquires a foreign corporation's shares, to ascertain whether the corporation is
a PFIC and that a foreign corporation may become a PFIC after All-Star acquires
shares therein. While All-Star generally will seek to avoid investing in PFIC
shares to avoid the tax consequences detailed above, there are no guarantees
that it will be able to do so and it reserves the right to make such investments
as a matter of its investment policy.
TAXATION OF SHAREHOLDERS
------------------------
All or a portion of a loss realized on a disposition of All-Star Shares
may be disallowed under "wash sale" rules to the extent the shareholder acquires
other shares of All-Star including within the period beginning 30 days before
the disposition of the loss shares and ending 30 days after such date. Any
38
disallowed loss will result in an adjustment to the shareholder's tax basis in
some or all of the other shares acquired.
If the aggregate qualified dividend income (as defined in the Prospectus)
All-Star receives during any taxable year is 95% or more of its gross income,
then 100% of its dividends (other than properly designated capital gain
dividends) will be eligible to be treated as qualified dividend income by its
individual shareholders. For this purpose, the only gain included in the term
"gross income" is the excess of net short-term capital gain over net long-term
capital loss (i.e., net capital gain is excluded).
If, as stated in the Prospectus, All-Star retains any net capital gain, it
may designate all or part of the retained amount as undistributed capital gains
in a notice to its shareholders. If it makes such a designation, it would be
required to pay federal income tax at the rate of 35% on the undistributed gain
("All-Star tax") and each shareholder subject to federal income tax (1) would be
required to include in income, as long-term capital gain, his, her or its
proportionate share of the designated gain (which, in the case of individuals,
would be taxed at a maximum federal income tax rate of 15%), (2) would be
entitled to credit his, her or its proportionate share of the All-Star tax
against his, her or its federal income tax liability, if any, and to claim a
refund to the extent the credit exceeds that liability, and (3) would increase
the tax basis in his, her or its All-Star shares by the difference between the
included income and such share of the All-Star tax.
As described in the Prospectus, individuals and certain other non-
corporate All-Star shareholders may be subject to 28% backup withholding if any
such shareholder fails to provide a correct taxpayer identification number
("TIN") or certain required certifications. An individual's TIN is generally
his or her social security number. Backup withholding is not an additional tax.
Any amounts withheld under the backup withholding rules from payments made to a
shareholder may be refunded or credited against such shareholder's U.S. federal
income tax liability, if any, provided that the required information is
furnished to the Internal Revenue Service.
The foregoing discussion and the "Tax Matters" section in the Prospectus
do not address the special tax rules applicable to certain classes of investors,
such as tax-exempt entities, foreign investors, insurance companies and
financial institutions. Shareholders should consult their own tax advisers with
respect to special tax rules that may apply in their particular situations, as
well as the state, local, and, where applicable, foreign tax consequences of
investing in All-Star.
PRINCIPAL SHAREHOLDERS
As of [________], all officers and Trustees of All-Star as a group owned
less than 1% of the Fund's outstanding shares.
FINANCIAL STATEMENTS
PricewaterhouseCoopers LLP, are the independent registered public
accounting firm for the Fund. PricewaterhouseCoopers LLP provides audit and tax
return review services and assistance and consultation in connection with the
review of various Securities and Exchange Commission filings. Prior to
September, 1999, there were other independent auditors for the Fund. The annual
audited financial statements incorporated by reference in this SAI have been so
39
incorporated, and the financial statements in the Prospectus have been so
included, in reliance upon the report of PricewaterhouseCoopers LLP given on
authority of said firm as experts in accounting. The audited financial
statements contained in the All-Star's annual report for the fiscal year ended
December 31, 2006 and the unaudited financial statements contained in All-Star's
semi-annual report for the six months ended June 30, 2007 are incorporated
herein by reference. Any statement contained in the Fund's annual and semi-
annual report that was incorporated herein shall be deemed modified or
superseded for purposes of the Prospectus or this SAI to the extent a statement
contained in the Prospectus or this SAI varies from such statement. Any such
statement so modified or superseded shall not, except as so modified or
superseded, be deemed to constitute a part of the Prospectus or this SAI. All-
Star will furnish, without charge, a copy of its Annual Report, upon request to
All-Star c/o ALPS Fund Services, Inc., 1290 Broadway, Suite 1100, Denver,
Colorado 80203, telephone number 1-800-542-3863.
40
APPENDIX A
PROXY VOTING GUIDELINES
A-1
PART C. - Other Information.
Item 25. Financial Statements and Exhibits
(1) Financial Statements:
Included in Part A:
Financial Highlights
Included in Part B:
Financial statements included in the Annual Report dated December
31, 2006 (5)
(2) Exhibits
(a)(1) Declaration of Trust dated 8/20/1986 as amended through 9/16/1986 (3)
--------------------------------------------------------------------------------------------
(a)(2) Amendment to Declaration of Trust dated 5/11/1993 (3)
--------------------------------------------------------------------------------------------
(b) Amended By-Laws (2)
--------------------------------------------------------------------------------------------
(c) Not Applicable
--------------------------------------------------------------------------------
(d)(1) Form of Specimen Certificate for Shares of Beneficial Interest (3)
--------------------------------------------------------------------------------------------
(d)(2) Form of Subscription Certificate*
--------------------------------------------------------------------------------------------
(d)(3) Form of Notice of Guaranteed Delivery*
--------------------------------------------------------------------------------------------
(e) Automatic Dividend Reinvestment and Cash Purchase Plan Brochure, as
amended (1)
--------------------------------------------------------------------------------------------
(f) Not Applicable
--------------------------------------------------------------------------------------------
(g)(1) Fund Management Agreement between Registrant and ALPS Advisers, Inc.
dated 12/18/2006, filed herewith.
--------------------------------------------------------------------------------------------
(g)(2) Portfolio Management Agreement between Registrant, ALPS Advisers, Inc.
and Pzena Investment Management, LLC dated 12/18/2006, filed herewith
--------------------------------------------------------------------------------------------
(g)(3) Portfolio Management Agreement between Registrant, ALPS Advisers, Inc.
and Chase Investment Counsel Corporation dated 12/18/2006, filed herewith.
--------------------------------------------------------------------------------------------
(g)(4) Portfolio Management Agreement between Registrant, ALPS Advisers, Inc.
and TCW Investment Management Company dated 12/18/2006, filed
herewith.
--------------------------------------------------------------------------------------------
(g)(5) Portfolio Management Agreement between Registrant, ALPS Advisers, Inc.
and Matrix Asset Advisors, Inc. dated 12/18/2006,
filed herewith.
--------------------------------------------------------------------------------------------
(g)(6) Portfolio Management Agreement between Registrant, ALPS Advisers, Inc.
and Schneider Capital Management Corporation dated 12/18/2006, filed
herewith.
--------------------------------------------------------------------------------------------
(h) Not Applicable
--------------------------------------------------------------------------------------------
(i) Not Applicable
--------------------------------------------------------------------------------------------
(j)(1) Amended and Restated Master Custodian Agreement between Registrant and
State Street Bank and Trust Company dated 09/19/2005, filed herewith.
--------------------------------------------------------------------------------------------
(j)(2) Custody Fee Schedule between Registrant and State Street Bank and Trust
Company dated March 1, 2007*
--------------------------------------------------------------------------------------------
(k)(1) Administration, Bookkeeping and Pricing Services Agreement between
Registrant and ALPS Fund Services, Inc. dated 12/18/2006, filed herewith.
--------------------------------------------------------------------------------------------
(k)(2) Addendum to Administration, Bookkeeping and Pricing Services Agreement
dated 04/09/2007, filed herewith.
--------------------------------------------------------------------------------------------
(k)(3) Form of Subscription Agreement between Registrant and Computershare, Inc.,
filed herewith
--------------------------------------------------------------------------------------------
(k)(4) Form of Information Agent Agreement between Registrant and The Altman
Group, Inc., filed herewith
--------------------------------------------------------------------------------------------
(k)(5) Transfer Agency and Service Agreement between Registrant and
Computershare Shareholder Services, Inc. dated 8/1/2007, filed herewith
--------------------------------------------------------------------------------------------
(k)(6) Fee Schedule to Transfer Agency and Service Agreement dated 8/1/2007,
filed herewith
--------------------------------------------------------------------------------------------
(l) Opinion and Consent of Counsel*
--------------------------------------------------------------------------------------------
(m) Not Applicable
--------------------------------------------------------------------------------------------
(n) Consent of Independent Registered Public Accounting Firm*
--------------------------------------------------------------------------------------------
(o) Not Applicable
--------------------------------------------------------------------------------------------
(p) Not Applicable
--------------------------------------------------------------------------------------------
(q) Not Applicable
--------------------------------------------------------------------------------------------
(r)(1) Code of Ethics of ALPS Advisers, Inc., filed herewith
--------------------------------------------------------------------------------------------
(r)(2) Code of Ethics of Registrant, filed herewith
--------------------------------------------------------------------------------------------
(99) Power of Attorney for: John A. Benning, Thomas W. Brock, Edmund J.
Burke, George R. Gaspari, Richard W. Lowry, John J. Neuhauser, and
Richard C. Rantzow dated August 21, 2007, filed herewith.
--------------------------------------------------------------------------------------------
*To be filed by Amendment.
(1) Incorporated by reference to the Registration Statement on Form N-2
filed with the Commission on February 23, 1998.
(2) Incorporated by reference to the Registration Statement on Form N-2
filed with the Commission on February 22, 2002.
(3) Incorporated by reference to Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-2 filed with the Commission on March 28,
2002.
(4) Incorporated by reference to the Registration Statement on Form N-2
filed with the Commission on March 8, 2004.
(5) Incorporated by reference to the Form N-CSR filed with the Commission
on March 8, 2007.
Item 26. Marketing Arrangements
Not Applicable.
Item 27. Other Expenses of Issuance and Distribution
The following table sets forth the expenses to be incurred in connection with
the offering described in this Registration Statement:
Registration Fee $
New York Stock Exchange listing fee $
Printing $
Accounting fees and expenses $
Legal fees and expenses $
Information Agent fees and expenses $
Subscription Agent fees and expenses $
Miscellaneous $
Total $
Item 28. Persons Controlled By or Under Common Control with Registrant
None.
Item 29. Number of Holders of Securities
(1) Title of Class (2) Number of Record Holders as of [DATE]
Liberty All-Star Equity Fund [ ]
Item 30. Indemnification
See Article V to the Amended Declaration of Trust as filed as Exhibit (a)(1)
hereto.
Insofar as indemnification for liabilities arising under the Securities Act of
1933, may be provided to Trustees, officers and controlling persons of the
Registrant, pursuant to the foregoing provisions or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a Trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933 and will be governed by the
final adjudication of such issue.
ITEM 31. Business and Other Connections of Investment Adviser.
ALPS Advisers, Inc., the Registrant's Investment Adviser, was incorporated April
2, 2001 and is primarily engaged in the corporate administration of and the
provision of multi-management services for the Registrant and Liberty All-Star
Growth Fund, Inc., another multi-managed closed-end investment company.
Information regarding ALPS Advisers, Inc., and its officers and directors is set
forth in the Prospectus, in the Statement of Additional Information and in its
Form ADV (File No. 801-67135) filed with the Commission and is incorporated
herein by reference.
Item 32. Location of Accounts and Records:
Registrant maintains the records required to be maintained by it under Rules
31a-1(a), 31a-1(b), and 31a-2(a) under the Investment Company Act of 1940 at its
principal executive offices at 1290 Broadway, Suite 1100, Denver, Colorado
80203. Certain records, including records relating to Registrant's shareholders
and the physical possession of its securities, may be maintained pursuant to
Rule 31a-3 at the main office of Registrant's transfer agent or custodian.
Item 33. Management Services
None
Item 34. Undertakings
(1) The Registrant undertakes to suspend the offering of shares until the
prospectus is amended, if subsequent to the effective date of this Registration
Statement, its net asset value declines more than ten percent from its net asset
value, as of the effective date of the Registration Statement or its net asset
value increases to an amount greater than its net proceeds as stated in the
prospectus.
(2) Not applicable.
(3) Not applicable.
(4) Not applicable.
(5) Registrant undertakes that, for the purpose of determining any liability
under the Securities Act, the information omitted from the form of prospectus
filed as part of the Registration Statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the Registrant pursuant to Rule
497(h) will be deemed to be a part of the Registration Statement as of the time
it was declared effective.
Registrant undertakes that, for the purpose of determining any liability under
the Securities Act, each post-effective amendment that contains a form of
prospectus will be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that time
will be deemed to be the initial bona fide offering thereof.
(6) Registrant undertakes to send by first class mail or other means designed
to ensure equally prompt delivery, within two business days of receipt of a
written or oral request, any Statement of Additional Information constituting
Part B of this Registration Statement.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and/or the
Investment Company Act of 1940, the Registrant has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Denver, and State of Colorado, on the 21st day of
August, 2007.
Liberty All-Star Equity Fund
By: /s/ Tane T. Taylor
---------------------------
Tane T. Taylor, Secretary
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
/s/ John A. Benning
-------------------
John A. Benning*
Trustee
/s/ Thomas W. Brock
-------------------
Thomas W. Brock*
Trustee
/s/ Edmund J. Burke
-------------------
Edmund J. Burke*
Trustee
/s/ George R. Gaspari
---------------------
George R. Gaspari*
Trustee
/s/ Richard W. Lowry
--------------------
Richard W. Lowry*
Trustee
/s/ John J. Neuhauser
---------------------
John J. Neuhauser*
Trustee
/s/ Richard C. Rantzow
----------------------
Richard C. Rantzow*
Trustee
*Signatures affixed by Tane T. Tyler, pursuant to a Power of Attorney dated
August 21, 2007.