106,885,060 RIGHTS FOR 10,688,506 SHARES
LIBERTY ALL-STAR EQUITY FUND
SHARES OF BENEFICIAL INTEREST
Liberty All-Star Equity Fund ("All-Star" or the "Fund") is offering rights
(the "Rights") to its shareholders (the "Offer"). These Rights will allow you to
subscribe for new shares of beneficial interest of All-Star (the "Shares"). For
every ten Rights that you receive, you may buy one new All-Star Share. You will
receive one Right for each outstanding All-Star Share you own on April 1, 2002
(the "Record Date"). Fractional Shares will not be issued upon the exercise of
the Rights. Accordingly, Shares may be purchased only pursuant to the exercise
of Rights in integral multiples of ten. Also, Shareholders on the Record Date
may purchase Shares not acquired by other shareholders in this Rights offering,
subject to limitations discussed in this Prospectus. The Rights are not
transferable and will not be admitted for trading on the New York Stock Exchange
("NYSE"). See "The Offer." THE SUBSCRIPTION PRICE PER SHARE WILL BE 95% OF THE
LOWER OF (i) THE LAST REPORTED SALE PRICE ON THE NYSE ON MAY 7, 2002 (the
"Pricing Date") OF A SHARE OF ALL-STAR, OR (ii) THE NET ASSET VALUE OF A SHARE
OF ALL-STAR ON THAT DATE.
THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON MAY 6, 2002 (the
"Expiration Date"). SINCE THE CLOSE OF THE OFFERING ON THE EXPIRATION DATE IS
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 GEORGESON SHAREHOLDER
COMMUNICATIONS INC. (THE "INFORMATION AGENT") TOLL FREE AT (866) 904-6821.
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)
("Portfolio Managers") having different investment styles recommended and
monitored by Liberty Asset Management Company, All-Star's fund manager ("LAMCO"
or "Fund Manager"). All-Star's investment objective is to seek total investment
return, comprised of long term captial appreciation and current income. Under
normal market conditions, it 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. FOR A DISCUSSION
OF CERTAIN RISK FACTORS AND SPECIAL CONSIDERATIONS WITH RESPECT TO OWNING SHARES
OF ALL-STAR, SEE "SPECIAL CONSIDERATIONS AND RISK FACTORS" BEGINNING ON PAGE 20
AND "INVESTMENT OBJECTIVE, POLICIES AND RISKS" ON PAGE 23 OF THIS PROSPECTUS.
The address of All-Star is One Financial Center, Boston, Massachusetts 02111
and its telephone number is (800) 542-3863. All-Star's 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 February 13, 2002. The net asset value per share of beneficial
interest of All-Star at the close of business on February 12, 2002 and April 1,
2002 was $10.19 and $10.43, respectively, and the last reported sale price of a
Share on such Exchange on those dates was $11.06 and $11.01, respectively.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION 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.......................................... $ 9.91 NONE $ 9.91
Total.............................................. $105,923,094 NONE $105,923,094
(1) Estimated based on an assumption that the Subscription Price will be 95% of
the net asset value on April 1, 2002 (the "Estimated Purchase Price").
(2) Before deduction of expenses payable by All-Star, estimated at $315,000.
SHAREHOLDERS WHO DO NOT EXERCISE THEIR RIGHTS SHOULD EXPECT THAT THEY WILL,
AT THE COMPLETION OF THE OFFER, OWN A SMALLER PROPORTIONAL INTEREST IN THE FUND
THAN IF THEY EXERCISED THEIR RIGHTS. AS A RESULT OF THE OFFER YOU MAY EXPERIENCE
AN IMMEDIATE DILUTION OF THE AGGREGATE NET ASSET VALUE 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 net asset value 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 net asset value or market price per
Share will be when the Offer expires or what proportion of the 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
APRIL 2, 2002 HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AND IS
INCORPORATED BY REFERENCE IN ITS ENTIRETY INTO THIS PROSPECTUS. THE TABLE OF
CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION APPEARS ON PAGE 34 OF THIS
PROSPECTUS, AND A COPY IS AVAILABLE AT NO CHARGE BY CALLING THE INFORMATION
AGENT TOLL FREE AT 1-866-904-6821.
The date of this Prospectus is April 2, 2002.
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 is
important to you. To understand the Offer fully, you should read the entire
document carefully, including the risk factors.
PURPOSE OF THE OFFER
The Board of Trustees of All-Star has determined that it would be in the
best interest 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 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 net asset value and without
incurring any brokerage commissions. See "The Offer--Purpose of the Offer."
IMPORTANT TERMS OF THE OFFER
Total number of Shares available for primary
subscription............................... 10,688,506 Shares
Number of Rights you will receive for each
outstanding Share you own on the Record
Date....................................... One Right for every one Share
Number of Shares you may purchase with your
Rights at the Subscription Price per
Share...................................... One Share for every ten Rights
Subscription Price........................... 95% of the lower of (i) the last reported
sale price on the NYSE on May 7, 2002 (the
"Pricing Date") of a Share of All-Star, or
(ii) the net asset value of a Share of
All-Star on the Pricing Date.
Shareholders' inquiries should be directed to:
Georgeson Shareholder Communications Inc.
1-866-904-6821
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 him or her (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 which were not otherwise subscribed for
by others on 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 Rights holders will be honored in full. If the requests for Shares
exceed the Shares available, the available 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 the Fund. Shares acquired
pursuant to the Over-Subscription Privilege are subject to allotment, which is
more fully discussed under "The Offer--Over-Subscription Privilege."
2
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 deliver it, together with payment in full to EquiServe
Trust Company, N.A. ("EquiServe" or "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.
Rights holders will have no right to rescind a purchase after the
Subscription Agent has received payment. See "The Offer--Method of Exercise of
Rights" and "The Offer--Payment for Shares."
Since the Expiration Date is prior to the Pricing Date, Shareholders who
choose to exercise their Rights will not know at the time they exercise such
Rights what the purchase price for Shares acquired pursuant to such exercise
will be. Shareholders will have no right to rescind their subscription after
receipt of their payment for Shares by the Subscription Agent. 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
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:
GEORGESON SHAREHOLDER COMMUNICATIONS INC.
1-866-904-6821
3
IMPORTANT DATES TO REMEMBER
Please note that the dates in the table below may change if the Offer is
extended.
EVENT DATE
Record Date.......................................... April 1, 2002
Subscription Period.................................. April 5, 2002 through May 6, 2002*
Expiration Date (Deadline for delivery of
Subscription Certificate together with payment of
estimated subscription price (See "The Offer--Payment
for Shares" on page 17 of this Prospectus) or for
delivery of Notice of Guaranteed Delivery)........... May 6, 2002
Pricing Date......................................... May 7, 2002
Deadline for payment of final Subscription Price
pursuant to Notice of Guaranteed Delivery............ May 9, 2002
Confirmation to Registered Shareholders.............. May 21, 2002
For Registered Shareholders' Subscriptions--deadline
for payment of unpaid balance if final Subscription
Price is higher than Estimated Subscription Price.... May 31, 2002
---------------------------------
* Unless the Offer is extended.
OFFERING FEES AND EXPENSES
Offering expenses incurred by the Fund are estimated to be $315,000.
RESTRICTIONS ON FOREIGN SHAREHOLDERS
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 the 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 assets on an approximately equal basis among a
number of independent investment management organizations (currently five in
number) each having a different investment style. See "The Multi-Manager
Concept." All-Star's investment objective is to seek total investment return,
comprised of long term capital appreciation and current income. Under normal
market conditions, it seeks its objective through investing at least 80% of
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 net assets under normal
conditions) is generally invested in Short-Term Money Market Instruments. See
"Investment Objective, Policies and Risks."
4
All-Star commenced investment operations in November, 1986. Its
outstanding shares of beneficial interest are listed and traded on the NYSE
(Symbol "USA"). The average weekly trading volume of the Shares on the NYSE
during the year ended December 31, 2001 was 115,971 Shares. As of April 1,
2002, All-Star's net assets were $1,114,971,352, and 106,885,060 Shares of
All-Star were issued and outstanding.
INFORMATION ABOUT LIBERTY ASSET MANAGEMENT COMPANY
LAMCO provides selection, evaluation and monitoring services to All-Star
and is responsible for the provision of administrative services to the Fund,
some of which are delegated to LAMCO's affiliate, Colonial Management
Associates, Inc. ("Colonial"). See "Management of All-Star" for the fees paid
by the Fund to LAMCO and by LAMCO to the Portfolio Managers. Since the fees of
LAMCO and the Portfolio Managers are based on the average weekly net assets of
All-Star, LAMCO and the Portfolio Managers will benefit from the Offer. See
"Management of All-Star." As of March 31, 2001, LAMCO managed over
$1.3 billion in assets.
LAMCO, organized in 1985, is a direct wholly owned subsidiary of Columbia
Management Group, Inc. (formerly known as Fleet/Liberty Holdings, Inc.), which
is a direct wholly owned subsidiary of Fleet National Bank, a national banking
association, which in turn is a direct wholly owned subsidiary of FleetBoston
Financial Corporation, a U.S. financial holding company. The principal
executive offices of LAMCO are located at One Financial Center, Boston,
Massachusetts 02111. The principal executive offices of Columbia Management
Group, Inc., Fleet National Bank and FleetBoston Financial Corporation are
located at 100 Federal Street, Boston, Massachusetts 02110.
SPECIAL CONSIDERATIONS AND RISK FACTORS
The following summarizes some of the matters that you should consider
before investing in All-Star through the Offer.
Dilution............................. 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 the Fund than if they
exercised their Rights. As a result of the Offer you may
experience an immediate dilution of the aggregate net asset
value of your Shares, which, under certain circumstances,
may be substantial. This is because the Subscription Price
per Share and/or the net proceeds to the Fund for each new
Share sold will be less than the Fund's net asset value per
Share on the Expiration 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 net asset value or market price per Share
will be on the Pricing Date, All-Star estimates that such
dilution should not be substantial. For example, if
All-Star's Shares are trading at a premium from their net
asset value of 9.5% (the average premium for the six-month
period ended January 31, 2001), and assuming all Rights are
exercised, the Subscription Price would be 5% below
All-Star's net asset value per Share, resulting in a
reduction of such net asset value of approximately $0.05 per
Share, or less than 0.45%. See "Special Considerations and
Risk Factors--Dilution."
5
Distributions........................ All-Star currently has a policy of paying distributions on
its Shares totaling approximately 10% of its net asset value
per year, payable in four quarterly distributions of 2.5% of
its net asset value at the close of the NYSE on the Friday
prior to each quarterly declaration date. These fixed
distributions, which are not related to All-Star's net
investment income or net realized capital gains or losses,
will be treated as ordinary dividend income up to the amount
of All-Star's current and accumulated earnings and profits.
If, for any calendar year, the total distributions made
under the 10% pay-out policy exceed All-Star's net
investment income and net realized capital gains, the excess
will be treated as a tax-free 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 tax-free 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
his or her Shares.
All-Star may, in the discretion of the Board of Trustees,
retain for reinvestment, and not distribute, net long-term
capital gains in excess of net short-term capital losses
("net capital gain") for any year to the extent that its net
investment income and net realized gains exceed the minimum
amount required to be distributed for such year under the
10% pay-out policy, although All-Star reserves the right to
distribute such excess. Retained net capital gain will be
taxed to All-Star and, as may be designated by All-Star, to
the Shareholders as long-term capital gains. Each
Shareholder will be able to claim a proportionate share of
the federal income tax paid by All-Star with respect to such
gain 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 so taxed and the credit. See "Distributions;
Automatic Dividend Reinvestment and Cash Purchase Plan."
Although All-Star's tax on such retained capital gain might
be greater (up to a maximum 35% rate) from the Shareholder's
tax on such gain, the Shareholder will be entitled to a
credit (or refund) for the full amount of tax paid by
All-Star on such gain.
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 net asset value is a
risk separate and distinct from the risk that All-Star's net
asset value 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."
6
Anti-takeover Provisions............. All-Star's Declaration of Trust and By-Laws have 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. 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
All-Star's Board of Trustees, in which event such conversion
would only require the majority vote of All-Star's
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 All-Star's Board of
Trustees under certain conditions. These provisions cannot
be amended without a similar super-majority vote. In
addition, All-Star's 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."
Repurchase........................... You will be free to dispose of your Shares on the NYSE or
other markets on which the Shares may trade, but, because
the Fund is a closed-end fund, you do not have the right to
redeem your Shares.
You should carefully consider your ability to assume the foregoing risks
before making an investment in the Fund. An investment in Shares of the Fund
is not appropriate for all investors.
7
EXPENSES
SHAREHOLDER TRANSACTION EXPENSES
These are the expenses that an investor incurs when buying Shares of
All-Star, whether in this Offer, in the open-market or through All-Star's
Automatic Dividend Reinvestment and Cash Purchase Plan, as amended ("Plan").
Sales Load............................... None (l)
Automatic Dividend Reinvestment and Cash $1.25 per voluntary cash investment
Purchase Plan Fees.....................
------------------------
(1) No sales load or commission will be payable in connection with this 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 beneficial
interests):
Management and Administrative Fees.......................... 0.91%
Other Expenses.............................................. 0.11%
----
Total Annual Expenses....................................... 1.02%
EXAMPLE: You would pay the following expenses on an investment (at net asset
value) of $1,000, assuming a 5% annual return.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
$10 $32 $56 $125
THESE FIGURES ARE INTENDED TO ILLUSTRATE THE EFFECT OF ALL-STAR'S EXPENSES,
BUT ARE NOT MEANT TO PREDICT ITS FUTURE RETURNS AND EXPENSES, WHICH MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
The purpose of the above tables is to assist investors in understanding the
various costs and expenses that an investor in All-Star will bear directly or
indirectly. The numbers shown under the ANNUAL EXPENSES table are projections
based on All-Star's actual expenses for the year ended December 31, 2001, and on
its projected net assets assuming the Offer is fully subscribed for at the
Estimated Purchase Price of $9.91 per Share. See "Financial Highlights" for
All-Star's actual ratio of expenses to average net assets for the year ended
December 31, 2001.
8
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance. Information is shown for the Fund's last ten fiscal
years. Certain information reflects financial results from a single Fund Share.
The information for the fiscal years ended December 31, 1999, December 31, 2000
and December 31, 2001 has been audited by PricewaterhouseCoopers LLP,
independent accountants. The information included in the Fund'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 accountants,
together with the financial statements of the Fund, are included in the Fund's
December 31, 2001 Annual Report and are incorporated by reference into the
Statement of Additional Information (see cover page).
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE:
Net asset value 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................................. (1.79) 0.96 1.22 2.35 3.01(a)
Provision for federal income tax.............. -- -- -- -- (0.36)
------ ------- ------- ------- -------
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)
Return of capital............................. -- -- -- -- --
------ ------- ------- ------- -------
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)
------ ------- ------- ------- -------
Net asset value 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 net asset value........................ (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......... 1.03% 0.96% 0.97% 1.00% 1.01%
Ratio of net investment income to average net
assets........................................ 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 offering for shares at a price below net asset
value.
(c) Effect of payment of a portion of distributions in newly issued shares
valued at a discount from net asset value.
(d) Calculated assuming all distributions reinvested at the actual reinvestment
price and all primary rights exercised.
9
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of year............ $ 11.03 $ 9.26 $10.40 $ 10.78 $ 11.20
------- ------- ------ ------- -------
Income from Investment Operations:
Net investment income......................... 0.08 0.10 0.11 0.12 0.16
Net realized and unrealized gain (losses) on
investments................................. 2.15(a) 2.71 (0.20) 0.78(a) 0.54
Provision for federal income tax.............. (0.13) -- -- (0.18) --
------- ------- ------ ------- -------
Total from Investment Operations................ 2.10 2.81 (0.09) 0.72 0.70
------- ------- ------ ------- -------
Less Distributions from:
Net investment income......................... (0.08) (0.10) (0.12) (0.12) (0.18)
Realized capital gain......................... (1.10) (0.94) (0.52) (0.58) (0.66)
Return of capital............................. -- -- (0.36) (0.37) (0.23)
------- ------- ------ ------- -------
Total Distributions............................. (1.18) (1.04) (1.00) (1.07) (1.07)
------- ------- ------ ------- -------
Change due to rights offering (b)............... -- -- (0.05) (0.03) (0.05)
Impact of Shares issued in dividend reinvestment
(c)........................................... -- -- -- -- --
------- ------- ------ ------- -------
Total Distributions, Reinvestments and Rights
Offering...................................... (1.18) (1.04) (1.05) (1.10) (1.12)
------- ------- ------ ------- -------
Net asset value at end of year.................. $ 11.95 $ 11.03 $ 9.26 $ 10.40 $ 10.78
======= ======= ====== ======= =======
Market price at end of year..................... $11.250 $10.875 $8.500 $11.125 $11.125
======= ======= ====== ======= =======
TOTAL INVESTMENT RETURN FOR
SHAREHOLDERS: (D)
Based on net asset value........................ 21.7% 31.8% (0.8)% 8.8% 6.9%
Based on market price........................... 16.2% 41.4% (14.9)% 12.7% 14.9%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of year (millions)............ $988 $872 $710 $725 $665
Ratio of expenses to average net assets......... 1.03% 1.06% 1.07% 1.08% 1.08%
Ratio of net investment income to average net
assets........................................ 0.73% 0.92% 1.16% 1.08% 1.44%
Portfolio turnover rate......................... 70% 54% 44% 72% 57%
------------------------
(a) Before provision for federal income tax.
(b) Effect of All-Star's rights offering for shares at a price below net asset
value.
(c) Effect of payment of a portion of distributions in newly issued shares
valued at a discount from net asset value.
(d) Calculated assuming all distributions reinvested at the actual reinvestment
price and all primary rights exercised.
10
SHARE PRICE DATA
Trading in All-Star's Shares on the NYSE commenced on October 24, 1986. For
the two years ended December 31, 2001 and the quarter ended March 31, 2002, the
high and low sales prices for All-Star's Shares, as reported in the consolidated
transaction reporting system, and the highest discount from or premium to net
asset value per Share and the net asset value on the day or days when the Shares
traded at such high and low sales prices, were as follows:
DISCOUNT DISCOUNT
FROM OR FROM OR
PREMIUM TO PREMIUM TO
HIGH SALES NET ASSET NET ASSET LOW SALES NET ASSET NET ASSET
PRICE VALUE VALUE PRICE VALUE VALUE
---------- --------- ------------ --------- --------- ------------
2000
1st Quarter....................... $11.75 $14.52 -19.1% $ 9.750 $12.98 -24.9%
2nd Quarter....................... $12.75 $14.17 -10.0% $10.313 $14.10 -26.8%
3rd Quarter....................... $13.25 $14.84 -10.7% $12.313 $14.31 -13.9%
4th Quarter....................... $13.25 $14.23 -6.9% $11.313 $13.42 -15.7%
2001
1st Quarter....................... $13.57 $13.80 -1.7% $ 11.50 $11.07 3.9%
2nd Quarter....................... $13.55 $12.78 6.0% $ 11.50 $10.82 6.3%
3rd Quarter....................... $13.25 $12.05 9.9% $ 8.60 $ 8.83 -2.6%
4th Quarter....................... $11.85 $10.33 14.7% $ 10.40 $ 9.43 10.2%
2002
1st Quarter....................... $12.39 $10.26 20.8% $ 10.55 $10.34 2.0%
All-Star's Shares have traded in certain periods at a discount from their
net asset value. Certain features of and steps taken by All-Star may have tended
to reduce the discount from net asset value 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" below), begun in July, 1988, may
have contributed to this effect. This trend may also have resulted in whole or
in part from other factors, such as the Fund's investment performance and
increased attention directed to All-Star by securities analysts and market
letters.
The net asset value of a Share of All-Star on April 1, 2002 was $10.43. The
last reported sale price of an All-Star Share on that day was $11.01,
representing a premium to net asset value of 5.6%.
11
INVESTMENT PERFORMANCE
The table below shows two measures of All-Star's return to investors for the
one, five, ten and fifteen year periods through December 31, 2001. No. 1
("All-Star NAV") shows All-Star's investment performance based on a valuation of
its Shares at net asset value ("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 reinvestment of all of the Fund'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" below), and full exercise of primary subscription rights in
All-Star's 1992, 1993, 1994 and 1998 rights offerings.
The Lipper Large-Cap Core Mutual Fund Average has been included so that the
Fund'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 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
ALL-STAR ALL-STAR CORE MUTUAL S&P 500
NAV PRICE FUND AVERAGE INDEX
------------- -------- ---------------- --------------
1 Year beginning January 1, 2001............ -12.7% 0.0% -13.8% -11.9%
5 Years beginning January 1, 1997........... 9.7% 11.9% 8.2% 10.7%
10 Years beginning January 1, 1992.......... 11.4% 12.3% 11.0% 12.9%
15 Years beginning January 1, 1987.......... 13.0% 12.9% 11.9% 13.7%
The above results represent All-Star's past performance and are not intended
as a prediction of its future performance. The investment return, net asset
value 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.
12
THE OFFER
TERMS OF THE OFFER
All-Star is issuing to Record Date Shareholders nontransferable Rights to
subscribe for the Shares, without par value, of the Fund's beneficial interest.
Each such shareholder is being issued one Right for each Share of beneficial
interest owned on the Record Date. The Rights entitle the holder to acquire on
Primary Subscription at the Subscription Price one Share for each ten Rights
held. No Rights will be issued for fractional Shares. Accordingly, Shares may be
purchased only pursuant to the exercise of Rights in integral multiples of ten.
Rights may be exercised at any time during the Subscription Period, which
commences on April 5, 2002 and ends at 5:00 p.m., New York City time, on May 6,
2002, the Expiration Date.
In addition, any Shareholder who fully exercises all Rights initially issued
to him or her in the Primary Subscription (other than those Rights which cannot
be exercised because they represent the right to acquire less than one Share) is
entitled to subscribe for Shares which were not otherwise subscribed for by
others on Primary Subscription. For purposes of determining the number of Shares
a 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. Shares acquired pursuant to the
Over-Subscription Privilege are subject to allotment, which is more fully
discussed below 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, 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 of such fractional Shares.
The Rights will be evidenced by Subscription Certificates which will be
mailed to Record Date Shareholders. 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 the Shares paid for is set forth below under "Method of
Exercise of Rights" and "Payment for Shares."
PURPOSE OF THE OFFER
The Board of Trustees of All-Star 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 thereby permitting the Fund to be in a better
position to more fully take advantage of investment opportunities that may
arise, and that 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 proceeds of the Offer will enable All-Star's
Portfolio Managers to take advantage of perceived investment opportunities
without having to sell existing portfolio holdings which they otherwise would
retain. The Offer seeks to reward investors by giving existing shareholders the
opportunity to purchase additional Shares at a price below market and/or net
asset value and without brokerage commissions. In addition, 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 the Fund to maintain the current ratio of its fixed expenses to
its net assets.
All-Star's Fund Manager and Portfolio Managers will benefit from the Offer
because their fees are based on the average weekly 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
13
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 LAMCO. The other four Trustees
are not "interested persons" of All-Star or LAMCO.
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 1940 Act. In 1992, All-Star completed a rights offering
to shareholders of 5,464,168 additional Shares at a subscription price of $10.05
per Share, for proceeds to the Fund after expenses of $54,683,782. In 1993,
All-Star completed a second rights offering to shareholders of 4,227,570
additional Shares at a subscription price of $10.41 per Share, for proceeds to
the Fund after expenses of $43,759,004. In 1994, All-Star completed a third
rights offering to shareholders of 4,704,931 additional Shares at a subscription
price of $9.14 per Share, for proceeds to the Fund after expenses of
$42,793,069. In 1998, All-Star completed a fourth rights offering to
shareholders of 4,318,134 additional Shares at a subscription price of $12.83
per Share, for proceeds to the Fund after expenses of $55,166,659. All four
rights offerings were oversubscribed. Under the laws of Massachusetts, the state
in which the Fund is organized, the Board of Trustees has the authority to
approve rights offerings without obtaining shareholder approval. The staff of
the Securities and Exchange Commission ("SEC") has interpreted the 1940 Act as
not requiring shareholder approval of a rights offering at a price below the
then current net asset value so long as certain conditions are met, including a
good faith determination by the fund's board of trustees that such offering
would result in a net benefit to existing shareholders.
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
Date Shareholders who have exercised all the Rights initially issued to them and
who wish to acquire more than the number of Shares for which the Rights issued
to them are exercisable. Record Date Shareholders who exercise all the 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, the available Excess Shares will be
allocated (subject to elimination of fractional Shares) among those who
over-subscribe based on the number of Rights originally issued to them by the
Fund. The allocation process may involve a series of allocations in order to
assure that the total number of Shares available for over-subscriptions is
distributed on a pro rata basis.
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 holders of Rights
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 holder being allocated a greater number of Excess
Shares than the holder subscribed for pursuant to the exercise of such holder's
Over-Subscription Privilege, then such holder will be allocated only such number
of Excess Shares as such holder subscribed for and the remaining Excess Shares
will be allocated among all other holders
14
exercising Over-Subscription Privileges. The formula to be used in allocating
the Excess Shares is as follows:
Holder's Record Date Position
----------------------------- X Excess Shares Remaining
Total Record Date Position
of all Oversubscribers
The allocation process may involve a series of allocations in order to
assure that the total number of Shares available for Over-Subscription is
distributed on a pro rata basis. The Fund will not offer or sell any Shares
which are not subscribed for under the Primary Subscription or the
Over-Subscription Privilege.
THE SUBSCRIPTION PRICE
The Subscription Price for the Shares to be issued pursuant to the Rights
will be 95% of the lower of (i) the last reported sale price of a Share of
All-Star on the NYSE on May 7, 2002, the Pricing Date, or (ii) the net asset
value of a Share of All-Star on the Pricing Date.
All-Star announced the terms of the Offer before the opening of trading on
the NYSE on February 13, 2002. The net asset value per Share of All-Star at the
close of business on February 12, 2002 and on April 1, 2002 was $10.19 and
$10.43, respectively, and the last reported sale price of a Share on the NYSE on
those dates was $11.06 and $11.01, respectively, representing a 8.5% premium and
a 5.6% premium, respectively, in relation to the net asset value per Share at
the close of business on these dates.
EXPIRATION OF THE OFFER
The Offer will expire at 5:00 p.m., New York City time, on May 6, 2002.
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, shareholders who decide to acquire Shares on Primary Subscription or
pursuant to the Over-Subscription Privilege will not know, when they make such
decision, what the purchase 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. The Fund
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 the
Fund deems appropriate.
SUBSCRIPTION AGENT
The Subscription Agent is EquiServe Trust Company, N.A. EquiServe is also
the Fund's dividend paying agent, transfer agent and registrar. The Subscription
Agent will receive from All-Star a fee estimated at approximately $100,000 plus
reimbursement for its out-of-pocket expenses related to the Offer. INQUIRIES BY
ALL HOLDERS OF RIGHTS SHOULD BE DIRECTED TO EQUISERVE TRUST COMPANY, N.A.,
P.O. BOX 43025, PROVIDENCE, RI 02940-3025 (TELEPHONE (800) 542-3863); HOLDERS
MAY ALSO CONSULT THEIR BROKERS OR NOMINEES.
15
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:
Georgeson Shareholder Communications Inc.
111 Commerce Road
Carlstadt, New Jersey 07072-2586
Call Toll Free 1-866-904-6821
The Information Agent will receive a fee estimated at approximately $15,000
plus reimbursement for its out-of-pocket expenses.
METHOD OF EXERCISE OF RIGHTS
Rights may be exercised by filling in 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 for the Shares as described below under "Payment
for Shares." Rights may also be exercised through a Rights holder's broker, who
may charge such Rights holder a servicing fee in connection with such exercise.
Fractional Shares will not be issued, and Rights holders 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 EQUISERVE TRUST
COMPANY, N.A. by one of the following methods:
SUBSCRIPTION CERTIFICATE
DELIVERY METHOD ADDRESS
------------------------ -------
If By Mail: EquiServe
Attn: Corporate Actions
P.O. Box 43025
Providence, RI 02940-3025
If By Hand: Securities Transfer and Reporting Services, Inc.
c/o EquiServe
100 Williams St. Galleria
New York, NY 10038
If By Overnight Courier or Express EquiServe
Mail: Attn: Corporate Actions
40 Campanelli Drive
Braintree, MA 02184
By Broker-Dealer or other Nominee: Shareholders whose Shares are held in a brokerage, bank or
(Notice of Guaranteed Delivery) trust account may contact their broker or other nominee and
instruct them to submit a Notice of Guaranteed Delivery and
payment on their behalf.
16
DELIVERY BY ANY METHOD OR TO ANY ADDRESS NOT LISTED ABOVE WILL NOT CONSTITUTE
GOOD DELIVERY.
All questions as to the validity, form, eligibility (including times of
receipt and matters pertaining to beneficial ownership) and the acceptance of
subscription forms 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 the Fund's counsel, be unlawful. All-Star also
reserves the right to waive any irregularities or conditions, and the Fund'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 the Fund 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
Holders of Rights who subscribe for Shares on 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 the Shares subscribed for on 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 May 9, 2002. 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) 380-3388; telephone number to confirm receipt (781) 575-4816).
(2) Alternatively, a holder of Rights can, together with the Subscription
Certificate, send payment for the Shares acquired on 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 $10.25
per Share. Please note that the estimated subscription price (as calculated
pursuant to the Subscription Certificate) differs from the Estimated Purchase
Price shown on the cover page of this Prospectus, which is presented for
illustration purposes only. 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 NOT ACCEPT CASH AS A MEANS OF PAYMENT FOR SHARES. EXCEPT AS OTHERWISE SET
FORTH BELOW, A PAYMENT PURSUANT TO THIS METHOD MUST BE IN UNITED STATES DOLLARS
BY MONEY ORDER OR CHECK DRAWN ON A BANK LOCATED IN THE CONTINENTAL UNITED
STATES, MUST BE PAYABLE TO THE LIBERTY ALL-STAR EQUITY FUND, AND MUST ACCOMPANY
AN 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
shareholder exercising his or her Rights (or, if the All-Star 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
shareholder to All-Star or any excess to be refunded by All-Star to such
shareholder, in each case
17
based on the Subscription Price as determined on the Pricing Date. Any
additional payment required from a shareholder must be received by the
Subscription Agent prior to 5:00 p.m., New York City time, on May 9, 2002, and
any excess payment to be refunded by All-Star to such shareholder will be mailed
by the Subscription Agent with the confirmation. All payments by a 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.
Such payments will be held by the Subscription Agent 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.
Rights holders will have no right to rescind their subscription after
receipt of their payment for Shares by the Subscription Agent.
If a holder of Rights 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) find other purchasers for such subscribed and unpaid for Shares;
(ii) apply any payment actually received by it toward the purchase of the
greatest number of whole Shares which could be acquired by such holder upon
exercise of the Primary Subscription or the Over-Subscription Privilege;
(iii) sell in the open market all or a portion of the Shares purchased by the
holder, and apply the proceeds to the amounts owed; and (iv) 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.
All-Star shareholders whose Shares are held by a broker-dealer, bank, trust
company or other nominee should contact the nominee to exercise their Rights and
request the nominee to exercise their Rights in accordance with their
instructions.
Brokers, banks, trust companies, depositories and other nominees who hold
All-Star 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 Right 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 EquiServe 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 RIGHTS HOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT THE 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. BECAUSE UNCERTIFIED PERSONAL CHECKS MAY TAKE
AT LEAST FIVE BUSINESS DAYS TO CLEAR, YOU ARE STRONGLY URGED TO PAY, OR ARRANGE
FOR PAYMENT, BY MEANS OF A CERTIFIED OR CASHIER'S CHECK OR MONEY ORDER. SHARES
WILL NOT BE DELIVERED UNTIL CHECKS HAVE CLEARED.
DELIVERY OF STOCK CERTIFICATES
Participants in All-Star's Automatic Dividend Reinvestment and Cash Purchase
Plan who exercise the Rights issued on the Shares held in their accounts in the
Plan will have their Shares acquired on Primary Subscription and pursuant to the
Over-Subscription Privilege credited to their shareholder
18
distribution reinvestment accounts in the Plan. 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 on 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
shareholders, stock certificates for all Shares acquired on Primary Subscription
and pursuant to the Over-Subscription Privilege will be mailed, together with
the confirmation and refund of the amount, if any, paid in excess of the final
Subscription Price, on or about May 21, 2002 if the estimated Subscription Price
is equal to or in excess of the final Subscription Price. If the 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 May 31, 2002, provided that such
additional amount has been paid and payment for the 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" above.
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 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 Internal Revenue Code of 1986, as amended ("Code"), the
Treasury Regulations promulgated thereunder and other authorities currently in
effect, all of which are subject to change, possibly with a retroactive effect.
This 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.
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 exercised Rights, if any, plus the Subscription Price
for the Share. A Record Date Shareholder's basis in 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 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 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
19
rate of 20% in the case of a noncorporate shareholder, if the shareholder then
held 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")
(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
DILUTION
If you do not exercise all of your Rights during the Subscription Period,
when the Offering is over you will own a relatively smaller percentage of the
Fund than if you had exercised all of your Rights. The Fund cannot tell you
precisely how much smaller the percentage of the Fund that you would own because
the Fund does not know how many of the Fund's Record Date Shareholders will
exercise their Rights and how many of their Rights they will exercise.
Shareholders will experience an immediate dilution of the aggregate NAV of
Shares as a result of the completion of the Offer because (i) the Subscription
Price per Share will be less than the Fund's NAV per Share on the Expiration
Date, (ii) the Fund 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 the Fund'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 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 the Fund. To
the extent such investments achieve a better return than current investments,
earnings per Share will experience appreciation.
20
The following example assumes that all of the Shares are sold at the
Estimated Purchase Price of $9.91 and after deducting all expenses related to
the issuance of the Shares.
DILUTION
NAV PER SHARE ON PER SHARE IN PERCENTAGE
APRIL 1, 2002 DOLLARS DILUTION
---------------- -------------- ----------
Primary Subscription or 10,688,506 Shares $10.43 $ 0.05 0.48%
MARKET VALUE AND NET ASSET VALUE
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 the Fund's net asset value may decrease. Since
the commencement of the Fund's operations, the Fund's Shares have traded in
certain periods in the market at a discount to NAV. See "Share Price Data." 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 Fund's Shares are not subject to redemption.
Investors desiring liquidity may, subject to applicable securities laws, trade
their Shares in the Fund 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. The
Fund cannot predict whether the Shares will trade at a discount or premium to
NAV after completion of the Offer.
POSSIBLE SUSPENSION OF THE OFFER
All-Star has, as required by the Securities and Exchange Commission's
registration form, undertaken to suspend the Offer until it amends this
Prospectus if subsequent to March 29, 2002, the effective date of the Fund's
Registration Statement, All-Star's net asset value declines more than 10% from
its net asset value as of March 29, 2002. Accordingly, All-Star will notify
shareholders of any such decline and thereby permit them to cancel their
exercise of Rights.
USE OF PROCEEDS
The net proceeds of the Offer, assuming that all Shares offered hereby are
sold at an Estimated Purchase Price of $9.91 per Share, are estimated to be
approximately $105,608,094, after deducting expenses payable by All-Star
estimated at $315,000. Such net proceeds will be invested by All-Star's
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 (as defined under "Investment
Objective, Policies and Risks" below).
THE MULTI-MANAGER CONCEPT
All-Star allocates its portfolio assets on an approximately equal basis
among a number of independent investment management firms ("Portfolio
Managers"), currently five in number, recommended by LAMCO, each of which
employs a different investment style, and from time to time rebalances the
portfolio among the Portfolio Managers so as to maintain an approximately equal
allocation of the portfolio among them throughout all market cycles.
21
In the opinion of LAMCO, the multi-manager concept 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, any given investment style
will move into and out of market favor and will result in better investment
performance under certain market conditions but less successful performance
under other conditions;
(iii) consequently, 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 will be diluted, and the investment
performance of the total portfolio will be more consistent and less volatile
over the long-term than if a single style were employed throughout the entire
period;
(iv) consistent performance at a given annual rate of return over time
produces a higher rate of return for the long-term than more volatile
performance having the same average annual rate of return.
LAMCO, 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.
LAMCO continuously monitors the performance and investment styles of
All-Star's Portfolio Managers and from time to time recommends changes of
Portfolio Managers based on factors such as changes in a Portfolio Manager's
investment 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 All-Star's Portfolio Managers. Since its inception, All-Star has had eleven
Portfolio Manager changes.
All-Star Portfolio Manager changes, as well as the periodic rebalancings of
its 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" above).
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 LAMCO by the
Securities and Exchange Commission, 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 other 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 regularly
scheduled annual shareholder meeting (normally held in April) next 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:
Boston Partners Asset Management, L.P.
Mastrapasqua & Associates, Inc.
Oppenheimer Capital LLC
22
Schneider Capital Management Corporation
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.
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" below).
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
Corporation ("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 LAMCO
or the Portfolio Managers deem that market conditions are such that a more
conservative approach to investment is desirable.
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
RISK below 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 All-Star's 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,
23
may lend its portfolio securities (principally to broker-dealers) where such
loans are callable at any 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 will 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. The Fund 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 which 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.
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 the Fund 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 the Fund 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 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.
Expenses and losses incurred as a result of the hedging strategies described
above will reduce All-Star's current return.
24
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 risk thereof.
RISKS
As an investment company that holds common stocks, All-Star's portfolio is
subject to the possibility that common stock prices will decline over short or
even extended periods. All-Star may remain substantially fully invested during
periods when stock prices generally rise and also during periods when they
generally decline. In addition, All-Star's portfolio is subject to the risks
associated with growth stocks. Growth stock prices may be more sensitive to
changes in current or expected earnings than the prices of other stocks, and
growth stocks may not perform as well as value stocks or the stock market in
general. Risks are inherent in investments in equities, and Fund shareholders
should be able to tolerate significant fluctuations in the value of their
investment in All-Star. All-Star is intended to be a long-term investment
vehicle and is not designed to provide investors with a means of speculating on
short-term stock market movements. Investors should not consider the Fund a
complete investment program.
In addition to the foregoing investment risks, shares of closed-end
investment companies such as All-Star are not redeemable and frequently trade at
a discount from their net asset value. This risk is separate and distinct from
the risk that All-Star's net asset value may decline. See "Share Price Data" for
information about the market price and net asset value of All-Star's Shares
since January 1, 2000.
REDUCING INVESTMENT RISK
As a matter of fundamental policy, All-Star will not (i), as to 75% of its
total assets, purchase the securities (other than U.S. Government Securities) of
any one issuer if after such purchase more than 5% of its assets would be
invested in the securities of that issuer, (ii) purchase more than 10% of the
outstanding voting securities of such issuer, (iii) invest 25% or more of its
total assets in the securities of issuers in the same industry, or (iv) invest
more than 10% of its total assets in securities that at the time of purchase
have legal or contractual restrictions on resale (including unregistered
securities that are eligible for resale to qualified institutional buyers
pursuant to Rule 144A under the Securities Act of 1933). See "Investment
Restrictions" in the Statement of Additional Information.
MANAGEMENT OF ALL-STAR
The management of All-Star's business and affairs is the responsibility of
its Board of Trustees.
All-Star has a Fund Management Agreement with LAMCO pursuant to which LAMCO
provides the Portfolio Manager selection, evaluation, monitoring and rebalancing
services ("investment management services") described above under "The
Multi-Manager Concept." No single individual at LAMCO is responsible for LAMCO's
decisions with respect to the retention or replacement of the Portfolio
Managers.
LAMCO is also responsible for the provision of administrative services to
All-Star, including the provision of office space, shareholder and broker-dealer
communications, compensation of officers of All-Star who are officers or
employees of LAMCO or its affiliates, and the supervision of transfer
25
agency, dividend disbursing, custodial and other services provided to others.
Certain of LAMCO's administrative responsibilities have been delegated to
Colonial.
LAMCO has its offices at One Financial Center, Boston, Massachusetts 02111.
LAMCO was organized in 1985 and is a wholly owned subsidiary of Columbia
Management Group, Inc., which in turn is an indirect wholly owned subsidiary of
FleetBoston Financial Corporation, a U.S. financial holding company.
Under All-Star's Portfolio Management Agreements with each of its Portfolio
Managers and LAMCO, 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 LAMCO from time to time, subject to All-Star's
investment objective and policies, to the supervision and control of the
Trustees, and to instructions from LAMCO. As described under the section
entitled "The Multi-Manager Concept", LAMCO 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 the Portfolio Managers' activities are subject to general
oversight by LAMCO and the Trustees and officers of All-Star, neither LAMCO nor
such Trustees and 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 Fund portfolio transactions initiated
by it, All-Star's Portfolio Managers are permitted to place portfolio
transactions initiated by them with another Portfolio Manager or its
broker-dealer affiliate or with a broker-dealer affiliate of LAMCO 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 LAMCO and its Portfolio
Management Agreements with the Portfolio Managers, All-Star pays LAMCO a fund
management fee and an administrative fee, and LAMCO 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 the Fund's average weekly net
assets during the prior month).
FUND MANAGEMENT
FEE PAID TO LAMCO
AND PORTFOLIO MANAGEMENT
AVERAGE WEEKLY FEE PAID TO ADMINISTRATIVE
NET ASSET VALUE PORTFOLIO MANAGERS FEE PAID TO LAMCO TOTAL FEES
--------------- ------------------------ ----------------- ----------
First $400 million... 0.800% (0.400% to Portfolio Managers) 0.200% 1.00%
Next $400 million.... 0.720% (0.360% to Portfolio Managers) 0.180% 0.90%
Next $400 million.... 0.648% (0.324% to Portfolio Managers) 0.162% 0.81%
Over $1.2 billion.... 0.584% (0.292% to Portfolio Managers) 0.146% 0.73%
Colonial provides pricing and bookkeeping services to All-Star for an annual
fee of $10,000 per year plus a fee based on the Fund's average net assets for
any month that such assets are over $50 million. The fee shall be calculated as
follows: $190,000 divided by the sum of the Fund's average monthly net assets
plus the average monthly net assets of Liberty All-Star Growth Fund, Inc. The
Fund also reimburses Colonial for its out-of-pocket expenses, including fees
payable to third parties for pricing services.
26
CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is All-Star's custodian. EquiServe Trust Company, N.A., 150
Royall Street, Canton, Massachusetts 02021, is the transfer and dividend
disbursing agent and registrar for All-Star.
EXPENSES OF THE FUND
LAMCO provides the Portfolio Manager selection, evaluation, monitoring and
rebalancing services and assumes responsibility for the administrative services
described above, pays the compensation of and furnishes office space for the
officers of All-Star who are affiliated with LAMCO, and pays the management fees
of the Portfolio Managers. All-Star pays all its expenses, other than those
expressly assumed by LAMCO. The expenses payable by All-Star include: fees of
the Manager; expenses of all audits by independent public accountants; expenses
of transfer agent, registrar, dividend disbursing agent and shareholder record
keeping services (including reasonable fees and expenses payable to the Manager
for such services); expenses of custodial services including fund accounting and
record keeping services provided by the Custodian; expenses of obtaining
quotations for calculating the value of the Fund's net assets; salaries and
other compensation of any of its executive officers and employees who are not
officers, directors, stockholders or employees of the Manager or any of its
affiliates; taxes levied against the Fund and the expenses of preparing tax
returns and reports; brokerage fees and commissions in connection with the
purchase and sale of portfolio securities for the Fund; organizational and
offering expenses; costs, including the interest expense, of borrowing money;
costs and/or fees incident to Trustee and shareholder meetings of the Fund, the
preparation and mailings of proxy material, prospectuses and the reports of the
Fund to its shareholders, the filing of reports with regulatory bodies, the
maintenance of the Fund's legal existence, membership dues and fees of
investment company trade associations, the listing (and maintenance of such
listing) of the Fund's shares on stock exchanges, and the registration of shares
with federal and state securities authorities; legal fees and expenses
(including reasonable legal fees for legal services rendered by the Manager or
its affiliates), including the legal fees related to the registration and
continued qualification of the Fund's shares for sale; costs of printing stock
certificates representing shares of the Fund; Trustees' fees and expenses of
Trustees who are not directors, officers, employees or stockholders of the
Manager or any of its affiliates; its pro rata portion of the fidelity bond
required by Section 17(g) of the 1940 Act, or other insurance premiums; and fees
payable to federal and state authorities in connection with the registration of
the Fund's shares.
DESCRIPTION OF SHARES
GENERAL
All-Star's authorized capitalization consists of an unlimited number of
Shares of beneficial interest, without par value, of which 106,885,060 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 of All-Star 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.
27
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 All-Star Shares. All-Star,
however, is authorized to repurchase its Shares on the open market when its
Shares are trading at a discount from their net asset value. 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 All-Star's 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
(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 five percent 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 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
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.
28
The Board 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
All-Star's Shares to their net asset value, the Board 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 Trustees' recommendation,
Shareholders, by substantial majorities, 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.
DISTRIBUTIONS; AUTOMATIC DIVIDEND
REINVESTMENT AND CASH PURCHASE PLAN
10% DISTRIBUTION POLICY
All-Star's current distribution policy is to pay distributions on its Shares
totaling approximately 10% of its net asset value per year, payable in four
quarterly distributions of 2.5% of its net asset value at the close of the NYSE
on the Friday prior to each quarterly declaration date. These fixed
distributions, which are not related to All-Star's net investment income or net
realized capital gains or losses, will be treated as ordinary dividend income up
to the amount of All-Star's current and accumulated earnings and profits. If,
for any calendar year, the total distributions made under the 10% pay-out policy
exceed All-Star's net investment income and net realized capital gains, the
excess will be treated as a tax-free 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 tax-free 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 his or her Shares. All-Star made distribution from
capital in 1987, 1988, 1989, 1990, 1992, 1993 and 1994 (See "Financial
Highlights").
To the extent All-Star's 10% payout 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 10% payout policy. In
addition, in order to make distributions under the 10% payout 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.
All-Star may, in the discretion of the Board of Trustees, retain for
reinvestment, and not distribute, net capital gain for any year to the extent
that its net investment income and net realized gains exceed the minimum amount
required to be distributed for such year under the 10% pay-out policy, although
All-Star reserves the right to distribute such excess. Retained net capital gain
will be taxed to both All-Star and the Shareholders as long-term capital gains;
however, each shareholder 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 may 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 those
non-participants in the Plan who specifically elect to receive their
distribution in cash by completing and signing an option card, a copy of which
will be enclosed with the notice of
29
each such distribution payable in Shares, and returning it on a timely basis to
EquiServe Trust Company, N.A., All-Star's transfer agent and dividend paying
agent.
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 net
asset value 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.
AUTOMATIC DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
Under All-Star's Automatic Dividend Reinvestment and Cash Purchase Plan (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
EquiServe Trust Company, as agent for participants in the Plan (the "Plan
Agent"), in additional Shares of All-Star. 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
net asset value per Share on the valuation date for the distribution (but not a
discount of more than 5% from the then current 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 (if
the Fund's Shares are trading at a discount to their net asset value) or in
newly issued Shares (if the Fund's Shares are trading at or above their net
asset value). Dividends and distributions are subject to taxation, whether
received in cash or in Shares (see "Tax Status" below).
Participants in the Plan have the option of making additional cash payments
in any amount on a monthly basis for investment in All-Star Shares purchased on
the open market. These voluntary cash payments will be invested on or about the
15th day of each calendar 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 Shareholders such as 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.
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 whenever the Plan Agent makes open market
purchases.
30
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 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 Status" below.
Either Liberty All-Star Equity Fund or the Plan Agent may amend or terminate
the Plan. Participants will receive written notice at least 90 days before the
effective date of any amendment. In the case of termination, participants will
receive written notice of termination at least 90 days before the record date of
any dividend or distribution by the Fund.
Shareholders must affirmatively elect to participate in the Plan, and may do
so by completing an application and filing it with the Plan Agent. Shareholders
may call or write the Plan Agent, EquiServe Trust Company N.A., P.O. Box 43011,
Providence, R.I. 02940-3011 (800-542-3863) for information about the Plan.
Shareholders who own shares in their own name can participate directly in
the Plan. Shareholders whose shares are held in the name of a brokerage firm,
bank or other nominee should instruct the nominee to participate on their
behalf.
A Shareholder who wishes to participate in the Plan, but whose brokerage
firm, bank or other nominee is unable to participate on the Shareholder's
behalf, should request the nominee to re-register the shares in the
shareholder's name which will enable the shareholder to participate in the Plan.
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 only be effective for subsequent distributions with
a record date at least ten days after the notice of withdrawal is received by
the Plan Agent.
TAX STATUS
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 under the Code,
and intends to make distributions to the Shareholders in accordance with the
timing requirements set out in the Code. 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, and not distribute, net capital gain). All-Star also expects
to make sufficient annual distributions to avoid being subject to a
nondeductible 4% federal excise tax imposed on regulated investment companies.
If All-Star fails to qualify as a regulated investment company in any year, it
would incur federal corporate income tax on its taxable income and its
distributions would be taxable as ordinary dividend income to the Shareholders
to the extent of its net investment income and net capital gain. 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 regulated investment company.
31
Distributions by All-Star from net investment income and net realized
capital gains will be taxable to Shareholders whether received by shareholders
in cash or in Shares of All-Star. 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 of All-Star 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 must 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 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. Net capital gain is taxable, in the case
of a noncorporate shareholder, at a maximum rate of 20%. As All-Star may elect,
net capital gain not distributed by All-Star will also be taxable to
Shareholders, but Shareholders will be able to claim a tax credit for the tax
paid by All-Star with respect to such undistributed capital gain.
In general, any gain or loss realized upon a taxable disposition of Shares
by a shareholder who holds such Shares as a capital asset will be treated as a
long-term capital gain or loss if the Shares have been held for more than twelve
months and otherwise as a short-term capital gain or loss. However, if a
shareholder holds Shares of All-Star 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.
At the time of an investor's purchase of All-Star Shares, All-Star's net
asset value may reflect undistributed net investment income or capital gains or
net unrealized appreciation of securities it holds. As of December 31, 2001,
All-Star's investments had net unrealized gains of $98,462,182. Realization and
a subsequent distribution to a shareholder of such amount, although it may in
effect constitute a return of his or her investment, would be taxable to the
shareholder as ordinary income or capital gain, as described above. For federal
income tax purposes, All-Star is permitted to carry forward to another taxable
year its net realized capital losses, if any, from earlier taxable years and
thus may realize net capital gains in the later year up to the amount of such
losses without being required to pay taxes on or to distribute such gains. As of
December 31, 2001, the end of its last completed fiscal year, All-Star had no
capital loss carryovers.
Individuals and certain other non-corporate All-Star Shareholders may be
subject to withholding tax on reportable dividends and capital gain
distributions and contain other payments at the rate in effect at the time of
distribution (currently 30%) ("back-up withholding"). Generally, Shareholders
subject to back-up withholding will be those for whom a taxpayer identification
number and certain required certificates 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 from distributions to any Shareholder who does
not certify to All-Star that the Shareholder is not subject to back-up
withholding due to notification by the Internal Revenue Service that the
shareholder has under-reported interest or dividend income.
Distributions from net investment income paid to Shareholders who are
non-resident aliens or foreign entities may be subject to withholding of federal
income tax (but not, in such event, subject to back-up withholding) at the rate
of 30% unless a reduced rate of withholding or a withholding
32
exemption is provided under an applicable treaty. Non-U.S. shareholders are
urged to consult their own tax advisers concerning the applicability of the
withholding tax.
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
All-Star was organized on August 20, 1986 as a "Massachusetts business
trust" and commenced investment operations on November 3, 1986. Under
Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, All-Star's Declaration of Trust contains an express disclaimer of
Shareholder liability for the acts or obligations of All-Star and provides for
indemnification and reimbursement of expenses out of All-Star's property for any
shareholder held personally liable for the obligations of All-Star. Thus, the
risk of a Shareholder incurring financial loss on account of an All-Star
liability is limited to circumstances in which both inadequate insurance existed
and All-Star itself were unable to meet its obligations from the liquidation of
its portfolio investments.
LAMCO is a direct wholly owned subsidiary of Columbia Management
Group, Inc., an indirect wholly owned subsidiary of FleetBoston Financial
Corporation.
Under the Fund Management Agreement between All-Star and LAMCO, All-Star may
use the name "Liberty 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
LAMCO. In addition, LAMCO may grant the non-exclusive right to use the name
"Liberty All-Star" to any other entity, including any other investment company
of which LAMCO or any of its affiliates is the investment adviser or
distributor.
33
STATEMENT OF ADDITIONAL INFORMATION
Additional information about the Fund 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 the
Prospectus. Set forth below is the Table of Contents of the Statement of
Additional Information.
TABLE OF CONTENTS
Investment Objective and Policies........................... 2
Investment Restrictions..................................... 5
Investment Advisory and Other Services...................... 7
Trustees and Officers....................................... 9
Portfolio Security Transactions............................. 17
Principal Shareholders...................................... 19
Financial Statements........................................ 19
34
APPENDIX A
INFORMATION ABOUT THE PORTFOLIO MANAGERS
Current Portfolio Managers
BOSTON PARTNERS ASSET MANAGEMENT, L.P.
28 State Street
Boston, Massachusetts 02109
Boston Partners Asset Management, L.P. ("Boston Partners") was appointed as
an All-Star Portfolio Manager effective May 11, 1998. Boston Partners has been
an investment advisor since 1995. The Sole General Partner of Boston Partners is
Boston Partners, Inc., a Delaware Subchapter S Corporation. Desmond J. Heathwood
is the President of Boston Partners, Inc. As of December 31, 2001, Boston
Partners managed over $10.2 billion in assets.
Mark E. Donovan, CFA, Chairman, Equity Strategy Committee, has managed the
portion of All-Star's portfolio allocated to Boston Partners since its
appointment as an All-Star manager in 1998. Mr. Donovan has been with Boston
Partners since its founding and has 21 years of investment experience.
MASTRAPASQUA & ASSOCIATES, INC.
814 Church Street, Suite 600
Nashville, Tennessee 37203
Mastrapasqua & Associates, Inc. ("Mastrapasqua") was appointed as an
All-Star Portfolio Manager effective November 1, 2000. Mastrapasqua, an
investment advisor since 1993, is an independently owned firm. Ownership of
Mastrapasqua lies 100% with its officers and trustees. Mastrapasqua's principal
executive officer is Frank Mastrapasqua, Ph.D., Chairman and Chief Executive
Officer. Mr. Mastrapasqua, Thomas A. Trantum, President, and Mauro Mastrapasqua,
First Vice President, may be deemed to be control persons of Mastrapasqua by
virtue of their aggregate ownership of more than 25% of the outstanding voting
stock of Mastrapasqua. As of December 31, 2001, Mastrapasqua managed
approximately $1.8 billion in assets.
Frank Mastrapasqua and Thomas Trantum, CFA, have managed the portion of
All-Star's portfolio allocated to Mastrapasqua since its appointment as an
All-Star manager. Messrs. Mastrapasqua and Trantum have over 62 years of
investment experience and have managed portfolios together for the last
14 years.
OPPENHEIMER CAPITAL LLC
1345 Avenue of the Americas
New York, New York 10105
Oppenheimer Capital, LLC ("Oppenheimer") was appointed as an All-Star
Portfolio Manager effective February 15, 1990. Oppenheimer, an investment
advisor since 1969, is a Delaware partnership and an indirect subsidiary of
Allianz A.G. Oppenheimer's principal executive officer is Kenneth M. Poovey. As
of December 31, 2001, Oppenheimer managed over $37.2 billion in assets.
John G. Lindenthal, Managing Director, has managed the portion of All-Star's
portfolio allocated to Oppenheimer since its appointment as an All-Star manager
in 1990. Mr. Lindenthal joined Oppenheimber in 1979 and has 32 years of
investment experience.
A-1
SCHNEIDER CAPITAL MANAGEMENT CORPORATION
450 East Swedesford Road
Wayne, PA 19087
Schneider Capital Management Corporation ("Schneider") was appointed as an
All-Star Portfolio Manager effective March 1, 2002, replacing Westwood
Management Corp. Schneider, a registered investment advisor, was founded in 1996
by Arnold C. Schneider III, CFA. Schneider is 100% employee-owned.
Mr. Schneider may be deemed to be a control person of Schneider by virtue of his
aggregate ownership of more than 25% of the outstanding voting stock of
Schneider. As of December 31, 2001, Schneider managed approximately
$1.6 billion in assets.
Mr. Schneider serves as President and Chief Investment Officer of Schneider
and manages the portion of the Fund's portfolio allocated to Schneider. Prior to
founding Schneider, Mr. Schneider was a Senior Vice President and Partner of the
Wellington Management Company.
TCW INVESTMENT MANAGEMENT COMPANY
865 South Figueroa Street
Los Angeles, CA 90017
TCW Investment Management Company ("TCW") was appointed as an All-Star
Portfolio Manager effective April 1, 1999. TCW is a wholly owned subsidiary of
The TCW Group, Inc. ("TCW Group"). Established in 1971, TCW Group's direct and
indirect subsidiaries, including TCW, provide a variety of trust, investment
management and investment advisory services. Societe Generale Asset Management,
S.A. ("SGAM") owns 51% of the TCW Group. SGAM is a wholly owned subsidiary of
Societe Generale, S.A. ("Societe Generale "). SGAM is located at 92708 place de
la Corpole, 92078 Paris, France. Societe Generale is located at 29 boulevard
Haussman, 75009, Paris, France. The employees, management, and other
shareholders of the TCW Group own the remaining 49% of the company. Under the
terms of an agreement between the TCW Group and SGAM, SGAM will acquire an
additional 19% interest in the TCW Group over the course of the next five years.
SGAM and TCW have stated their intention to maintain the personnel, processes,
investment strategy and operations of TCW, which will continue to operate under
the TCW brand name. As of December 31, 2001, TCW and its affiliates had over
$87.7 billion in assets under management or committed to management.
Glen E. Bickerstaff, Group Managing Director U.S. Equities, has managed the
portion of All-Star's portfolio allocated to TCW since its appointment as an
All-Star Portfolio Manager. Mr. Bickerstaff has been with TCW since 1994.
A-2
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING OF ANY SECURITIES OTHER THAN THE
REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO ANY PERSON IN ANY STATE
OR JURISDICTION OF THE UNITED STATES OR ANY COUNTRY WHERE SUCH OFFER WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE FACTS AS SET FORTH IN THE PROSPECTUS OR IN THE AFFAIRS OF THE FUND
SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
Prospectus Summary................... 2
Expenses............................. 8
Financial Highlights................. 9
Share Price Data..................... 11
Investment Performance............... 12
The Offer............................ 13
Special Considerations and Risk
Factors............................ 20
Use of Proceeds...................... 21
The Multi-Manager Concept............ 21
Investment Objective, Policies and
Risks.............................. 23
Management of All-Star............... 25
Description of Shares................ 27
Distributions; Automatic Dividend
Reinvestment and Cash Purchase
Plan............................... 29
Tax Status........................... 31
General.............................. 33
Statement of Additional
Information........................ 34
Appendix A--
Information about the Portfolio
Managers........................... A-1
[LOGO]
LIBERTY
ALL-STAR
EQUITY FUND
A MULTI-MANAGED INVESTMENT COMPANY
10,688,506 SHARES OF BENEFICIAL
INTEREST ISSUABLE UPON EXERCISE
OF RIGHTS TO SUBSCRIBE
FOR SUCH SHARES
---------------------
PROSPECTUS
APRIL 2, 2002
---------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
LIBERTY ALL-STAR EQUITY FUND
STATEMENT OF ADDITIONAL INFORMATION
April 2, 2002
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" or the "Fund") dated April 2, 2002. A copy of the Prospectus may be
obtained, without charge, by calling or writing Liberty Asset Management Company
at One Financial Center, Boston, Massachusetts 02111(800-542-3863).
TABLE OF CONTENTS PAGE
Investment Objective and Policies 2
Investment Restrictions 5
Investment Advisory and Other Services 7
Trustees and Officers 9
Portfolio Security Transactions 17
Principal Shareholders 19
Financial Statements 19
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."
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 unexcercised 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.
2
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 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.
3
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
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
4
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 Securities and Exchange Commission ("SEC") with respect to such
transactions.
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.
(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).
5
(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.
(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.
6
INVESTMENT ADVISORY AND OTHER SERVICES
As stated under "Management of All-Star" in the Prospectus, Liberty Asset
Management Company ("LAMCO") performs the investment management services and is
responsible for the administrative services described therein. LAMCO, through
Columbia Management Group, Inc. ("Columbia"), is an indirect wholly owned
subsidiary of FleetBoston Financial Corporation ("FleetBoston"), Boston,
Massachusetts. As indicated under "Trustees and Officers" below, all of its
officers are officers of LAMCO, Colonial Management Associates, Inc., Columbia
or other affiliates of Columbia.
Reference is made to Appendix A of the Prospectus for the names of the
controlling persons of All-Star's current and new Portfolio Managers and the
names of the individual(s) at each Portfolio Manager primarily responsible for
the management of the portion of All-Star's portfolio assigned to it. None of
such Portfolio Managers has any affiliation with LAMCO or (except as Portfolio
Manager) with All-Star.
As described under "Management of All-Star" in the Prospectus, All-Star
pays LAMCO a fund management fee for its investment management services (from
which LAMCO pays the Portfolio Managers' fee), and an administrative fee for its
administrative services.
For the years ended December 31, 2000 and 2001 the total fund management
and administrative fees paid to LAMCO were $12,256,060 and $10,701,655,
respectively, of which an aggregate of $4,900,684 and $4,268,503, respectively,
was paid to the Portfolio Managers.
All-Star's current Fund Management Agreement and Portfolio Management
Agreements will continue in effect until July 31, 2003 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"), LAMCO or the Portfolio
Managers by a vote cast in person at a meeting called for the purpose of voting
on such approval. The Fund 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.
On March 1, 2002, Schneider Capital Managment Corporation ("Schneider")
replaced Westwood Management Corp. as a Portfolio Manager of All-Star. On
February 12, 2002, the Board of Trustees approved this change as well as the
proposed Portfolio Management Agreement between All-Star, LAMCO and Schneider.
The new Portfolio Management Agreement with Schneider is substantially identical
to one formerly in place with Westwood Management Corp. Under the new Portfolio
Management Agreement, Schneider is paid the same portfolio management fee that
was paid to Westwood Management Corp. prior to the effective date of the change.
The Fund and LAMCO have adopted Codes of Ethics pursuant to the
requirements of the Investment Company Act of 1940, as amended. These Codes of
Ethics permit personnel subject to the Codes to invest in securities, including
securities that may be purchased or held by the funds. Copies of the Codes of
Ethics of the Fund and LAMCO can be reviewed and copied at the Commission's
Public Reference Room in Washington, D.C. Information on the operation of the
Public Reference Room may be obtained by calling the Commission at
1-202-942-8090. The Codes of Ethics are also available on the EDGAR database on
the Commission's Internet site at www.sec.gov, or may be obtained, after paying
a duplicating fee, by electronic request at
7
publicinfo@sec.gov, or by writing the Commission's Public Reference Section,
Washington, D.C. 20549-0102.
CUSTODIAN AND PRICING AND BOOKKEEPING AGENT
State Street Bank and Trust Company (the "Bank"), 225 Franklin Street,
Boston, Massachusetts 02110, is the custodian of the portfolio securities and
cash of All-Star. As such, the Bank 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 its portfolio
securities and disburses funds in connection with the payment of distributions
and expenses.
Colonial Management Associates, Inc. ("Colonial"), an affiliate of LAMCO,
performs pricing and bookkeeping services for All-Star (see "Management of
All-Star" in the Prospectus). For the years ended December 31, 2000 and 2001,
All-Star paid pricing and bookkeeping fees to Colonial of $283,483 and $233,932
respectively.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts
02110, are the independent accountants of All-Star. The independent accountants
audit and report on the annual financial statements and provide tax return
review services and assistance and consultation in connection with the review of
various SEC filings.
8
TRUSTEES AND OFFICERS
The names, addresses and ages of the Trustees and officers of the Liberty
All-Star Equity Fund, the date each was first elected or appointed to office,
their term of office, their principal business occupations during at least the
last five years, the number of portfolios overseen by each Trustee and other
directorships they hold, are shown below.
NUMBER OF
POSITION PORTFOLIOS IN
WITH LIBERTY TERM OF OFFICE FUND COMPLEX
NAME, ADDRESS ALL-STAR AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN
AND AGE EQUITY FUND SERVICE DURING PAST FIVE YEARS BY TRUSTEE
------------- ------------ -------------- ----------------------- --------------
DISINTERESTED TRUSTEE(S)
Robert J. Birnbaum Trustee Trustee Since Retired since January 1994; Special Counsel, 2
(Age 74) 1994; Term Dechert, Price & Rhoads (September 1988 to
c/o Liberty Asset Management Expires 2003 December 1993); President and Chief Operating
Company Officer, New York Stock Exchange, Inc. (May
One Financial Center 1985 to June 1988).
Boston, MA 02111
James E. Grinnell Trustee Trustee Since Private investor since November 1988; President 2
(Age 71) 1986; Term and Chief Executive Officer, Distribution
c/o Liberty Asset Management Expires 2002 Management Systems, Inc. (1983 to May 1986);
Company Senior Vice President, Operations, The Rockport
One Financial Center Company (importer and distributor of shoes)
Boston, MA 02111 (May 1986 to 1988).
Richard W. Lowry Trustee Trustee Since Private Investor since 1987 (formerly Chairman 105
(Age 65) 1986; Term and Chief Executive Officer, U.S. Plywood
c/o Liberty Asset Management Expires 2004 Corporation (building products manufacturer)).
Company
One Financial Center
Boston, MA 02111
OTHER
NAME, ADDRESS DIRECTORSHIPS
AND AGE HELD
------------- -------------
DISINTERESTED TRUSTEE(S)
Robert J. Birnbaum Dresdner RCM Global Funds
(Age 74) (investment companies)
c/o Liberty Asset Management and Chicago Options
Company Exchange Board
One Financial Center
Boston, MA 02111
James E. Grinnell None
(Age 71)
c/o Liberty Asset Management
Company
One Financial Center
Boston, MA 02111
Richard W. Lowry None
(Age 65)
c/o Liberty Asset Management
Company
One Financial Center
Boston, MA 02111
9
NUMBER OF
POSITION PORTFOLIOS IN
WITH LIBERTY TERM OF OFFICE FUND COMPLEX
NAME, ADDRESS ALL-STAR AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN
AND AGE EQUITY FUND SERVICE DURING PAST FIVE YEARS BY TRUSTEE
------------- ------------ -------------- ----------------------- --------------
John J. Neuhauser Trustee Trustee Since Academic Vice President and Dean of Faculties 105
(Age 58) 1998; Term since August 1999, Boston College (formerly
c/o Liberty Asset Management Expires 2004 Dean, Boston College School of Management from
Company September 1977 to September 1999).
One Financial Center
Boston, MA 02111
INTERESTED TRUSTEE
William E. Mayer* Trustee Trustee Since Managing Partner, Park Avenue Equity Partners 105
(Age 61) 1998; Term (private equity fund) since February 1999
c/o Liberty Asset Management Expires 2003 (formerly Founding Partner, Development Capital,
Company LLC from November 1996 to February 1999; Dean
One Financial Center and Professor, College of Business and
Boston, MA 02111 Management, University of Maryland from October,
1992 to November 1996).
OTHER
NAME, ADDRESS DIRECTORSHIPS
AND AGE HELD
------------- -------------
John J. Neuhauser Saucony, Inc. (athletic
(Age 58) footwear); SkillSoft
c/o Liberty Asset Management Corp. (E-Learning).
Company
One Financial Center
Boston, MA 02111
INTERESTED TRUSTEE
William E. Mayer* Lee Enterprises (print
(Age 61) and on-line media); WR
c/o Liberty Asset Management Hambrecht + Co (financial
Company service provider); First
One Financial Center Health (healthcare);
Boston, MA 02111 Systech Retail Systems
(retail industry
technology provider)).
* A Trustee who is an "interested person" (as defined in the Investment Company
Act of 1940 ("1940 Act")) of Liberty All-Star Equity Fund or LAMCO. Mr. Mayer is
an interested person by reason of his affiliation with WR Hambrecht + Co., a
registered broker-dealer.
10
OFFICERS
YEAR FIRST ELECTED
POSITION WITH LIBERTY OR APPOINTED PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE ALL-STAR EQUITY FUND TO OFFICE DURING PAST FIVE YEARS
--------------------- --------------------- ------------------ ----------------------
William R. Parmentier, Jr. President, Chief 1998 President and Chief Executive Officer
(Age 49) (since June 1998) and Chief
Liberty Asset Management Company Executive Officer and Investment Officer (since May 1995),
One Financial Center Chief Investment Officer Senior Vice President (May 1995 to
Boston, MA 02111 June 1998), Liberty Asset Management
Company.
Christopher S. Carabell Vice President 1997 Senior Vice President, Product
(Age 38) Development and Marketing (since
Liberty Asset Management Company January 1999), Vice President,
One Financial Center Investments, Liberty Asset Management
Boston, MA 02111 Company (March 1996 to January 1999).
Mark T. Haley, CFA Vice President 1999 Vice President-Investments (since
(Age 37) January 1998), Director of Investment
Liberty Asset Management Company Analysis (December 1996 to December
One Financial Center 1998), Investment Analyst (January
Boston, MA 02111 1994 to November 1996), Liberty Asset
Management Company.
J. Kevin Connaughton Treasurer 2000 Treasurer of the Liberty Funds and of
(Age 37) the Liberty All-Star Funds since
One Financial Center December 2000 (formerly Controller of
Boston, MA 02111 the Liberty Funds and of the Liberty
All-Star Funds from February 1998 to
October 2000); Treasurer of the Stein
Roe Funds since February, 2001
(formerly Controller from May 2000 to
February 2001); Senior Vice President
of Liberty Funds Group LLC ("LFG")
since January 2001 (formerly Vice
President from April 2000 to January
2001; Vice President of Colonial
Management Associates, Inc.
("Colonial") from February 1998 to
October 2000; Senior Tax Manager,
Coopers & Lybrand, LLP from April
1996 to January 1998.
11
YEAR FIRST ELECTED
POSITION WITH LIBERTY OR APPOINTED PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE ALL-STAR EQUITY FUND TO OFFICE DURING PAST FIVE YEARS
--------------------- --------------------- ------------------ ----------------------
Michelle G. Azrialy Controller 2001 Controller of the Liberty Funds and
(Age 32) of the Liberty All-Star Funds since
One Financial Center May 2001; Vice President of LFG since
Boston, MA 02111 March 2001 (formerly Assistant Vice
President of Fund Administration from
September 2000 to February 2001;
Compliance Manager of Fund
Administration from September 1999 to
August 2000) (formerly Assistant Vice
President and Assistant Treasurer,
Chase Global Fund Services - Boston
from August 1996 to September, 1999).
Vicki L. Benjamin Chief Accounting Officer 2001 Chief Accounting Officer of the
(Age 40) Liberty Funds and of the Liberty
One Financial Center All-Star Funds since June 2001; Vice
Boston, MA 02111 President of LFG since April 2001
(formerly Vice President, Corporate
Audit, State Street Bank and Trust
Company from May 1998 to April 2001;
Audit Manager from July, 1994 to
June, 1997; Senior Audit Manager from
July, 1997 to May, 1998, Coopers &
Lybrand, LLP).
Jean S. Loewenberg Secretary 2002 Secretary of the Liberty Funds and of
(Age 56) the Liberty All-Star Funds since
One Financial Center February 2002; Senior Vice President
Boston, MA 02111 and Group Senior Counsel, Fleet
National Bank since November 1996.
12
ROLE OF THE BOARD OF TRUSTEES
The Trustees of All-Star are responsible for the overall management and
supervision of All-Star's affairs and for protecting the interests of the
shareholders. The Trustees meet 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. Birnbaum, Grinnell, Lowry and Neuhauser are members of the Audit
Committee of the Board of Trustees of All-Star. The Audit Committee's functions
include making recommendations to the Trustees regarding the selection and
performance of the independent accountants, and reviewing matters relative to
accounting and auditing practices and procedures, accounting records, and the
internal accounting controls, of All-Star, and certain service providers. In the
fiscal year ended December 31, 2001, the Audit Committee convened two times.
SHARE OWNERSHIP
The following table shows the dollar range of equity securities
beneficially owned by each Trustee in All-Star and in all Liberty Funds overseen
by the Trustee as of December 31, 2001.
AGGREGATE DOLLAR RANGE OF
EQUITY SECURITIES OWNED IN
ALL REGISTERED FUNDS
DOLLAR RANGE OF EQUITY OVERSEEN BY TRUSTEE IN
NAME OF TRUSTEE SECURITIES OWNED IN ALL-STAR LIBERTY FAMILY OF FUNDS
--------------- ---------------------------- ---------------------------
DISINTERESTED TRUSTEES
Robert J. Birnbaum $50,001-100,000 $50,001-100,000
James E. Grinnell Over $100,000 Over $100,000
Richard W. Lowry Over $100,000 Over $100,000
John J. Neuhauser $1-10,000 Over $100,000
INTERESTED TRUSTEE
William E. Mayer $1-10,000 $50,001-100,000
As of December 31, 2001, no Disinterested Trustee or any of their
immediate family members owned beneficially or of record any class of securities
of LAMCO, a portfolio manager or any person controlling, controlled by or under
common control with LAMCO or a portfolio manager.
During the calendar years ended December 31, 2000 and December 31, 2001,
no Disinterested Trustee (or their immediate family members) had any direct or
indirect interest in LAMCO, a portfolio manager or any person controlling,
controlled by or under common control with LAMCO or a portfolio manager.
During the calendar years ended December 31, 2000 and December 31, 2001,
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 LAMCO, a
13
portfolio manager or a person controlling, controlled by or under common control
with LAMCO or a portfolio manager; (iii) LAMCO or a portfolio manager; (iv) any
person controlling, controlled by or under common control with LAMCO or a
portfolio manager; or (v) an officer of any of the above.
During the calendar years ended December 31, 2000 and December 31, 2001,
no Disinterested Trustee (or their immediate family members) had any direct or
indirect relationship with (i) All-Star; (ii) another fund managed by LAMCO,a
portfolio manager or a person controlling, controlled by or under common control
with LAMCO or a portfolio manager; (iii) LAMCO or a portfolio manager; (iv) a
person controlling, controlled by or under common control with LAMCO or a
portfolio manager; or (v) an officer of any of the above.
During the calendar years ended December 31, 2000 and December 31, 2001,
no officer of LAMCO, a portfolio manager or any person controlling, controlled
by or under common control with LAMCO 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
In determining to approve the Fund's Fund Management Agreement and
Portfolio Management Agreements and recommend their approval to shareholders,
the Trustees met over the course of the year with the relevant investment
advisory personnel from LAMCO and the Portfolio Managers and considered
information provided by LAMCO and the Portfolio Managers relating to the
education, experience and number of investment professionals and other personnel
providing services under that agreement. See "Management of All-Star" in the
Fund's Prospectus and "Trustees and Officers" in this SAI. The Trustees also
took into account the time and attention devoted by senior management of LAMCO
and the Portfolio Managers to the Fund and the other funds in the complex. The
Trustees evaluated the level of skill required to manage the Fund and concluded
that the human resources devoted by LAMCO and the Portfolio Managers to the Fund
were appropriate to fulfill effectively each of their duties under the
agreements. The Trustees also considered the business reputation of LAMCO and
the Portfolio Managers and each of their respective financial resources, and
concluded that each of them would be able to meet any reasonably foreseeable
obligations under the agreements.
The Trustees received information concerning the investment philosophy
and investment process applied by LAMCO and the Portfolio Managers in managing
the Fund. See "Investment Objective, Policies and Risks" in the Fund's
Prospectus. In this connection, the Trustees considered the in-house research
capabilities of LAMCO and the Portfolio Managers as well as other resources
available to their personnel, including research services available to LAMCO and
the Portfolio Managers as a result of securities transactions effected for the
Fund and other investment advisory clients. The Trustees concluded that
investment process, research capabilities and philosophy of each Portfolio
Manager and LAMCO were well suited to the Fund, given the Fund's investment
objective and policies.
The Trustees considered the scope of the services provided by LAMCO and
each Portfolio Manager to the Fund under the agreements relative to services
provided by third parties to other mutual funds. See "Investment Advisory and
Other Services." The Trustees concluded that the scope of the services provided
by LAMCO and each Portfolio Manager to the Fund was
14
consistent with the Fund's operational requirements, including, in addition to
its investment objective, compliance with the Fund's investment restrictions,
tax and reporting requirements and related shareholder services.
The Trustees considered the quality of the services provided by LAMCO and
each Portfolio Manager to the Fund. The Trustees evaluated each of their records
with respect to regulatory compliance and compliance with the investment
policies of the Fund. The Trustees also evaluated the procedures of LAMCO and
each Portfolio Manager designed to fulfill their fiduciary duty to the Fund with
respect to possible conflicts of interest, including each of their codes of
ethics (regulating the personal trading of its officers and employees) (see
"Investment Advisory and Other Services"), the procedures by which LAMCO and
each Portfolio Manager allocates trades among its various investment advisory
clients and the record of LAMCO and each Portfolio Manager in these matters. The
Trustees also received information concerning standards of LAMCO and each
Portfolio Manager with respect to the execution of portfolio transactions. See
"Portfolio Security Transactions."
The Trustees considered LAMCO's management of non-advisory services
provided by persons other than LAMCO by reference, among other things, to the
Fund's total expenses and the reputation of the Fund's other service providers.
See "Expenses" in the Fund's Prospectus. The Trustees also considered
information provided by third parties relating to the Fund's investment
performance relative to its performance benchmark(s), relative to other similar
funds managed by LAMCO and each Portfolio Manager and relative to funds managed
similarly by other advisors. The Trustees reviewed performance over various
periods, including the Fund's one, five and ten year calendar year periods
and/or the life of the Fund, as applicable (See "Investment Performance" in the
Fund's Prospectus), as well as factors identified by LAMCO as contributing to
the Fund's performance. See the Fund's most recent annual and semi-annual
reports. The Trustees concluded that the scope and quality of the services
provided by LAMCO and each Portfolio Manager was sufficient to merit approval of
each agreement for two years.
In reaching that conclusion, the Trustees also gave substantial
consideration to the fees payable under the agreements. The Trustees reviewed
information concerning fees paid to investment advisors of similarly managed
funds. The Trustees also considered the fees of the Fund as a percentage of
assets at different asset levels and possible economies of scale to LAMCO and
each Portfolio Manager. The Trustees evaluated the profitability of LAMCO with
respect to the Fund, concluding that such profitability appeared to be generally
consistent with levels of profitability that had been determined by courts to be
"not excessive." For these purposes, the Trustees took into account not only the
actual dollar amount of fees paid by the Fund directly to LAMCO, but also
so-called "fallout benefits" to the Advisor such as reputational value derived
from serving as fund manager to the Fund and the research services available to
LAMCO and each Portfolio Manager by reason of brokerage commissions generated by
the Fund's turnover. In evaluating the Fund's advisory fees, the Trustees also
took into account the complexity of investment management for the Fund relative
to other types of funds. Based on challenges associated with less readily
available market information about foreign issuers and smaller capitalization
companies, limited liquidity of certain securities, and the specialization
required for focused funds, the Trustees concluded that generally greater
research intensity and trading acumen is
15
required for equity funds, and for international or global funds, as compared to
funds investing, respectively, in debt obligations or in U.S. issuers. See
"Investment Objective, Policies and Risks" in the Fund's Prospectus.
Based on the foregoing, the Trustees concluded that the fees to be paid
to LAMCO and each Portfolio Manager under the advisory agreement were fair and
reasonable, given the scope and quality of the services rendered by LAMCO and
each Portfolio Manager.
GENERAL
All-Star's Board of Trustees is divided into three classes, each of which
has a term of three years expiring with the annual meeting of shareholders in
the third year of the term. 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. The term of office of Mr. Grinnell will
expire upon the final adjournment of the 2002 annual meeting, unless he is
re-elected at that meeting; The term of office of Messrs. Birnbaum and Mayer
will expire upon the final adjournment of the 2003 annual meeting (Mr. Birnbaum
will reach mandatory retirement age during his term and will retire at that
time); the term of office of Messrs. Lowry and Neuhauser will expire upon final
adjournment of the annual meeting for the year 2004. Messrs. Lowry, Mayer, and
Neuhauser are also Trustees of Liberty Funds Trusts I through VII (the "Liberty
Trusts"), the umbrella trusts for an aggregate of 53 open-end funds managed by
affiliates of LAMCO, nine closed-end funds managed by Colonial (the "Colonial
Closed-End Funds"), Liberty Variable Investment Trust, the umbrella trust for 17
open-end funds managed by Colonial or its affiliates that serve as investment
vehicles for variable annuities and variable life insurance products; Liberty
Floating Rate Fund; Stein Roe Floating Rate Limited Liability Company,
Liberty-Stein Roe Institutional Floating Rate Income Fund and Liberty-Stein Roe
Funds Income Trust, Liberty-Stein Roe Funds Municipal Trust, Liberty-Stein Roe
Funds Investment Trust, Liberty-Stein Roe Advisor Trust, Stein Roe Trust, SR&F
Base Trust and Stein Roe Variable Investment Trust, the umbrella trusts for 40
open-end funds managed by Stein Roe & Farnham Incorporated, a LAMCO affiliate.
The All Star's Board of Trustees are also directors of Liberty All-Star Growth
Fund, Inc., another closed-end multi-managed fund managed by LAMCO.
TRUSTEE COMPENSATION
LAMCO or its affiliates pay the compensation of all the officers of
All-Star, including the Trustees who are affiliated with LAMCO. Beginning
January 1, 1999, the aggregate of the fees paid to the Trustees by All-Star that
have the same Board of Directors as the Liberty All-Star Growth Fund, Inc., and
Liberty All-Star Growth and Income Fund and hold their meetings concurrently
with those of the Fund, consists of Trustee/Director fees of $125,000 per annum,
assuming a minimum of four meetings are held and all meetings are attended.
One-third of the retainer and the fees for concurrently held meetings was
allocated among the Fund and the two other funds on a per fund basis, and the
remaining two thirds was allocated among the three funds based on their net
assets. Effective February 9, 2001, Liberty All-Star Growth and Income Fund was
merged into another open-end fund in the Liberty Trusts and the retainer and
meeting fees will be allocated between the Fund and Liberty All-Star Growth
Fund, Inc. For 2001, All-Star paid the independent Trustees an aggregate of
$94,733 in fees and expenses.
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The following table shows, for the year ended December 31, 2001, the
compensation received from the Fund by each current Trustee, and the aggregate
compensation paid to each current Trustee for service on the Board of Trustees
of the Fund and the two All-Star Funds. The Fund has no bonus, profit sharing or
retirement plans.
AGGREGATE
COMPENSATION FROM TOTAL COMPENSATION FROM THE
NAME THE FUND LIBERTY ALL-STAR FUNDS (INCLUDING THE FUND)
---- -------- -------------------------------------------
Robert J. Birnbaum $19,186.39 $25,300
James E. Grinnell $19,186.39 $25,300
Richard W. Lowry $18,806.88 $24,800
William E. Mayer $18,806.88 $24,800
John J. Neuhauser $18,806.88 $24,800
Joseph R. Palombo(1) N/A N/A
(1) For the fiscal year ended December 31, 2001, Mr. Palombo did not
receive compensation because he was an affiliated Trustee and an
employee of Liberty Financial Companies, Inc. ("LFC"). Mr. Palombo
resigned as Trustee of the Liberty All-Star Funds effective
November 1, 2001. Because Mr. Palombo is an "interested person" of
LAMCO, he resigned his position as a Trustee/Director of the
Liberty All-Star Funds on November 1, 2001, in connection with the
acquistion of the asset management business of LFC by Fleet
National Bank.
The following table shows, for the calendar year ended December 31, 2001, the
compensation received from the Liberty Funds by the Trustees. The Liberty Funds
have no bonus, profit sharing or retirement plans.
NAME TOTAL COMPENSATION FROM LIBERTY FUNDS
---- -------------------------------------
Robert J. Birnbaum $25,300
James E. Grinnell(2) $75,300
Richard W. Lowry $135,300
William E. Mayer $132,300
John J. Neuhauser $132,510
Joseph R. Palombo(3) N/A
(2) Resigned as Trustee of the Liberty Funds on December 27, 2000. In
connection with the combination of Liberty and Stein Roe boards of
trustees, Mr. Grinnell will receive $75,000 for retiring prior to
the respective board's mandatory retirement age. This payment will
continue for the lesser of two years or until the date Mr. Grinnell
would otherwise have retired at age 72. The payments, which began in
2001, are paid quarterly. FleetBoston and the Liberty Fund Complex
will each bear one-half of the cost of the payments. The portion of
the payments borne by FleetBoston was paid by LFC prior to November
1, 2001, when the asset management business of LFC was acquired by
Fleet National Bank, a subsidiary of FleetBoston. The Liberty Fund
Complex portion of the payments will be allocated among the Liberty
Fund Complex based on each fund's share of the Trustee fees for
2000.
(3) For the fiscal year ended December 31, 2001, Mr. Palombo did not
receive compensation because he was an affiliated Trustee and an
employee of LFC.
PORTFOLIO SECURITY TRANSACTIONS
Each of All-Star's Portfolio Managers has discretion to select brokers
and dealers to execute portfolio transactions initiated by the 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 with All-Star provide, in substance, that, except as
provided in the
17
following paragraph, 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. It is expected that securities
will ordinarily be purchased in the primary markets, and that, in assessing the
best net price and execution available to All-Star, the Portfolio Manager will
consider all factors it deems relevant, including the breadth of the market in
the security, the price of the security, the financial condition and execution
capability of the broker or dealer and the reasonableness of the commission, if
any, for the specific transaction and on a continuing basis. Recognizing these
factors, All-Star may pay a brokerage commission in excess of that which another
broker or dealer may have charged for effecting the same transaction.
The Portfolio Management Agreements also provide that LAMCO has the right
to request that transactions giving rise to brokerage commissions, in amounts to
be agreed upon from time to time between LAMCO and the Portfolio Manager, be
executed by brokers and dealers (to be agreed upon from time to time between
LAMCO and the Portfolio Manager) which provide, directly or through third
parties, research products and services to LAMCO or to All-Star. The commissions
paid on such transactions may exceed the amount of commissions another broker
would have charged for effecting that transaction. Research products and
services made available to LAMCO through brokers and dealers executing
transactions for All-Star involving brokerage commissions include performance,
portfolio characteristics, investment style 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, performance and fee and expense data; data relating to portfolio
manager changes by pension plan fiduciaries; quotation equipment; and related
computer hardware and software, all of which are used by LAMCO in connection
with its selection and monitoring of portfolio managers (including the Portfolio
Managers) for All-Star and other multi-managed clients of LAMCO, the assembly of
a mix of investment styles appropriate to the investment objective of All-Star
or such other clients, and the determination of overall portfolio strategies.
LAMCO from time to time reaches understandings with each of the Portfolio
Managers as to the amount of the All-Star 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 LAMCO and the
commissions to be charged to All-Star in connection therewith. These amounts may
differ among the Portfolio Managers based on the nature of the markets for the
types of securities managed by them and other factors.
These research products and services are used by LAMCO in connection with
its management of All-Star, Liberty All-Star Growth Fund, Inc., Liberty All-Star
Equity Fund, Variable Series, and other multi-managed clients of LAMCO,
regardless of the source of the brokerage commissions. In instances where LAMCO
receives from broker-dealers products or services which are used both for
research purposes and for administrative or other non-research purposes, LAMCO
makes a good faith effort to determine the relative proportions of such products
or services which may be considered as investment research, based primarily on
anticipated usage, and pays for the costs attributable to the non-research usage
in cash.
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 that 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
particular transaction or in terms of all the client accounts (including
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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.
During 1999, 2000 and 2001, All-Star paid total brokerage commissions of
$2,341,013, $2,274,317 and $1,838,717, respectively. Approximately $504,593 of
the commissions paid in 1999, and $793,194 and $602,531, respectively, of the
commissions paid in 2000 and 2001 on transactions aggregating approximately
$451,713,793, $686,662,586 and $422,625,822, respectively, were paid to
brokerage firms which provided or made available to All-Star's Portfolio
Managers or to LAMCO research products and services as described above.
Although All-Star does not permit a Portfolio Manager to act or have an
affiliate act as broker for Fund portfolio transactions initiated by it, the
Portfolio Managers are permitted to place Fund 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 compliance with Rule 17e-1 under the Investment
Company Act of 1940. During 1999, 2000 and 2001 no Fund portfolio transactions
were placed with any Portfolio Manager or its broker-dealer affiliate.
PRINCIPAL SHAREHOLDERS
On April 1, 2002, Cede & Co. Fast, Depository Trust Company, 55 Water
Street, New York, NY 10004 and Liberty Mutual Insurance Company and Liberty
Mutual Fire Insurance Company, 175 Berkeley Street, Boston, MA 02116, owned of
record 98,788,235 and 7,263,996 Shares, respectively, representing 92.43% and
6.80%, respectively of All-Star's then outstanding Shares.
FINANCIAL STATEMENTS
PricewaterhouseCoopers LLP, are the independent accountants 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 financial statements incorporated by
reference in this SAI have been so 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 Fund's Annual Report, which includes financial statements for
the fiscal year ended December 31, 2001, is incorporated herein by reference
with respect to all information other than the information set forth on pages 1
through 19 and 35 through 40 thereof. Any statement contained in the Fund's
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. The
Fund will furnish, without charge, a copy of its Annual Report, upon request to
Liberty Asset Management Company, One Financial Center, Boston, Massachusetts
02111, telephone (800) 542-3863.
19