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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-4537
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Liberty All-Star Growth Fund, Inc.
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(Exact name of registrant as specified in charter)
One Financial Center, Boston, Massachusetts 02111
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(Address of principal executive offices) (Zip code)
Vincent Pietropaolo, Esq.
Columbia Management Group, Inc.
One Financial Center
Boston, MA 02111
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(Name and address of agent for service)
Registrant's telephone number, including area code: 1-617-772-3698
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Date of fiscal year end: 12/31/04
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Date of reporting period: 12/31/04
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. Section 3507.
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ITEM 1. REPORTS TO STOCKHOLDERS.
MULTIPLE MANAGERS
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EXCHANGE TRADED
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ALIGNMENT AND OBJECTIVITY
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QUARTERLY DISTRIBUTIONS
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INSTITUTIONAL QUALITY
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MONITORING AND REBALANCING
LIBERTY ALL-STAR GROWTH FUND 2004 ANNUAL REPORT
[ALL STAR(R) GROWTH FUND LOGO]
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[GRAPHIC]
A SINGLE INVESTMENT...
A DIVERSIFIED GROWTH PORTFOLIO
Only one fund offers:
- - A diversified, multi-managed portfolio of small, mid- and large cap growth
stocks
- - Exposure to the industries that make the U.S. economy the world's most
dynamic
- - Access to institutional quality investment managers
- - Objective and ongoing manager evaluation
- - Active portfolio rebalancing
- - A quarterly fixed distribution policy
- - Actively managed, exchange traded fund listed on the New York Stock Exchange
(ticker symbol: ASG)
LIBERTY ALL-STAR GROWTH FUND, INC.
CONTENTS
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1 President's Letter
4 Editorial Feature: Fund Fundamentals
10 Investment Managers/Portfolio Characteristics
11 Manager Roundtable
17 Investment Growth
18 Table of Distributions and Rights Offerings
19 Top 20 Holdings and Economic Sectors
20 Major Stock Changes in the Fourth Quarter
21 Schedule of Investments
27 Financial Statements
30 Financial Highlights
32 Notes to Financial Statements
35 Report of Independent Registered Public Accounting Firm
36 Automatic Dividend Reinvestment and Cash Purchase Plan
37 Tax Information
38 Directors and Officers
INSIDE BACK
COVER Fund Information
</Table>
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PRESIDENT'S LETTER
FELLOW SHAREHOLDERS: FEBRUARY 2005
Two thousand four was a comparatively quiet year for domestic equity markets,
with generally positive returns for growth stock investors. Equity investors
remember all too well the roaring market of the late 1990s, the bear market of
2000-2002 and the strong rebound of 2003. In that light, a less volatile,
relatively uneventful year may have been a welcome respite.
The table that follows demonstrates that the Fund moderately outperformed
large cap growth stocks in 2004. However, it lagged the strong performance
posted by small and mid-cap growth stocks. Much of the reason for the
underperformance relative to small and mid-cap stocks can be traced to better
returns from lower quality, high beta stocks, a point we will discuss further
momentarily.
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FUND STATISTICS
PERIODS ENDING DECEMBER 31, 2004 4TH QUARTER 2004 3 YEARS 5 YEARS
LIBERTY ALL-STAR GROWTH FUND, INC.
Year End Net Asset Value (NAV) $6.29
Year End Market Price $6.61
Year End Premium 5.1%
Distributions $0.15 $0.63 $1.88 $4.14
Market Price Trading Range $6.11 to $6.80 $5.51 to $7.70 $4.38 to $8.78 $4.38 to $12.56
Premium/(Discount) Range 10.9% to 3.9% 13.8% to 0.7% 13.8% to (10.2)% 13.8% to (23.9)%
<Caption>
PERFORMANCE SUMMARY
PERIODS ENDING DECEMBER 31, 2004 4TH QUARTER 2004 3 YEARS* 5 YEARS*
Shares Valued at NAV 10.7% 7.0% 1.1% (4.5)%
Shares Valued at NAV with Dividends Reinvested 10.7% 6.7% 1.3% (4.0)%
Shares Valued at Market Price with Dividends Reinvested 10.5% 6.9% 2.9% 1.3%
Lipper Multi-Cap Growth Mutual Fund Average 12.1% 10.7% 1.9% (7.5)%
Category Percentile Rank (1=best; 100=worst) 67th 82nd 57th 33rd
Russell Growth Indices
Largecap 9.2% 6.3% (0.2)% (9.3)%
Midcap 13.9% 15.5% 6.2% (3.4)%
Smallcap 15.1% 14.3% 5.8% (3.6)%
Nasdaq Composite Index 14.9% 9.1% 4.2% (11.4)%
</Table>
Figures shown for the Fund and the Lipper Multi-Cap Growth Mutual Fund Average
are total returns, which include dividends, after deducting fund expenses. The
Fund's reinvested returns assume that all of the Fund's rights offerings were
fully subscribed under the terms of each offering. Figures shown for the
unmanaged Russell Indices and the Nasdaq Composite Index are total returns,
including income. Past performance cannot predict future results.
(*) Average annual returns.
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Returning to 2004, it was a year of few surprises, and for every bit of
good news there seemed to be an offsetting negative. The presidential election
in effect neutralized the stock market for three quarters, leaving the S&P 500
Index just about flat through nine months (+1.5 percent through September 30).
Another newsworthy item was the Federal Reserve reversing its highly
accommodative monetary policy by hiking its target Fed funds rate five times
beginning in June, raising that key short-term rate from 1.0 percent to 2.25
percent. Those hikes have had relatively little impact on financial markets, as
the Fed had been carefully telegraphing its intentions so as not to catch
investors off guard. The dollar has fallen--thus far in an orderly manner,
mitigating the potential for a sharp sell-off in dollar denominated assets.
Higher cost oil extracted its measure of pain--a barrel of crude moving
close to $56 in October--but inflation, while at its highest since 2000,
remained quiescent (+3.3 percent as measured by the Consumer Price Index). In
addition, key economic indicators suggest continued growth in consumer and
corporate spending. Iraq remains a painful reminder of the world that we live
in, but terrorist actions--except for events such as the tragic bombings in
Spain and Russia--were muted.
CORPORATE EARNINGS REMAIN STRONG
On the corporate front, earnings topped out in the first quarter, but to an
extent that was to be expected after the unsustainably strong recovery in 2003.
By the time fourth quarter figures are tallied, earnings should be up about 20
percent for the year. The energy, utility and telecom sectors were the best
performers among the 10 sectors that make up the S&P 500 Index, while the
sectors that lagged were health care, information technology and consumer
staples.
A look beneath the surface reveals a few key points about the Fund
vis-a-vis overall market performance in recent years. First, it has been a
difficult period for growth stock investors in general. In 2004, value topped
growth by a good margin in all three capitalization ranges--large, mid- and
small cap. Looking back, during the very strong bull market of the second half
of the 1990s, growth stocks consistently outperformed value stocks. Since 2000,
the trend has largely been reversed--in fact, value has outperformed growth for
the fifth straight year. Today, some investors consider value stocks to be as
fully valued as growth stocks were in the latter '90s. I am not going to predict
an imminent turnaround and a resumption of leadership by growth stocks, but such
a reversion to the mean is overdue, on an historic basis. As well, the Fund's
three growth managers express some feelings on this topic in our annual Manager
Roundtable, which begins on page 11.
LOWER QUALITY STOCKS OUTPERFORM
Another point that needs to be made concerns the issue of quality. Lower quality
stocks have generally been outperforming high quality ones. This was to be
expected in last year's recovery, as rapidly improving economic conditions
considerably reduced the high-risk premiums commanded by low quality companies
during the last recession. The highly accommodative monetary policy provided by
the Federal Reserve not only pushed short-term interest rates to 40-year lows,
but also collapsed yield spreads for low quality borrowers. This allowed highly
leveraged companies to access the credit markets, affording them a good deal
more financial flexibility. What is a little curious is that lower quality
stocks outperformed through the first three quarters of 2004, even as the
Federal Reserve began raising short-term rates, signaling a move away from its
highly accommodative monetary stance. There were signs during the fourth quarter
that investors were beginning to focus more on earnings quality and
sustainability. We would not be surprised if that trend were to continue, given
the backdrop of slower profit growth coupled with an environment of tighter
liquidity.
Further, it is worth pointing out that the Fund's investment managers are
going to maintain their quality orientation and not try to chase performance.
How did that impact 2004? Last year, stocks from certain sectors that are not
traditional
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[PHOTO OF FRED H. WOFFORD, WILLIAM R. PARMENTIER JR., MARK T. HALEY]
OFFICERS OF LIBERTY ALL-STAR GROWTH FUND, FROM LEFT: FRED H. WOFFORD, VICE
PRESIDENT - OPERATIONS; WILLIAM R. PARMENTIER, JR., PRESIDENT AND CHIEF
EXECUTIVE OFFICER; AND MARK T. HALEY, CFA, VICE PRESIDENT - INVESTMENTS.
growth areas led the market. Energy and industrials are prime examples. Stocks
from these sectors, although not a large component of the growth indices, were
sizable contributors to return. On the other hand, traditional growth
industries--such as information technology and health care--lagged in 2004. Our
belief is that a better environment for growth stocks in general and quality
growth stocks in particular will benefit the Fund. On the longer term, the Fund
ranks in the top one-third of the Lipper Multi-Cap Growth Mutual Fund universe
over the past five years. Our goal will be to return the Fund's short-term
performance to such a level.
As we look ahead, we believe the Fund's basic structure--a closed-end,
multi-managed Fund providing shareholders with access to institutional quality
investment managers and exposure to the full capitalization spectrum of high
quality growth stocks--will serve investors well. Likewise, management and
ongoing monitoring by the Fund manager, Liberty Asset Management Company
(LAMCO), ensure alignment with shareholder interests and that the investment
managers are meeting expectations. A fuller description of the Fund's unique
attributes may be found in this Annual Report's feature section, which
immediately follows this letter. I encourage you to review it.
In summary, we believe the Fund is well positioned to benefit from its high
quality orientation and the managers' adherence to their investment disciplines
and processes. We have been through a period that is anomalous in the long
history of the stock market, and a return to traditional quality growth stock
leadership should prove rewarding.
We at LAMCO pledge to continue our best efforts on behalf of Fund
shareholders. Indeed, managing with our shareholders' best interests first and
foremost is what we do every day. As always, we thank you for your ongoing
support of the Fund.
Sincerely,
/s/ William R. Parmentier
William R. Parmentier, Jr.
President and Chief Executive Officer
Liberty All-Star Growth Fund, Inc.
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FUND FUNDAMENTALS
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Multiple Managers
Large institutional investors--pension funds, endowments and foundations, for
example--employ multiple portfolio managers to make investment decisions. These
large investors establish investment policy and objectives and then retain
well-qualified investment managers to implement the policy according to their
guidelines.
Liberty All-Star Growth Fund is managed in much the same way. The Fund's
advisor, Liberty Asset Management Company (LAMCO), allocates the Fund's assets
among three growth stock managers. Growth managers concentrate on companies with
high expected sales and earnings growth that are often leaders in expanding
sectors of the economy. Why three managers practicing the same style? Because
even within the growth style performance can vary by capitalization. Liberty
All-Star Growth Fund provides investors with exposure to all three
capitalization ranges: small cap, mid-cap and large cap. This diversifies the
portfolio and can dampen the higher volatility that comes with having a single
growth manager.
AS ADVISOR TO THE ALL-STAR GROWTH FUND, LIBERTY ASSET MANAGEMENT COMPANY (LAMCO)
ADDS VALUE FOR INVESTORS BY PRACTICING A WELL-DEFINED AND DISCIPLINED INVESTMENT
MANAGEMENT PROCESS. LAMCO BRINGS OBJECTIVITY, EXPERIENCE AND EXPERTISE TO
CONSTRUCTING AND MONITORING A MULTI-MANAGED PORTFOLIO, AND IS DEDICATED TO THE
LONG-TERM SUCCESS OF FUND SHAREHOLDERS.
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[GRAPHIC]
Exchange Traded
Liberty All-Star Growth Fund is a closed-end investment company with a fixed
number of shares that trade on the New York Stock Exchange and on other
exchanges. By contrast, open-end mutual funds create and redeem shares
continuously as money flows into or out of the fund and are not traded on stock
exchanges.
In recent years, closed-end, exchange-traded funds have become increasingly
popular because they offer several advantages to investors. Taking Liberty
All-Star Growth Fund as an example, Fund shares are bought and sold just like
shares of other publicly traded companies. The price of a share is determined by
supply and demand and pricing is continuous--not just end-of-day, as is the case
with open-end funds. Fund shares trade frequently, there are no annual sales
fees and expense ratios are often lower than many open-end funds. While many
exchange-traded funds are passive investments whose return is based on the
performance of an index, Liberty All-Star Growth Fund is actively managed by its
three investment managers. From their perspective, the Fund's closed-end
structure is advantageous because they have the confidence of knowing they will
not experience sharp inflows or outflows of assets and thus are able to focus on
the long-term investment merits of their portfolio.
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Alignment and Objectivity
Alignment with shareholders' best interests and objective decision-making are
two fundamental principles to which LAMCO, the Fund's advisor, is dedicated. A
constant focus on these two standards helps to ensure that all the myriad
decisions involved in the management of the Fund are made openly and equitably.
The Fund's sole goal is better and more consistent long-term total returns for
its shareholders, which LAMCO pursues by constructing a diversified line-up of
growth style managers who practice varying strategies and focus on stocks in
different capitalization ranges.
A series of checks and balances ensures the integrity of that goal. There
are no in-house loyalties or external alliances to stand in the way. The Fund is
governed by an independent Board of Directors that is elected by and responsible
to the shareholders. The Fund's three investment managers are retained by the
Fund, but make independent buy and sell decisions. They know, however, that
LAMCO monitors their performance and adherence to their growth style of
investing and will replace them if such action is warranted. In addition, the
LAMCO officers involved in day-to-day management of the Fund are incented to act
in investors' best interests because they too are shareholders and a portion of
their compensation is tied to Fund performance.
6
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Institutional Quality
Liberty All-Star Growth Fund is intended to bring institutional quality
investing to individual investors. Multi-management is one strategy large
institutions use to manage their portfolios that the Fund brings to individual
investors. There are several others, however.
One is manager quality. All-stars are proven performers in their field...a
select group that stands apart. Since assuming complete management of the Fund
in November 1995, LAMCO has sought investment managers who meet its rigorous
criteria. LAMCO selects investment management firms for the Fund after an
extensive review of their background and track record, including the firm's
investment philosophy, process, people and performance. As investors in any type
of fund have learned, manager selection is perhaps the critical decision. The
managers LAMCO retains for the Fund principally serve institutional clients and
are generally not accessible to individual investors. The Fund's institutional
size and professional reputation can provide shareholders with access to these
leading managers.
LAMCO overlays another level of quality. There are thousands of investment
management firms from which to choose, and their long-term investment
performance varies widely. In researching and retaining managers, LAMCO calls on
the expertise of its professional staff, state-of-the-art analytical tools and
years of experience in the investment field. Similarly, LAMCO's continuous
monitoring ensures that the managers meet expectations.
7
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[GRAPHIC]
Monitoring and Rebalancing
Two significant phases of ongoing Fund management are monitoring and
rebalancing. These are disciplines that individual investors should
practice--but often don't, owing to a lack of time or expertise. LAMCO adds
value for Fund shareholders by performing both.
Monitoring is a continuous process in which LAMCO routinely reviews the
investment managers. Constant vigilance is required to ensure that each
portfolio manager is performing as expected. Investment returns are closely
watched, but are not the only factor that is monitored. Firm ownership and key
personnel can change, for example, introducing new decision-makers. Market
pressures may lead a manager to deviate from its espoused growth strategy.
LAMCO's active monitoring guards against these possibilities. We analyze the
Fund's investment managers' trading activity and the characteristics of their
portfolio holdings to confirm that they are adhering to their strategy and
performing well compared to their peers.
Periodic rebalancing maintains the Fund's structural integrity and is a
well- recognized investment discipline. Owing to shifting market sentiment and
their differing styles and strategies, the investment managers will perform
differently over time. This can unbalance the intended composition of the Fund's
investment portfolio. When this happens, LAMCO "locks in" profits by taking
assets from the outperforming managers and giving them to those whose strategy
and capitalization focus have temporarily lagged. While this seems
counterintuitive, it is really a case of taking money from today's winners and
redeploying it among tomorrow's.
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Quarterly Distributions
Since 1997, the Fund has followed a policy of paying annual distributions on its
common stock at a rate of 10 percent of the Fund's net asset value (paid
quarterly at 2.5 percent per quarter), providing a systematic mechanism for
distributing funds to shareholders.
Because a portion of the portfolio is turned over when an investment
manager is replaced (often generating realized capital gains), the Fund's
multi-management investment approach and the payout policy complement one
another.
Recognizing the diverse needs of the Fund's shareholders, the Fund also
offers an Automatic Dividend Reinvestment and Cash Purchase Plan. Some investors
prefer their dividends in the form of cash. Others reinvest their dividends in
additional Fund shares, thus letting their dividends compound over time. The
Cash Purchase feature allows shareholders to make additional investments in the
Fund on a monthly basis. The Fund rounds out its services for shareholders by
providing a range of tools, such as a Web site at www.all-starfunds.com;
communications, such as monthly updates and quarterly reports; and investor
assistance via toll-free telephone at 1-800-LIB-FUND.
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INVESTMENT MANAGERS/PORTFOLIO CHARACTERISTICS
THE FUND'S THREE GROWTH INVESTMENT MANAGERS AND THE MARKET CAPITALIZATION
ON WHICH EACH FOCUSES:
[CHART]
M.A. WEATHERBIE & CO., INC.
Companies with enduring competitive advantages and high, sustainable
earnings growth.
TCW INVESTMENT MANAGEMENT COMPANY
Companies with competitive advantages and superior business models that
should result in rapidly growing sales and earnings.
WILLIAM BLAIR & COMPANY, L.L.C.
Companies that have demonstrated consistently high rates of growth and
profitability.
MANAGERS' DIFFERING INVESTMENT STRATEGIES ARE REFLECTED IN PORTFOLIO
CHARACTERISTICS
The portfolio characteristics table below is a regular feature of the Fund's
shareholder reports. It serves as a useful tool for understanding the value of
the Fund's multi-managed portfolio. The characteristics are different for each
of the Fund's three investment managers. These differences are a reflection of
the fact that each has a different capitalization focus and investment strategy.
The shaded column highlights the characteristics of the Fund as a whole, while
the first three columns show portfolio characteristics for the S&P/BARRA
SmallCap, MidCap and LargeCap Growth indices.
PORTFOLIO CHARACTERISTICS AS OF DECEMBER 31, 2004
(UNAUDITED)
MARKET CAPITALIZATION SPECTRUM
SMALL LARGE
[CHART]
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S&P/BARRA GROWTH:
SMALLCAP MIDCAP LARGECAP M.A. WILLIAM TOTAL
600 INDEX 400 INDEX 500 INDEX WEATHERBIE TCW BLAIR FUND
Number of Holdings 241 182 178 58 48 37 138*
Weighted Average Market
Capitalization
(billions) $ 1.5 $ 3.8 $ 121.7 $ 2.5 $ 19.6 $ 55.0 $ 25.1
Average Five-Year
Earnings Per Share
Growth 14% 16% 17% 17% 37% 16% 22%
Dividend Yield 0.7% 0.9% 1.6% 0.3% 0.3% 0.7% 0.4%
Price/Earnings Ratio 23x 23x 22x 26x 37x 23x 27x
Price/Book Value Ratio 3.9x 4.3x 5.1x 4.4x 6.4x 5.5x 5.3x
</Table>
* Certain holdings are held by more than one manager.
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MANAGER ROUNDTABLE
THE FUND'S MANAGERS LOOK AT 2004 AND 2005, AS WELL AS AT LONGER-TERM TRENDS
INFLUENCING STOCKS BY STYLE AND CAPITALIZATION
THOUGH NOT AS STRONG AS 2003, 2004 TURNED OUT TO BE A SATISFACTORY YEAR, THANKS
TO A STRONG FOURTH QUARTER. ONCE AGAIN, THE MANAGERS REMAINED TRUE TO THEIR
INVESTMENT DISCIPLINES --UNSWAYED BY THE SURPRISING ABILITY OF LOWER QUALITY
STOCKS TO POST HIGHER RETURNS THAN HIGHER QUALITY ISSUES. HERE, THEY DISCUSS
2004 AND 2005, AS WELL AS LONGER-TERM TRENDS, AND IDENTIFY A STOCK THEY LIKE FOR
THE YEAR AHEAD.
Continuing an annual tradition, the Fund's manager, Liberty Asset Management
Company (LAMCO), recently had the opportunity to moderate a roundtable with the
Fund's three investment managers. As would be expected, there is commonality to
the managers' comments because they are all growth style investors. However, in
reading this roundtable, Fund shareholders should make note of differences, as
well--for example, the managers' comments about the 2004 performance advantage
of small and mid-cap growth stocks over large cap growth stocks. As well, the
managers look at a longer-term trend of great interest to growth investors,
namely five years of outperformance by value stocks and factors that may change
it. The participating investment managers and their investment styles are:
THE VIEWS EXPRESSED IN THIS INTERVIEW REPRESENT THE PORTFOLIO MANAGERS' VIEWS AT
THE TIME OF THE DISCUSSION (JANUARY 2005) AND ARE SUBJECT TO CHANGE.
M. A. WEATHERBIE & CO., INC.
PORTFOLIO MANAGER/Matthew A. Weatherbie, CFA,
President and Founder
INVESTMENT STYLE/Small-Cap Growth - M.A. Weatherbie practices a small
capitalization growth investment style focusing on high quality companies that
demonstrate superior earnings growth prospects, yet are reasonably priced
relative to their intrinsic value. The firm seeks to provide superior returns
relative to small capitalization growth indices over a full market cycle.
TCW INVESTMENT MANAGEMENT COMPANY
PORTFOLIO MANAGER/Douglas S. Foreman, CFA,
Chief Investment Officer U.S. Equities
INVESTMENT STYLE/Mid-Cap Growth - TCW seeks capital appreciation through
investment in the securities of rapidly growing companies whose business
prospects, in TCW's view, are not properly perceived by consensus research.
WILLIAM BLAIR & COMPANY, L.L.C.
PORTFOLIO MANAGER/John G. Jostrand, CFA, Principal
INVESTMENT STYLE/Large-Cap Growth - William Blair emphasizes disciplined,
fundamental research to identify quality growth companies with the ability to
sustain their growth over long time periods. At the core of the firm is a group
of analysts, who perform research aimed at identifying companies that have the
opportunity to grow in a sustainable fashion for extended periods of time.
"TWO THOUSAND FOUR...WAS AN ODD YEAR IN THAT THE FIRST QUARTER WAS
SPECULATIVE... THE MIDDLE OF THE YEAR WAS MARKED BY ANXIETY...AND THE FOURTH
QUARTER AGAIN WAS SOMEWHAT SPECULATIVE IN OUR VIEW."
MATT WEATHERBIE,
M.A. WEATHERBIE
LAMCO: Having all the managers in a roundtable is an excellent opportunity for
Fund shareholders to compare the varying growth investment approaches that are
present in the Fund. Thus, we'd like to open by asking each of you to summarize
your investment philosophy and approach. Let's go by capitalization size, from
small to large. That means starting off with you, Matt Weatherbie.
WEATHERBIE (M.A. WEATHERBIE - SMALL-CAP GROWTH):
We are growth stock investors: We seek to invest in the best smaller
capitalization growth companies
11
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in America. This means companies with some seasoning, a significant competitive
advantage, high inherent profitability, financial strength and proven
entrepreneurial management. Our process is bottom-up and emphasizes both
detailed financial analysis and field research to assess the quality of a
company's business model and management. We use a disciplined, proven set of
stock valuation techniques to determine good investment value.
LAMCO: Doug Foreman, summarize your approach, will you please?
FOREMAN (TCW - MID-CAP GROWTH): We're aggressive growth investors. We're looking
for companies with the potential for positive earnings surprise and that have
outstanding business models. Those are our two key criteria. We believe that a
stock is only truly mispriced in the marketplace if the Wall Street consensus
has expectations in terms of growth rate and earnings per share (EPS) that are
below our own. That gap between what our estimates are based on our fundamental
work and what Wall Street expects and will pay for is our alpha, or our ability
to consistently outperform. Overall, our batting average for finding companies
that have sound business models is pretty high, which means the growth these
companies are generating is sustainable and capable of beating expectations.
LAMCO: John Jostrand, tell us about the William Blair large cap growth approach.
JOSTRAND (WILLIAM BLAIR - LARGE-CAP GROWTH): William Blair employs a quality
growth approach and a bottom-up fundamental research process. We define a
quality growth company as one exhibiting superior, long-term earnings growth
combined with a proven and sustainable competitive advantage from a market/brand
position, proprietary product or technology position, or a unique asset base.
These companies generally exhibit superior profitability, high reinvestment
rate, low financial leverage, consistency of returns and strong management. We
have a team of experienced analysts, who are organized into sector teams and led
by a portfolio manager.
LAMCO: That's a great start. Let's turn to the year just past. As we look back,
2004 was one of those years in which consensus estimates among investment
managers appear to have played out in reality--that is, for steady, but moderate
gains in the 6 percent range for large cap growth indices such as the Russell
1000 Growth, with small and mid-cap growth stocks providing better returns in
the 10 to 12 percent range. How do you assess the year from the perspective of
your own style and strategy? John Jostrand, let's ask you to lead off.
JOSTRAND (WILLIAM BLAIR - LARGE-CAP GROWTH): Our style had to sail through a
headwind over the past couple of years. Quality stocks entered one of the
periodic "out of favor" stages during 2003 and the first half of 2004, as did
large capitalization companies. The low interest rate environment, along with
investors shifting to a more speculative level, contributed to higher beta
stocks' outperformance during the early stage of the market rebound.
"TWO THOUSAND FOUR WAS A YEAR OF GOOD ECONOMIC PROGRESS IMPEDED SLIGHTLY BY
MACRO EVENTS...MOST IMPORTANTLY, THE PRICE OF A BARREL OF CRUDE OIL GOING FROM
AROUND $30 TO NEARLY $56 IN OCTOBER..."
DOUG FOREMAN,
TCW
In 2004, Standard and Poor's earnings posted 19.2 percent growth from the
previous year. Federal Reserve Chairman Alan Greenspan followed through on his
pledge to get short rates up, and we believe him when he says he will do it
again. Rising rates are usually coupled with slower rates of growth in earnings
as competition for capital becomes keener. We are expecting that short-term
interest rates--such as the Fed funds rate and Treasury bills--will continue to
rise, placing pressure on the lower quality, more highly leveraged companies.
During a more normal economic environment, quality companies should return to a
premium valuation because of their quality characteristics.
LAMCO: Let's go to the opposite end of the capitalization range and hear from
our small cap manager.
12
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WEATHERBIE (M.A. WEATHERBIE - SMALL-CAP GROWTH): Two thousand four ended with us
being reasonably satisfied with low double-digit returns from our strategy.
However, it was an odd year in that the first quarter was speculative due to the
prior unprecedented reduction in short-term interest rates by the Federal
Reserve while the middle of the year was marked by anxiety about the war in Iraq
and the upcoming presidential election. The fourth quarter again was somewhat
speculative in our view. Overall, the solid 22 percent earnings growth from
companies in our portfolio drove our returns.
LAMCO: Doug Foreman, as the Fund's mid-cap manager you're "in the middle."
What's your assessment of 2004?
FOREMAN (TCW - MID-CAP GROWTH): Two thousand four was a year of good economic
progress impeded slightly by macro events, such as the war in Iraq, five
increases in short-term interest rates by the Fed, the uncertainty of the
presidential election and, most importantly, the price of a barrel of crude oil
going from around $30 to nearly $56 in October before settling back a little. In
a nutshell, all of those factors created doubt in investors' minds until
October, November and December, when we saw some terrific returns. Investors
once again focused on earnings, and concluded they were pretty good. Because of
the uncertainty, a lot of investors focused on dividends last year, and as a
result value stocks--such as utilities, energy companies and real estate
investment trusts--outperformed growth stocks across the capitalization
spectrum. By contrast, technology, biotech and other growth sectors are valued
more on pure growth and they didn't do as well last year.
LAMCO: Interesting perspectives about lower quality being in favor, along with
market leadership from unusual quarters of the market. Two thousand five may be
shaping up as 2004's opposite, in that there is little consensus among
investors. The bulls and bears can both make compelling cases. Recognizing that
the Fund's managers primarily take a bottom-up approach, what are your overall
thoughts about '05? Doug, let's stay with you.
FOREMAN (TCW - MID-CAP GROWTH): Mid-cap growth should be well positioned for
2005. Growth wasn't the leader in 2004 and there isn't any undue speculation
occurring in the growth area. To the extent there's any euphoria in the stock
market, I think it's centered in the value area, as I just mentioned. So, I
think mid-cap growth is quite well positioned for good return. I'm particularly
optimistic about the semiconductor area in 2005 after the inventory buildup that
occurred in 2004. That has been corrected to a large extent and I think the
outlook there is good. I don't expect corporate profits to be quite as robust,
but they should be OK. As to interest rates, I think the Fed will continue to
raise short-term rates to 3.5 percent or so, maybe a little more. But I think
that's already been factored into investors' outlooks.
"QUALITY STOCKS ENTERED ONE OF THE PERIODIC 'OUT OF FAVOR' STAGES DURING 2003
AND THE FIRST HALF OF 2004, AS DID LARGE CAPITALIZATION COMPANIES."
JOHN JOSTRAND,
WILLIAM BLAIR
LAMCO: How do you view 2005 from the small cap perspective, Matt Weatherbie?
WEATHERBIE (M.A. WEATHERBIE - SMALL-CAP GROWTH): We are bottom-up investors and
will make no change in our philosophy and process for 2005. In my opinion,
however, the once-in-a-generation era of extremely low short-term interest rates
is ending. The economy is back on solid footing and the Fed has been tightening
by 25 basis points at every meeting beginning in June 2004. It likely won't stop
until rates are at a more neutral level of 3.0 to 3.5 percent. We believe this
may well dampen speculation and "carry trade" investing and cause investors to
increasingly seek out superior businesses with organic revenue and earnings per
share growth.
LAMCO: John Jostrand, how do you see things unfolding?
JOSTRAND (WILLIAM BLAIR - LARGE-CAP GROWTH): Overall, valuations are OK. The S&P
500 Index is trading
13
<Page>
under 17 times 2005 forecast earnings, while inflation is at a moderate level.
We feel that earnings growth will be in the 8 to 10 percent range. At that rate,
companies are trading at a fair rate of 17 times forecast earnings, and we
expect the market to expand with earnings growth.
LAMCO: What are the one or two macro factors--for example, interest rates,
energy costs, raw materials/commodities, geopolitical tensions or corporate
earnings--that you believe investors should watch in '05 as positive or negative
influences insofar as stock market performance is concerned? Let's take that one
in capitalization order, large to small.
"I BELIEVE A STOCK MARKET ENVIRONMENT WITH SHORT-TERM INTEREST RATES ONCE AGAIN
IN MORE NEUTRAL TERRITORY WILL ALLOW LEADERSHIP TO ROTATE TO GROWTH ONCE AGAIN."
MATT WEATHERBIE,
M.A. WEATHERBIE
JOSTRAND (WILLIAM BLAIR - LARGE-CAP GROWTH): In our opinion, the key issue to
watch will be the interest rate environment. We're not so much looking at the
short end--as we expect the Federal Reserve to continue raising rates--but more
at the 10-year. Lower interest rates have allowed the consumer to support the
post-bubble economy. Businesses took advantage of the lower rates to shore up
balance sheets. More recently, they have begun to increase their capital
spending. The duration of the economic recovery may depend solely on business
spending if a rise in long-term rates dampens the consumer.
As for commodity price increases, we feel that the combination of continued
productivity and global sourcing should offset the inflationary pressures from
the commodity or materials sector. With moderate inflation in place, we are
optimistic that rates will not increase to the point of suffocating the
expansion.
FOREMAN (TCW - MID-CAP GROWTH): For growth to do better, we need less
uncertainty regarding the macro factors that restrained the market in 2004 and
we need energy prices to stay reasonably moderate. If we see oil in the $40 per
barrel range a lot of the money that has been plowed into the energy sector will
plow back out, and it will have to go somewhere else.
WEATHERBIE (M.A. WEATHERBIE - SMALL-CAP GROWTH): I believe investors should
watch interest rates and corporate earnings among macro factors insofar as stock
market performance is concerned. Consensus expectations are for slowing but
still positive earnings growth for the S&P 500 companies--perhaps up 7 to 9
percent in 2005--and for short rates to rise to perhaps 3.5 percent, but for
long rates not to increase much at all. Positive or negative surprises relative
to these expectations will affect the market's performance.
LAMCO: One of the more intriguing trends of recent years has been growth versus
value. Growth reigned supreme in the late '90s, while value has been the story
in the early 2000s. Growth lagged value in 2004 for all three capitalization
ranges (small, mid- and large) and the same is true for longer periods (3-, 5-
and 10-year periods, using the Russell indices as the measure). Reflecting your
own capitalization focus for the All-Star Growth Fund in your answer, why has
growth lagged in recent years? And, what has to happen for market leadership to
rotate to growth once again? Let's go in reverse order, small to large.
WEATHERBIE (M.A. WEATHERBIE - SMALL-CAP GROWTH): One reason growth may have
lagged value is that when the Federal Reserve reduces short-term interest rates
to 1 percent and keeps them there for 12 months, it is relatively easy for banks
as well as companies with high-cost debt to show good earnings growth. Such
companies tend to be in value universes. I believe a stock market environment
with short-term interest rates once again in more neutral territory will allow
leadership to rotate to growth once again.
FOREMAN (TCW - MID-CAP GROWTH): The fundamentals of areas such as real estate,
energy and financials
14
<Page>
have been very strong over the last several years. Increases in housing and
energy prices have provided for significant increases in cash flow for these
industries, which have been concentrated in the value indices. Once crude and
housing price gains moderate or decline slightly, we should see investor
interest rotate back toward more traditional growth areas such as health care
and technology.
JOSTRAND (WILLIAM BLAIR - LARGE-CAP GROWTH): With 2004's outperformance of value
once again, the 10-year returns on the value indices are now greater than their
growth counterparts. At the end of the '90s, growth indices were on top. Many of
the sectors in the value index spent years out of favor. Energy companies, a
much larger component in value indices, were out of favor for decades. With a
tightening of supplies and growing global demand from China and India, energy
companies' earnings increased. Another large component of value indices is
retail banks. With the steep interest rate curve along with no major bank
crisis, banks were in an ideal environment. The contrary is true for the
companies that compile the bulk of the growth indices. Technology, the largest
sector in the growth indices, suffered many years of excess inventory and slack
demand. Health care, primarily large pharmaceuticals, after having many years of
new billion-dollar drug patents, were faced with a new product drought. The
fundamental changes in different industries' growth prospects is changing, and
companies that once resided in a Russell growth index are migrating to value and
vice versa. While this drifting takes place, intuitively it makes sense that
valuations will be similar for the different styles. Historically, growth
companies' higher quality characteristics have traded at a premium to value
companies. That may not be entirely the case this time around as the ground
shifts. However, the outperformance by value companies has now brought their
valuations in-line with their growth counterparts and we feel that the rotation
has largely been completed.
"I THINK THE FED WILL CONTINUE TO RAISE SHORT-TERM RATES TO 3.5 PERCENT OR SO,
MAYBE A LITTLE MORE. BUT I THINK THAT'S ALREADY BEEN FACTORED INTO INVESTORS'
OUTLOOKS."
DOUG FOREMAN,
TCW
LAMCO: Thoughtful answers, all. The other trend, of course, has been
outperformance by small and mid-cap stocks over large cap stocks. Again
reflecting your own capitalization range, do you see this continuing, or is a
reversal afoot?
JOSTRAND (WILLIAM BLAIR - LARGE-CAP GROWTH): There was an enormous interest in
large companies during the '90s that has been corrected over the past five
years. The increasingly competitive landscape should bode well for larger
capitalization companies that have the deep pockets to compete effectively.
Capital will become scarcer with an increased risk posture brought about by a
maturing economic cycle and a tighter monetary environment.
FOREMAN (TCW - MID-CAP GROWTH): I believe small and medium sized stocks will
continue to modestly outperform large cap stocks in 2005, but not by a wide
margin. Corporate profit growth is likely to be positive in 2005 but decelerate
year-over-year. Earnings from many small to medium sized companies should grow
faster than the average large cap company and, therefore, outperform. Overall
economic growth should be favorable, which should provide a favorable backdrop
for smaller businesses.
WEATHERBIE (M.A. WEATHERBIE - SMALL-CAP GROWTH): I believe that small cap growth
can continue to outperform. Companies in the S&P 500 are only projected to grow
earnings about 7 to 9 percent over the next two years, so these companies are
already at a growth disadvantage compared to our smaller cap growth companies,
which are growing in excess of 20 percent. In addition, the recent problems at
Merck, Pfizer, Marsh & McLennan, Fannie Mae and AIG, among others, highlight to
investors that complex business models and opaque accounting can make the
largest companies inherently more difficult to analyze independently.
15
<Page>
LAMCO: Let's conclude as we did last year when we asked you to name a stock that
you added recently to the portion of the All-Star Growth Fund portfolio that you
manage and why you added it. Doug Foreman, let's ask our mid-cap manager to lead
off.
FOREMAN (TCW - MID-CAP GROWTH): We believe Opsware could be positioned for a
breakout year. Opsware is the leading provider of data center automation
software for corporations and government. It helps large corporations better
manage their servers and networks, and it allows them to reduce their IT staffs
and/or put their IT employees to work on higher value strategic projects. It's a
solution whose time has come in the corporate enterprise environment, and
corporate IT spending should be picking up after a few soft years. Marc
Andreessen, who was a founder of Netscape, is the CEO, so there is great
leadership and experience at the helm.
"...THE OUTPERFORMANCE BY VALUE COMPANIES HAS NOW BROUGHT THEIR VALUATIONS
IN-LINE WITH THEIR GROWTH COUNTERPARTS AND WE FEEL THAT THE ROTATION HAS LARGELY
BEEN COMPLETED."
JOHN JOSTRAND,
WILLIAM BLAIR
LAMCO: Matt Weatherbie, tell us about a small cap growth stock that you like.
WEATHERBIE (M.A. WEATHERBIE - SMALL-CAP GROWTH): We recently added Thor
Industries to our portfolio. Thor is the largest, fastest growing, most
profitable (22 percent return on equity) manufacturer of recreational vehicles
with a 25 percent share of the overall industry--twice the market share of the
next largest competitor. The company's brand names include Airstream, Keystone
and Dutchman. Industry conditions are favorable and Thor has important
competitive advantages, including buying leverage, state-of-the-art engineering,
a very entrepreneurial organization and a debt-free balance sheet.
LAMCO: John Jostrand, wrap it up for us, please.
JOSTRAND (WILLIAM BLAIR - LARGE-CAP GROWTH): Caremark, the pharmacy benefit
management company (PBM) that designs and administers pharmaceutical services,
would be our 2005 pick. The company distributes medications to eligible
participants in various health benefit plans. Within the PBM landscape, there is
a high fixed cost structure, which means larger companies have better leverage
and competitive advantage. Caremark should gain synergistic benefits as a result
of its recent acquisition of Advanced PCS. With Advanced PCS, Caremark is now
close to the largest PBM in the market. Caremark announced a business coup
through the signing of the industry's largest contract, the Federal Employee
Plan mail order. The increased volume shifts significant competitive power
towards Caremark and allows management to be more selective with future
contracts. Other potential growth opportunities should arise with the new pharma
benefit for seniors coming online in the next year.
LAMCO: Thanks to All.
16
<Page>
INVESTMENT GROWTH AS OF DECEMBER 31, 2004
GROWTH OF A $10,000 INVESTMENT
The graph below illustrates the growth of a $10,000 investment assuming the
purchase of common stock at the closing market price (NYSE: ASG) of $9.25 on
December 31, 1996, and tracking its progress through December 31, 2004. This
8-year period covers the calendar years since the Fund commenced its 10 percent
distribution policy in 1997.
[CHART]
<Table>
<Caption>
MARKET PRICE GROWTH PLUS INCLUDES DISTRIBUTION REINVESTMENT
DISTRIBUTIONS PAID AND RIGHTS OFFERING PARTICIPATION
31-Dec-96 $10,000 $10,000
31-Jan-97 $10,676 $10,676
28-Feb-97 $11,081 $11,081
31-Mar-97 $11,135 $11,139
30-Apr-97 $11,000 $11,000
31-May-97 $12,124 $12,134
30-Jun-97 $12,935 $12,990
31-Jul-97 $14,151 $14,275
31-Aug-97 $14,035 $14,132
30-Sep-97 $15,049 $15,230
31-Oct-97 $14,305 $14,425
30-Nov-97 $14,516 $14,663
31-Dec-97 $14,246 $14,363
31-Jan-98 $14,651 $14,814
28-Feb-98 $15,530 $15,791
31-Mar-98 $16,314 $16,660
30-Apr-98 $16,449 $16,814
31-May-98 $15,757 $16,038
30-Jun-98 $15,892 $16,197
31-Jul-98 $15,959 $16,551
31-Aug-98 $12,870 $12,829
30-Sep-98 $13,681 $13,829
31-Oct-98 $14,357 $14,662
30-Nov-98 $14,895 $15,352
31-Dec-98 $15,165 $15,695
31-Jan-99 $15,030 $15,524
28-Feb-99 $14,827 $15,266
31-Mar-99 $14,622 $15,006
30-Apr-99 $14,689 $15,094
31-May-99 $14,968 $15,447
30-Jun-99 $15,441 $16,084
31-Jul-99 $15,441 $16,083
31-Aug-99 $14,538 $14,861
30-Sep-99 $14,605 $14,955
31-Oct-99 $14,943 $15,422
30-Nov-99 $14,738 $15,127
31-Dec-99 $15,819 $16,668
31-Jan-00 $15,481 $16,186
29-Feb-00 $15,414 $16,090
31-Mar-00 $16,368 $17,458
30-Apr-00 $16,232 $17,259
31-May-00 $15,914 $16,727
30-Jun-00 $17,670 $19,379
31-Jul-00 $17,197 $18,665
31-Aug-00 $18,600 $20,787
30-Sep-00 $18,465 $20,577
31-Oct-00 $17,924 $19,737
30-Nov-00 $16,186 $17,020
31-Dec-00 $15,781 $16,369
31-Jan-01 $16,973 $18,281
28-Feb-01 $16,346 $17,328
31-Mar-01 $15,146 $15,346
30-Apr-01 $16,303 $17,257
31-May-01 $16,843 $18,181
30-Jun-01 $16,486 $17,576
31-Jul-01 $16,659 $17,869
31-Aug-01 $15,319 $15,729
30-Sep-01 $13,773 $13,091
31-Oct-01 $14,497 $14,371
30-Nov-01 $15,405 $15,978
31-Dec-01 $15,578 $16,291
31-Jan-02 $15,762 $16,652
28-Feb-02 $15,330 $15,849
31-Mar-02 $16,108 $17,294
30-Apr-02 $15,362 $15,909
31-May-02 $15,189 $15,644
30-Jun-02 $14,076 $13,518
31-Jul-02 $12,941 $11,351
31-Aug-02 $13,286 $12,034
30-Sep-02 $12,616 $10,720
31-Oct-02 $12,962 $11,398
30-Nov-02 $13,514 $12,506
31-Dec-02 $12,757 $10,983
31-Jan-03 $12,984 $11,440
28-Feb-03 $12,832 $11,135
31-Mar-03 $13,005 $11,492
30-Apr-03 $13,546 $12,608
31-May-03 $14,054 $13,654
30-Jun-03 $14,638 $14,888
31-Jul-03 $14,822 $15,276
31-Aug-03 $14,270 $14,092
30-Sep-03 $14,454 $14,692
31-Oct-03 $15,016 $15,924
30-Nov-03 $15,178 $16,302
31-Dec-03 $15,308 $16,594
31-Jan-04 $15,870 $17,857
29-Feb-04 $15,784 $17,686
31-Mar-04 $15,686 $17,462
30-Apr-04 $15,784 $17,686
31-May-04 $15,200 $16,357
30-Jun-04 $15,200 $16,357
31-Jul-04 $14,822 $15,462
31-Aug-04 $15,114 $16,166
30-Sep-04 $15,070 $16,061
31-Oct-04 $15,395 $16,847
30-Nov-04 $15,643 $17,472
31-Dec-04 $15,751 $17,741
</Table>
The dark green region of the graph above reflects the growth of the investment
assuming all distributions were received in cash and not reinvested back in the
Fund. The value of the investment under this scenario grew to $15,751 (this
value includes distributions per share totaling $7.96 during the period).
The light green region of the graph depicts additional value realized
through reinvestment of all distributions and participation in all the rights
offerings under the terms of each offering. On three occasions, the Fund has
conducted rights offerings that allow shareholders to purchase additional shares
at a discount. The value of the investment under this scenario grew to
$17,741.
17
<Page>
TABLE OF DISTRIBUTIONS AND RIGHTS OFFERINGS
<Table>
<Caption>
RIGHTS OFFERINGS
-----------------------------------------------------
PER SHARE MONTH SHARES NEEDED TO PURCHASE SUBSCRIPTION
YEAR DISTRIBUTIONS COMPLETED ONE ADDITIONAL SHARE PRICE
1997 $ 1.24
1998 1.35 July 10 $ 12.41
1999 1.23
2000 1.34
2001 0.92 September 8 6.64
2002 0.67
2003 0.58 September 8* 5.72
2004 0.63
</Table>
* The number of shares offered was increased by an additional 25% to cover a
portion of the over-subscription requests.
DISTRIBUTION POLICY
Liberty All-Star Growth Fund, Inc.'s current policy, in effect since 1997, is to
pay distributions on its shares totaling approximately 10 percent of its net
asset value per year, payable in four quarterly installments of 2.5 percent of
the Fund's net asset value at the close of the New York Stock Exchange on the
Friday prior to each quarterly declaration date. THE FIXED DISTRIBUTIONS ARE NOT
RELATED TO THE AMOUNT OF THE FUND'S NET INVESTMENT INCOME OR NET REALIZED
CAPITAL GAINS OR LOSSES AND MAY BE TAXED AS ORDINARY INCOME UP TO THE AMOUNT OF
THE FUND'S CURRENT AND ACCUMULATED EARNINGS AND PROFITS. If, for any calendar
year, the total distributions made under the 10 percent pay-out policy exceed
the Fund's net investment income and net realized capital gains, the excess will
generally be treated as a non-taxable return of capital, reducing the
shareholder's adjusted basis in his or her shares. If the Fund's net investment
income and net realized capital gains for any year exceed the amount distributed
under the 10 percent pay-out policy, the Fund may, in its discretion, retain and
not distribute net realized capital gains and pay income tax thereon to the
extent of such excess.
18
<Page>
TOP 20 HOLDINGS AND ECONOMIC SECTORS
<Table>
<Caption>
AS OF AS OF
TOP 20 HOLDINGS (PERCENT OF NET ASSETS) DECEMBER 31, 2004 SEPTEMBER 30, 2004
eBay, Inc. 3.2% 3.2%
Yahoo! Inc. 2.6 2.8
Bed Bath & Beyond, Inc. 2.3 2.4
Maxim Integrated Products, Inc. 1.7 2.1
Danaher Corp. 1.7 1.7
UnitedHealth Group, Inc. 1.6 1.5
Xilinx, Inc. 1.6 1.8
Paychex, Inc. 1.6 1.6
SLM Corp. 1.6 1.5
Dell, Inc. 1.6 1.5
UTI Worldwide, Inc. 1.5 1.5
Fastenal Co. 1.5 1.5
Westwood One, Inc. 1.4 1.2
EchoStar Communications Corp., Class A 1.4 1.5
Medtronic, Inc. 1.4 1.6
First Data Corp. 1.3 1.6
Univision Communications, Inc., Class A 1.3 1.5
Lincare Holdings, Inc. 1.3 1.0
Juniper Networks, Inc. 1.2 1.3
Patterson Companies, Inc. 1.2 1.2
----------------- ------------------
33.0% 34.0%
----------------- ------------------
<Caption>
AS OF AS OF
ECONOMIC SECTORS (PERCENT OF NET ASSETS) DECEMBER 31, 2004 SEPTEMBER 30, 2004
Information Technology 31.6% 32.5%
Consumer Discretionary 21.7 21.8
Health Care 18.6 18.2
Industrials 11.4 10.5
Financials 8.0 8.5
Consumer Staples 2.9 3.2
Energy 1.8 1.9
Materials 1.6 1.5
Telecommunication Services 0.9 1.5
Other Net Assets 1.5 0.4
----------------- ------------------
100.0% 100.0%
----------------- ------------------
</Table>
19
<Page>
MAJOR STOCK CHANGES IN THE FOURTH QUARTER
The following are the major ($500,000 or more) stock changes--both purchases and
sales--that were made in the Fund's portfolio during the fourth quarter of 2004.
<Table>
<Caption>
SECURITY NAME PURCHASES (SALES) SHARES AS OF 12/31/04
PURCHASES
Accenture Ltd., Class A 70,000 70,000
Boston Scientific Corp. 13,355 13,355
Caremark Rx, Inc. 22,155 22,155
Cintas Corp. 15,398 34,705
Foxhollow Technologies, Inc. 21,200 21,200
The Goldman Sachs Group, Inc. 7,000 13,850
Kyphon, Inc. 21,000 21,000
Thor Industries, Inc. 22,337 22,337
VCA Antech, Inc. 28,352 28,352
VeriSign, Inc. 38,300 38,300
SALES
eBay, Inc. (6,950) 44,750
Fannie Mae (18,800) 0
QLT, Inc. (34,239) 16,175
SAP AG (20,575) 24,225
SRA International, Inc., Class A (9,050) 18,903
SunGard Data Systems, Inc. (71,100) 0
</Table>
20
<Page>
SCHEDULE OF INVESTMENTS as of December 31, 2004
<Table>
<Caption>
COMMON STOCKS (98.5%) SHARES MARKET VALUE
CONSUMER DISCRETIONARY (21.7%)
AUTOMOBILES (1.2%)
Harley-Davidson, Inc. 19,550 $ 1,187,662
Thor Industries, Inc. 22,337 827,586
-------------
2,015,248
-------------
HOTELS, RESTAURANTS & LEISURE (2.7%)
The Cheesecake Factory, Inc. (a) 48,186 1,564,583
International Speedway Corp., Class A 22,850 1,206,480
Life Time Fitness, Inc. (a) 11,961 309,551
P.F. Chang's China Bistro, Inc. (a) 18,567 1,046,250
Texas Roadhouse, Inc., Class A (a) 13,034 385,155
-------------
4,512,019
-------------
INTERNET & CATALOG RETAIL (4.3%)
Amazon.com, Inc. (a) 36,900 1,634,301
eBay, Inc. (a) 44,750 5,203,530
Netflix, Inc. (a) 22,007 271,346
-------------
7,109,177
-------------
MEDIA (8.0%)
Cablevision Systems Corp., Class A (a) 34,751 865,300
Carmike Cinemas, Inc. 23,116 843,734
Clear Channel Communications, Inc. 52,500 1,758,225
Cox Radio, Inc., Class A (a) 36,700 604,816
DreamWorks Animation SKG, Inc., Class A (a) 6,200 232,562
EchoStar Communications Corp., Class A 70,600 2,346,744
Getty Images, Inc. (a) 28,020 1,929,177
Univision Communications, Inc., Class A (a) 72,840 2,132,027
Westwood One, Inc. (a) 87,990 2,369,571
-------------
13,082,156
-------------
MULTI-LINE RETAIL (2.5%)
Dollar Tree Stores, Inc. (a) 52,909 1,517,430
Kohl's Corp. (a) 25,400 1,248,918
Wal-Mart Stores, Inc. 24,930 1,316,802
-------------
4,083,150
-------------
SPECIALTY RETAIL (3.0%)
Bed Bath & Beyond, Inc. (a) 93,100 3,708,173
Chico's FAS, Inc. (a) 5,800 264,074
The Children's Place Retail Stores, Inc. (a) 26,092 966,187
-------------
4,938,434
-------------
</Table>
See Notes to Schedule of Investments.
21
<Page>
<Table>
<Caption>
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
CONSUMER STAPLES (2.9%)
BEVERAGES (0.8%)
PepsiCo, Inc. 25,200 $ 1,315,440
-------------
FOOD & STAPLES RETAILING (1.5%)
United Natural Foods, Inc. (a) 25,181 783,129
Walgreen Co. 44,780 1,718,209
-------------
2,501,338
-------------
PERSONAL PRODUCTS (0.6%)
Avon Products, Inc. 23,100 893,970
-------------
ENERGY (1.8%)
ENERGY EQUIPMENT & SERVICES (0.9%)
CARBO Ceramics, Inc. 8,216 566,904
Patterson-UTI Energy, Inc. 44,983 874,920
-------------
1,441,824
-------------
OIL & GAS (0.9%)
Apache Corp. 11,000 556,270
Golar LNG Ltd. (a) 19,943 296,951
Suncor Energy, Inc. 17,045 603,393
-------------
1,456,614
-------------
FINANCIALS (8.0%)
CAPITAL MARKETS (4.5%)
Affiliated Managers Group, Inc. (a) 24,153 1,636,124
The Goldman Sachs Group, Inc. 13,850 1,440,954
Investment Technology Group, Inc. (a) 18,908 378,160
SEI Investments Co. 21,000 880,530
State Street Corp. 31,125 1,528,860
T. Rowe Price Group, Inc. 24,600 1,530,120
-------------
7,394,748
-------------
CONSUMER FINANCE (1.6%)
SLM Corp. 48,675 2,598,758
-------------
DIVERSIFIED FINANCIAL SERVICES (0.9%)
Financial Federal Corp. (a) 38,655 1,515,276
-------------
INSURANCE (1.0%)
Brown & Brown, Inc. 14,873 647,719
Montpelier Re Holdings Ltd. 12,622 485,316
Platinum Underwriters Holdings Ltd. 15,928 495,361
-------------
1,628,396
-------------
</Table>
See Notes to Schedule of Investments.
22
<Page>
<Table>
<Caption>
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
HEALTH CARE (18.6%)
BIOTECHNOLOGY (4.1%)
Affymetrix, Inc. (a) 22,100 $ 807,755
Amgen, Inc. (a) 22,200 1,424,130
Charles River Laboratories International, Inc. 7,741 356,163
Digene Corp. (a) 14,400 376,560
Enzon Pharmaceuticals, Inc. (a) 29,542 405,316
Genentech, Inc. (a) 20,600 1,121,464
Martek Biosciences Corp. (a) 18,295 936,704
Onyx Pharmaceuticals, Inc. (a) 12,600 408,114
Oscient Pharmaceuticals Corp. (a) 55,770 203,561
QLT, Inc. (a) 16,175 260,094
Vicuron Pharmaceuticals, Inc. (a) 24,700 430,027
-------------
6,729,888
-------------
HEALTH CARE EQUIPMENT & SUPPLIES (6.0%)
Alcon, Inc. 13,025 1,049,815
Boston Scientific Corp. (a) 13,355 474,770
CardioDynamics International Corp. (a) 62,184 321,491
Foxhollow Technologies, Inc. (a) 21,200 521,308
IntraLase Corp. (a) 20,300 476,644
Kyphon, Inc. (a) 21,000 540,960
Medtronic, Inc. 44,760 2,223,229
PolyMedica Corp. 37,786 1,409,040
ResMed, Inc. (a) 36,625 1,871,538
Zimmer Holdings, Inc. (a) 12,895 1,033,147
-------------
9,921,942
-------------
HEALTH CARE PROVIDERS & SERVICES (5.2%)
Caremark Rx, Inc. (a) 22,155 873,572
Express Scripts, Inc., Class A (a) 6,800 519,792
Lincare Holdings, Inc. (a) 48,374 2,063,151
Patterson Companies, Inc. (a) 45,112 1,957,410
UnitedHealth Group, Inc. 29,890 2,631,217
VCA Antech, Inc. (a) 28,352 555,699
-------------
8,600,841
-------------
PHARMACEUTICALS (3.3%)
Allergan, Inc. 13,325 1,080,258
Eli Lilly & Co. 18,175 1,031,431
Eon Labs, Inc. (a) 11,000 297,000
Medicis Pharmaceutical Corp., Class A 16,770 588,795
MGI Pharma, Inc. (a) 24,400 683,444
Nektar Therapeutics (a) 26,000 526,240
Pfizer, Inc. 43,630 1,173,211
-------------
5,380,379
-------------
</Table>
See Notes to Schedule of Investments.
23
<Page>
<Table>
<Caption>
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
INDUSTRIALS (11.4%)
AIR FREIGHT & LOGISTICS (1.5%)
UTI Worldwide, Inc. 37,235 $ 2,532,725
-------------
COMMERCIAL SERVICES & SUPPLIES (5.6%)
Bright Horizons Family Solutions, Inc. (a) 15,071 975,998
Cintas Corp. 34,705 1,522,161
The Corporate Executive Board Co. 26,989 1,806,644
Education Management Corp. (a) 51,391 1,696,417
Robert Half International, Inc. 33,900 997,677
Universal Technical Institute, Inc. (a) 26,255 1,000,840
West Corp. (a) 38,119 1,262,120
-------------
9,261,857
-------------
CONSTRUCTION & ENGINEERING (0.3%)
Chicago Bridge & Iron Co., N.V. 10,307 412,280
-------------
INDUSTRIAL CONGLOMERATES (0.8%)
General Electric Co. 38,000 1,387,000
-------------
MACHINERY (1.7%)
Danaher Corp. 47,910 2,750,513
-------------
TRADING COMPANIES & DISTRIBUTORS (1.5%)
Fastenal Co. 39,725 2,445,471
-------------
INFORMATION TECHNOLOGY (31.6%)
COMMUNICATIONS EQUIPMENT (3.8%)
Avocent Corp. (a) 7,902 320,189
Ixia (a) 31,906 536,340
Juniper Networks, Inc. (a) 75,400 2,050,126
Packeteer, Inc. (a) 28,872 417,200
Polycom, Inc. (a) 58,383 1,361,492
Research In Motion Ltd. (a) 19,600 1,615,432
-------------
6,300,779
-------------
COMPUTERS & PERIPHERALS (3.2%)
Dell, Inc. (a) 60,750 2,560,005
EMC Corp. (a) 76,325 1,134,953
Network Appliance, Inc. (a) 49,100 1,631,102
-------------
5,326,060
-------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (1.8%)
Cognex Corp. 40,298 1,124,314
National Instruments Corp. 65,682 1,789,835
-------------
2,914,149
-------------
</Table>
See Notes to Schedule of Investments.
24
<Page>
<Table>
<Caption>
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
INTERNET SOFTWARE & SERVICES (4.1%)
VeriSign, Inc. (a) 38,300 $ 1,283,816
WebEx Communications, Inc. (a) 51,393 1,222,125
Yahoo! Inc. (a) 112,800 4,250,304
-------------
6,756,245
-------------
IT SERVICES (5.5%)
Accenture Ltd., Class A (a) 70,000 1,890,000
CheckFree Corp. (a) 19,200 731,136
First Data Corp. 51,725 2,200,381
Forrester Research, Inc. (a) 23,426 420,262
Paychex, Inc. 76,985 2,623,649
SRA International, Inc., Class A (a) 18,903 1,213,573
-------------
9,079,001
-------------
OFFICE ELECTRONICS (1.2%)
Zebra Technologies Corp., Class A (a) 34,447 1,938,677
-------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (8.4%)
Altera Corp. (a) 32,500 672,750
Intel Corp. 45,890 1,073,367
Intersil Corp., Class A 20,956 350,803
Linear Technology Corp. 40,415 1,566,485
Maxim Integrated Products, Inc. 67,000 2,840,130
Microchip Technology, Inc. 48,400 1,290,344
Mindspeed Technologies, Inc. (a) 53,100 147,618
Novellus Systems, Inc. (a) 17,500 488,075
Semtech Corp. (a) 43,933 960,815
SiRF Technology Holdings, Inc. (a) 20,568 261,625
Taiwan Semiconductor Manufacturing Co., Ltd. (b) 186,789 1,585,839
Xilinx, Inc. 88,600 2,626,990
-------------
13,864,841
-------------
SOFTWARE (3.6%)
Agile Software Corp. (a) 54,100 441,997
Altiris, Inc. (a) 11,546 409,075
Interwoven, Inc. (a) 33,561 365,144
Intuit, Inc. (a) 27,500 1,210,275
NAVTEQ Corp. (a) 12,500 579,500
Opsware, Inc. (a) 73,300 538,022
Red Hat, Inc. (a) 45,200 603,420
Salesforce.com, Inc. (a) 43,100 730,114
SAP AG (b) 24,225 1,070,987
-------------
5,948,534
-------------
</Table>
See Notes to Schedule of Investments.
25
<Page>
<Table>
<Caption>
COMMON STOCKS (CONTINUED) SHARES MARKET VALUE
MATERIALS (1.6%)
CHEMICALS (1.6%)
Ecolab, Inc. 36,050 $ 1,266,437
Praxair, Inc. 30,615 1,351,652
-------------
2,618,089
-------------
TELECOMMUNICATION SERVICES (0.9%)
DIVERSIFIED TELECOMMUNICATION SERVICES (0.6%)
Sprint Corp. 21,300 529,305
Time Warner Telecom, Inc. (a) 93,800 408,968
-------------
938,273
-------------
WIRELESS TELECOMMUNICATION SERVICES (0.3%)
Telephone & Data Systems, Inc. 6,800 523,260
-------------
TOTAL COMMON STOCKS (COST OF $136,045,394) 162,117,352
-------------
<Caption>
SHORT-TERM INVESTMENT (2.8%) PAR VALUE
REPURCHASE AGREEMENT (2.8%)
Repurchase agreement with State Street
Bank & Trust Co., dated 12/31/04, due
01/03/05 at 1.50%, collateralized by U.S.
Treasury Bonds with various maturities to
08/15/29, market value of $4,739,188
(repurchase proceeds $4,637,580) (Cost of
$4,637,000) $ 4,637,000 4,637,000
-------------
TOTAL INVESTMENTS (101.3%) (COST
OF $140,682,394) (c) 166,754,352
OTHER ASSETS & LIABILITIES, NET (-1.3%) (2,109,668)
-------------
NET ASSETS (100.0%) $ 164,644,684
=============
NET ASSETS VALUE PER SHARE (26,173,977 SHARES OUTSTANDING) $ 6.29
=============
</Table>
NOTES TO SCHEDULE OF INVESTMENTS:
(a) Non-income producing security.
(b) Represents an American Depositary Receipt.
(c) Cost of investments for federal income tax purposes is $140,908,916.
Gross unrealized appreciation and depreciation of investments at
December 31, 2004 is as follows:
<Table>
Gross unrealized appreciation $ 40,972,370
Gross unrealized depreciation (15,126,934)
--------------
Net unrealized appreciation $ 25,845,436
==============
</Table>
See Notes to Financial Statements.
26
<Page>
STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2004
<Table>
ASSETS:
Investments at market value (identified cost $140,682,394) $ 166,754,352
Cash 30,897
Foreign currency (cost of $729) 747
Receivable for investments sold 1,286,432
Dividends and interest receivable 52,117
Foreign tax reclaim 66
-------------
TOTAL ASSETS 168,124,611
-------------
LIABILITIES:
Payable for investments purchased 778,822
Distributions payable to shareholders 2,204,346
Investment advisory, administrative and bookkeeping/pricing fees payable 402,215
Accrued expenses 94,544
-------------
TOTAL LIABILITIES 3,479,927
-------------
NET ASSETS $ 164,644,684
=============
NET ASSETS REPRESENTED BY:
Paid-in capital (authorized 60,000,000 shares at $0.10 Par;
26,173,977 shares outstanding) $ 147,055,864
Accumulated net investment loss (28)
Accumulated net realized loss on investments (8,483,128)
Net unrealized appreciation on investments and foreign currency translations 26,071,976
-------------
TOTAL NET ASSETS APPLICABLE TO OUTSTANDING SHARES
OF COMMON STOCK ($6.29 PER SHARE) $ 164,644,684
=============
</Table>
See Notes to Financial Statements.
27
<Page>
STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2004
<Table>
INVESTMENT INCOME:
Dividends $ 743,204
Interest 35,513
--------------
TOTAL INVESTMENT INCOME (NET OF FOREIGN TAXES
WITHHELD AT SOURCE WHICH AMOUNTED TO $5,670) 778,717
EXPENSES:
Investment advisory fee $ 1,254,674
Administrative fee 313,998
Bookkeeping and pricing fees 38,166
Custodian fees 25,438
Transfer agent fees 112,690
Shareholder communication expenses 138,546
Directors' fees and expenses 32,291
NYSE fee 42,818
Miscellaneous expense 109,102
--------------
TOTAL EXPENSES 2,067,723
--------------
CUSTODY EARNINGS CREDIT (244)
--------------
NET EXPENSES 2,067,479
--------------
NET INVESTMENT LOSS (1,288,762)
REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN CURRENCY:
Net realized gain on investment transactions:
Proceeds from sales 54,704,358
Cost of investments sold 45,525,335
--------------
Net realized gain on investment transactions 9,179,023
Net unrealized appreciation on investments and foreign currency:
Beginning of year 23,502,837
End of year 26,071,976
--------------
Change in unrealized appreciation-net 2,569,139
--------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 10,459,400
==============
</Table>
See Notes to Financial Statements.
28
<Page>
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
--------------------------------
2004 2003
OPERATIONS:
Net investment loss $ (1,288,762) $ (1,229,500)
Net realized gain on investment transactions 9,179,023 7,575,247
Change in unrealized appreciation (depreciation)-net 2,569,139 31,904,250
-------------- --------------
Net increase in net assets resulting from operations 10,459,400 38,249,997
-------------- --------------
DISTRIBUTIONS DECLARED FROM:
Paid-in capital (7,258,640) (5,634,283)
Net realized gain on investments (8,767,776) (7,098,747)
-------------- --------------
Total distributions (16,026,416) (12,733,030)
-------------- --------------
CAPITAL TRANSACTIONS:
Proceeds from rights offering -- 18,754,401
Dividend reinvestments 7,306,720 6,412,884
-------------- --------------
Increase in net assets from capital share transactions 7,306,720 25,167,285
-------------- --------------
Total increase in net assets 1,739,704 50,684,252
NET ASSETS:
Beginning of year 162,904,980 112,220,728
-------------- --------------
End of year (including accumulated net
investment loss of $28 and $0, respectively) $ 164,644,684 $ 162,904,980
-------------- --------------
</Table>
See Notes to Financial Statements.
29
<Page>
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2004 2003 2002 2001
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of year $ 6.51 $ 5.44 $ 8.31 $ 10.86
-------- -------- -------- --------
Income from Investment Operations:
Net investment income (loss) (0.05) (0.06) (0.07) (0.09)
Net realized and unrealized gain
(loss) on investments 0.46 1.79 (2.13) (1.50)
-------- -------- -------- --------
Total from Investment Operations 0.41 1.73 (2.20) (1.59)
-------- -------- -------- --------
Less Distributions from:
Net investment income -- -- -- --
Paid-in capital (0.29) (0.26) (0.67) (0.92)
Realized capital gain (0.34) (0.32) -- --
In excess of realized capital gain -- -- -- --
-------- -------- -------- --------
Total Distributions (0.63) (0.58) (0.67) (0.92)
-------- -------- -------- --------
Change due to rights offering (a) -- (0.08) -- (0.04)
Impact of shares issued
in dividend reinvestment (b) -- -- -- --
-------- -------- -------- --------
Total Distributions, Reinvestments
and Rights Offering (0.63) (0.66) (0.67) (0.96)
-------- -------- -------- --------
Net asset value at end of year $ 6.29 $ 6.51 $ 5.44 $ 8.31
======== ======== ======== ========
Market price at end of year $ 6.61 $ 6.83 $ 5.05 $ 8.33
======== ======== ======== ========
TOTAL INVESTMENT RETURN FOR SHAREHOLDERS: (c)
Based on net asset value 6.7% 33.7% (27.2)% (13.7)%
Based on market price 6.9% 51.1% (32.6)% (0.5)%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of year (millions) $ 165 $ 163 $ 112 $ 163
Ratio of expenses to average net assets (d) 1.31% 1.34% 1.38% 1.41%
Ratio of net investment income (loss)
to average net assets (d) (0.82)% (0.94)% (1.07)% (1.12)%
Portfolio turnover rate 28% 37% 25% 41%
</Table>
(a) Effect of Fund's rights offerings for shares at a price below net asset
value.
(b) Effect of payment of a portion of distributions in newly issued shares at a
discount from net asset value.
(c) Calculated assuming all distributions reinvested at actual reinvestment
price and all rights offerings were fully subscribed under the terms of
each offering.
See Notes to Financial Statements.
30
<Page>
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
2000 1999 1998 1997 1996 1995(e)
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of year $ 13.44 $ 13.03 $ 12.89 $ 11.27 $ 10.55 $ 9.95
-------- -------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income (loss) (0.09) (0.05) (0.03) (0.02) 0.01 0.31
Net realized and unrealized gain
(loss) on investments (1.15) 1.83 1.73 2.88 1.86 1.05
-------- -------- -------- -------- -------- --------
Total from Investment Operations (1.24) 1.78 1.70 2.86 1.87 1.36
-------- -------- -------- -------- -------- --------
Less Distributions from:
Net investment income -- -- -- -- (0.01) (0.31)
Paid-in capital (0.05) -- (0.83) -- -- --
Realized capital gain (1.22) (1.23) (0.52) (1.24) (1.01) (0.45)
In excess of realized capital gain (0.07) -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total Distributions (1.34) (1.23) (1.35) (1.24) (1.02) (0.76)
-------- -------- -------- -------- -------- --------
Change due to rights offering (a) -- -- (0.21) -- -- --
Impact of shares issued
in dividend reinvestment (b) -- (0.14) -- -- (0.13) --
-------- -------- -------- -------- -------- --------
Total Distributions, Reinvestments
and Rights Offering (1.34) (1.37) (1.56) (1.24) (1.15) (0.76)
-------- -------- -------- -------- -------- --------
Net asset value at end of year $ 10.86 $ 13.44 $ 13.03 $ 12.89 $ 11.27 $ 10.55
======== ======== ======== ======== ======== ========
Market price at end of year $ 9.438 $ 10.813 $ 11.438 $ 11.938 $ 9.250 $ 9.375
======== ======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN FOR SHAREHOLDERS: (c)
Based on net asset value (9.1)% 15.9% 15.3% 27.3% 18.3% 14.6%
Based on market price (1.8)% 6.2% 9.3% 43.6% 9.3% 19.3%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of year (millions) $ 180 $ 219 $ 199 $ 167 $ 137 $ 120
Ratio of expenses to average net assets (d) 1.21% 1.20% 1.22% 1.20% 1.35% 1.42%
Ratio of net investment income (loss)
to average net assets (d) (0.71)% (0.37)% (0.22)% (0.18)% 0.06% 2.87%
Portfolio turnover rate 62% 71% 33% 57% 51% 82%
</Table>
(d) The benefits derived from custody credits and directed brokerage
arrangements, if applicable, had an impact of less than 0.01%.
(e) Liberty Asset Management Company assumed complete management
responsibilities of the Fund in November 1995.
See Notes to Financial Statements.
31
<Page>
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2004
NOTE 1. ORGANIZATION
Liberty All-Star Growth Fund, Inc. (the "Fund") is a Maryland corporation
registered under the Investment Company Act of 1940 (the "Act"), as amended, as
a diversified, closed-end management investment company.
INVESTMENT GOAL
The Fund seeks long-term capital appreciation.
FUND SHARES
The Fund may issue 60,000,000 shares of common stock at $0.10 par.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America ("GAAP") requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates. The
following is a summary of significant accounting policies consistently followed
by the Fund in the preparation of its financial statements.
SECURITY VALUATION
Equity securities are valued at the last sale price at the close of the
principal exchange on which they trade. Unlisted securities or listed securities
for which there were no sales during the day are valued at the closing bid price
on such exchanges or over-the-counter markets.
Short-term debt obligations maturing in more than 60 days for which market
quotations are readily available are valued at current market value. Short-term
debt obligations maturing within 60 days are valued at amortized cost, which
approximates market value.
Investments for which market quotations are not readily available are
valued at fair value as determined in good faith under consistently applied
procedures approved by and under the general supervision of the Board of
Directors.
SECURITY TRANSACTIONS
Security transactions are accounted for on the trade date. Cost is determined
and gains (losses) are based upon the specific identification method for both
financial statement and federal income tax purposes.
REPURCHASE AGREEMENTS
The Fund may engage in repurchase agreement transactions with institutions that
the Fund's investment advisor has determined are creditworthy. The Fund, through
its custodian, receives delivery of underlying securities collateralizing a
repurchase agreement. Collateral is at least equal, at all times, to the value
of the repurchase obligation including interest. A repurchase agreement
transaction involves certain risks in the event of default or insolvency of the
counterparty. These risks include possible delays or restrictions upon the
Fund's ability to dispose of the underlying securities and a possible decline in
the value of the underlying securities during the period while the Fund seeks to
assert its rights.
INCOME RECOGNITION
Interest income is recorded on the accrual basis. Corporate actions and dividend
income are recorded on the ex-date.
FEDERAL INCOME TAX STATUS
Consistent with the Fund's policy to qualify as a regulated investment company
and to distribute all of its taxable income to shareholders, no federal income
tax has been accrued.
DISTRIBUTIONS TO SHAREHOLDERS
The Fund currently has a policy of paying distributions on its common shares
totaling approximately 10% of its net asset value per year. The distributions
are payable in four quarterly distributions of 2.5% of the Fund's net asset
value at the close of the New York Stock Exchange on the Friday prior to each
quarterly declaration date. Distributions to shareholders are recorded on
ex-date.
NOTE 3. FEDERAL TAX INFORMATION
The timing and character of income and capital gain distributions are determined
in accordance with income tax regulations, which may differ from GAAP.
Reclassifications are made to the Fund's capital accounts for permanent tax
differences to reflect income and gains available for distribution (or available
capital loss carryforwards) under income tax regulations.
For the year ended December 31, 2004, permanent book and tax basis
differences resulting primarily from differing treatments for net operating
losses and excess distributions were identified and reclassified among the
components of the Fund's net assets as follows:
32
<Page>
<Table>
<Caption>
ACCUMULATED NET ACCUMULATED
INVESTMENT LOSS NET REALIZED LOSS PAID-IN CAPITAL
- ---------------- ----------------- ---------------
$ 1,288,734 $ 8,767,776 $ (10,056,510)
</Table>
Net investment loss and net realized gains (losses), as disclosed on the
Statement of Operations, and net assets were not affected by this
reclassification.
The tax character of distributions paid during the years ended December 31,
2004 and December 31, 2003 was as follows:
<Table>
<Caption>
12/31/04 12/31/03
------------ -----------
Distributions paid from:
Ordinary income $ 8,767,776 $ 7,098,737
Long-term capital gain -- --
------------ -----------
8,767,776 7,098,737
Return of capital 7,326,081 4,528,603
------------ -----------
$ 16,093,857 11,627,340
</Table>
As of December 31, 2004, the components of distributable earnings on a tax basis
were as follows:
<Table>
<Caption>
UNDISTRIBUTED UNDISTRIBUTED NET
ORDINARY LONG-TERM UNREALIZED
INCOME CAPITAL GAINS APPRECIATION*
------------- ------------- -------------
$ -- $ -- $ 25,845,436
</Table>
* The differences between book-basis and tax-basis net unrealized appreciation
are primarily due to deferral of losses from wash sales.
The following capital loss carryforwards, are available to reduce taxable income
arising from future net realized gains on investments, if any, to the extent
permitted by the Internal Revenue Code:
<Table>
<Caption>
YEAR OF CAPITAL LOSS
EXPIRATION CARRYFORWARD
---------- ------------
2010 $ 8,256,606
</Table>
Future realized gains offset by the loss carryforwards are not required to be
distributed to shareholders. However, under the Fund's distribution policy, as
described above, such gains may be distributed to shareholders in the year gains
are realized. Any gains distributed may be taxable to shareholders as ordinary
income. Capital loss carryforwards of $8,767,776 were utilized during the year
ended December 31, 2004.
NOTE 4. FEES AND COMPENSATION PAID TO AFFILIATES
Liberty Asset Management Company ("LAMCO"), an indirect, wholly owned subsidiary
of Bank of America Corporation ("BOA"), is the investment advisor of the Fund.
Prior to April 1, 2004, LAMCO was an indirect, wholly owned subsidiary of
FleetBoston Financial Corporation ("FleetBoston"). Effective April 1, 2004,
FleetBoston, including the Fund's investment advisor, was acquired by BOA. The
acquisition did not change the way the Fund is managed, the investment personnel
assigned to manage the Fund or the fees paid by the Fund.
INVESTMENT ADVISORY FEE
LAMCO receives a quarterly investment advisory fee based on the Fund's average
weekly net assets at the following annual rates:
<Table>
<Caption>
AVERAGE WEEKLY NET ASSETS FEE RATE
------------------------- --------
First $300 million 0.80%
Over $300 million 0.72%
</Table>
Under Portfolio Manager Agreements, LAMCO pays each Portfolio Manager a
portfolio management fee based on the assets of the investment portfolio that
they manage. The portfolio management fee is paid from the investment advisory
fees collected by LAMCO and is based on the Fund's average weekly net assets at
the following annual rates:
<Table>
<Caption>
AVERAGE WEEKLY NET ASSETS FEE RATE
------------------------- --------
First $300 million 0.40%
Over $300 million 0.36%
</Table>
ADMINISTRATION FEE
LAMCO provides administrative and other services for a quarterly administration
fee based on the Fund's average weekly net assets at the following annual rates:
<Table>
<Caption>
AVERAGE WEEKLY NET ASSETS FEE RATE
------------------------- --------
First $300 million 0.20%
Over $300 million 0.18%
</Table>
PRICING AND BOOKKEEPING FEES
Columbia Management Advisors, Inc. ("Columbia"), an indirect, wholly owned
subsidiary of BOA and an affiliate of LAMCO, is responsible for providing
pricing and bookkeeping services to the Fund under a pricing and bookkeeping
agreement. Under a separate agreement (the "Outsourcing Agreement"), Columbia
has delegated those functions to State Street Corporation ("State Street"). As a
result, Columbia pays the total fees
33
<Page>
collected from the Fund for these services to State Street under the Outsourcing
Agreement.
Under its pricing and bookkeeping agreement with the Fund, Columbia
receives from the Fund an annual flat fee of $10,000 paid monthly, and in any
month that the Fund's average weekly net assets exceed $50 million, an
additional monthly fee. The additional fee rate is calculated by taking into
account the fees payable to State Street under the Outsourcing Agreement. This
rate is applied to the average daily net assets of the Fund for that month. The
Fund also pays additional fees for pricing services based on the number of
securities held by the Fund. For the year ended December 31, 2004, the effective
pricing and bookkeeping fee rate was 0.024%.
CUSTODY CREDITS
The Fund has an agreement with its custodian bank under which custody fees may
be reduced by balance credits. These credits are recorded as a reduction of
total expenses on the Statement of Operations. The Fund could have invested a
portion of the assets utilized in connection with the expense offset arrangement
in an income-producing asset if it had not entered into such an agreement
FEES PAID TO OFFICERS
With the exception of one officer, all officers of the Fund are employees of
LAMCO or its affiliates and receive no compensation from the Fund. Effective
August 23, 2004, the Board of Directors appointed a Chief Compliance Officer to
the Fund in accordance with federal securities regulations. The Fund, along with
other affiliated funds, will pay its pro-rata share of the expenses associated
with the Office of the Chief Compliance Officer.
OTHER
Columbia provides certain services to the Fund related to Sarbanes-Oxley
compliance. For the year ended December 31, 2004, the Fund paid $1,506 to
Columbia for such services. This amount is included in "Miscellaneous expense"
on the Statement of Operations.
NOTE 5. PORTFOLIO INFORMATION
PURCHASES AND SALES OF SECURITIES
For the year ended December 31, 2004, the cost of purchases and proceeds from
sales of securities, excluding short-term obligations, were $43,853,043 and
$54,420,375, respectively.
NOTE 6. OTHER RELATED PARTY TRANSACTIONS
During the year ended December 31, 2004, the Fund used Bank of America
Securities, a wholly owned subsidiary of BOA, as a broker. Total commissions
paid to Bank of America Securities during the period were $1,206.
NOTE 7. CAPITAL TRANSACTIONS
In a rights offering commencing August 12, 2003, shareholders exercised rights
to purchase 3,305,213 shares at $5.72 per share for proceeds, net of expenses,
of $18,754,401. During the year ended December 31, 2004 and the year ended
December 31, 2003, distributions in the amount of $7,306,720 and $6,412,884,
respectively, were paid in newly issued shares valued at market value or net
asset value, but not less than 95% of market value. Such distributions resulted
in the issuance of 1,166,652 and 1,083,624 shares, respectively.
34
<Page>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREHOLDERS AND THE BOARD OF DIRECTORS OF LIBERTY ALL-STAR GROWTH FUND,
INC.
In our opinion, the accompanying statement of assets and liabilities, including
the investment portfolio, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Liberty All-Star Growth Fund, Inc.
(the "Fund") at December 31, 2004, and the results of its operations, the
changes in its net assets and its financial highlights for the periods
indicated, in conformity with accounting principles generally accepted in the
United States of America. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States), which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 2004 by correspondence with the custodian and brokers, provide a
reasonable basis for our opinion. The financial highlights of the Fund for
periods prior to January 1, 1999 were audited by another independent registered
public accounting firm whose report dated February 12, 1999 expressed an
unqualified opinion on those statements.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 10, 2005
35
<Page>
AUTOMATIC DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN (UNAUDITED)
Each shareholder of the Fund will automatically be a participant in the Fund's
Automatic Dividend Reinvestment and Cash Purchase Plan as amended June 30, 1996
(the "Plan"), unless the shareholder specifically elects other- wise by writing
to the agent for participants in the Plan, EquiServe Trust Company, N.A. (the
"Plan Agent"), P.O. Box 43010, Providence, RI 02940-3010 or by calling
1-800-LIB-FUND (1-800-542-3863). Shareholders whose shares are held in the name
of a brokerage firm, bank or other nominee must notify their brokerage firm,
bank or nominee if they do not wish to participate in the Plan.
Shareholders whose shares are held in the name of a brokerage firm, bank or
other nominee will be able to participate in the Plan only if their brokerage
firm, bank or nominee is able to do so on their behalf. Shareholders
participating in the Plan through a brokerage firm may not be able to transfer
their shares to another brokerage firm and continue to participate in the Plan.
Under the Plan, all dividends and other distributions on shares of the Fund
are automatically reinvested by the Plan Agent in additional shares of the Fund.
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 market value or net asset value per
share on the valuation date for the distribution (but not a discount of more
than 5 percent from market price). Distributions declared payable only 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 at prevailing market
prices. If, prior to the Plan Agent's completion of such open market purchases,
the market price of a share equals or exceeds its net asset value, the remainder
of the distribution will be paid in newly issued shares valued at net asset
value (but not at a discount of more than 5 percent from market price).
Dividends and distributions are subject to taxation, whether received in cash or
in shares.
Participants in the Plan have the option of making additional cash payments
in any amount from $100 to $3,000 on a monthly basis for investment in shares of
the Fund 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 10 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.
There is no charge to participants for reinvesting distributions pursuant
to the Plan. The Plan Agent's fees are paid by the Fund. There are no brokerage
charges with respect to shares issued directly by the Fund as a result of
dividends or distributions declared payable in shares or in cash. However, each
participant bears a pro rata share of brokerage commissions incurred with
respect to the Plan Agent's open market purchases in connection with the
reinvestment of distributions declared payable only in cash.
With respect to purchases from voluntary cash payments, the Plan Agent will
charge $1.25 for each such purchase for a participant, plus a pro rata share of
the brokerage commissions. Brokerage charges for purchasing small amounts of
shares for individual accounts through the Plan are expected to be less than the
usual brokerage charges for such transactions, as the Plan Agent will be
purchasing shares for all participants in blocks and prorating the lower
commission thus attainable.
Shareholders may terminate their participation in the Plan by written
notice to the Plan Agent, EquiServe Trust Company, N.A., P.O. Box 43010,
Providence, RI 02940-3010. Such termination will be effective immediately if
received not less than 10 days prior to the record date for a dividend or
distribution; otherwise it will be effective on the first business day after the
payment date of such dividend or distribution. On termination, participants may
either have certificates for the Fund shares in their Plan accounts delivered to
them or have the Plan Agent sell such shares in the open market and deliver the
proceeds, less a $2.50 fee plus brokerage commissions, to the participant.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan.
36
<Page>
TAX INFORMATION (UNAUDITED)
All 2004 distributions whether received in cash or shares of theFund consist of
the following:
(1) ordinary dividends and
(2) return of capital
The table below details the breakdown of each 2004 distribution for federal
income tax purposes.
TAX STATUS OF 2004 DISTRIBUTIONS
<Table>
<Caption>
ORDINARY DIVIDENDS LONG-TERM
AMOUNT ------------------------------ CAPITAL RETURN OF
DATE PAID PER SHARE QUALIFIED NON-QUALIFIED GAINS CAPITAL
*01/02/04 $ 0.16 4.39% 48.61% -- 47.00%
03/22/04 $ 0.17 4.39% 48.61% -- 47.00%
06/28/04 $ 0.16 4.39% 48.61% -- 47.00%
10/04/04 $ 0.15 4.39% 48.61% -- 47.00%
**01/03/05 $ 0.15 -- -- -- --
</Table>
* Pursuant to Section 852 of the Internal Revenue Code, the taxability of
this distribution will be reported on the Form 1099-DIV for 2004.
** Pursuant to Section 852 of the Internal Revenue Code, the taxability of
this distribution will be reported on the Form 1099-DIV for 2005.
FOR CORPORATE SHAREHOLDERS
8% of the ordinary income distributed by the Fund for the year ended December
31, 2004, qualifies for the corporate dividends received deduction.
37
<Page>
DIRECTORS AND OFFICERS
The names of the Directors and Officers of the Liberty All-Star Growth Fund,
Inc., the date each was first elected or appointed to office, their term of
office, their principal business occupations and other directorships they have
held during at least the last five years, are shown below.
<Table>
<Caption>
NUMBER OF
POSITION TERM OF PRINCIPAL PORTFOLIOS IN
WITH LIBERTY OFFICE AND OCCUPATION(S) FUND COMPLEX OTHER
NAME (AGE) ALL-STAR LENGTH OF DURING PAST OVERSEEN DIRECTORSHIPS
AND ADDRESS GROWTH FUND SERVICE FIVE YEARS BY DIRECTOR HELD
DISINTERESTED DIRECTORS
John A. Benning (70) Director Director Retired since December, 1999; 2 TT International
c/o Liberty Asset Since 2002; Senior Vice President, USA (investment
Management Company Term expires General Counsel and company)
One Financial Center 2005 Secretary, Liberty Financial
Boston, MA 02111 Companies Inc. (July, 1985
to December, 1999); Vice
President, Secretary and
Director, Liberty Asset
Management Company (August,
1985 to December, 1999).
James E. Grinnell (75) Director Director Private investor since 2 None
c/o Liberty Asset Since 1994; November 1988; President and
Management Company Term Expires Chief Executive Officer,
One Financial Center 2006 Distribution Management
Boston, MA 02111 Systems, Inc.(1983 to May
1986); Senior Vice
President, Operations, The
Rockport Company (importer
and distributor of shoes)
(May 1986 to November 1988).
Richard W. Lowry (68) Chairman and Director Private Investor since 1987 106 None
c/o Liberty Asset Director Since 1994; (formerly Chairman and Chief
Management Company Term Expires Executive Officer,
One Financial Center 2007 U.S.Plywood Corporation
Boston, MA 02111 (building products
manufacturer).
John J.Neuhauser (61) Director Director Academic Vice President and 106 Saucony, Inc.
c/o Liberty Asset Since 1998; Dean of Faculties since (athletic footwear)
Management Company Term Expires August 1999, Boston College
One Financial Center 2006 (formerly Dean, Boston
Boston, MA 02111 College School of Management
from September 1977 to
September 1999).
INTERESTED DIRECTOR
William E. Mayer* (64) Director Director Managing Partner, Park 106 Lee Enterprises
c/o Liberty Asset Since 1998; Avenue Equity Partners (print media); WR
Management Company Term Expires (private equity) since Hambrecht + Co
One Financial Center 2005 February 1999 (formerly (financial service
Boston, MA 02111 Founding Partner, Development provider)
Capital, LLC from November
1996 to February 1999).
</Table>
*A DIRECTOR WHO IS AN "INTERESTED PERSON" (AS DEFINED IN THE INVESTMENT COMPANY
ACT OF 1940 ("1940 ACT")) OF LIBERTY ALL-STAR GROWTH FUND, INC. OR LAMCO. MR.
MAYER IS AN INTERESTED PERSON BY REASON OF HIS AFFILIATION WITH WR HAMBRECHT +
CO.
38
<Page>
<Table>
<Caption>
POSITION YEAR FIRST
WITH LIBERTY ELECTED OR
ALL-STAR APPOINTED PRINCIPAL OCCUPATION(S) DURING
NAME (AGE) AND ADDRESS GROWTH FUND TO OFFICE PAST FIVE YEARS
OFFICERS
William R. Parmentier,Jr.(52) President and 1998 President (since June 1998) and Chief Investment
Liberty Asset Management Company Chief Executive Officer (since April 1995), Senior Vice President
One Financial Center Officer (May 1995 to June 1998), Liberty Asset Management.
Boston, MA 02111
Mark T. Haley,CFA (40) Vice President 1999 Vice President-Investments (since January
Liberty Asset Management Company 1999), Director of Investment Analysis (December
One Financial Center 1996 to December 1998), Investment Analyst
Boston, MA 02111 (January 1994 to November 1996), Liberty Asset
Management.
Fred H.Wofford (49) Vice President 2003 Director of Funds Operations (since March
Liberty Asset Management Company 2003), Liberty Asset Management (formerly Director
One Financial Center of Investment Compliance, Deutsche Asset
Boston, MA 02111 Management from February 1999 to March 2003;
Manager of Fund Administration, BankBoston 1784
Funds from November 1995 to February 1999).
J. Kevin Connaughton (40) Treasurer 2000 Treasurer of the Columbia Funds since October
One Financial Center 2003 and of the Liberty All-Star Funds since
Boston, MA 02111 December 2000 (formerly Chief Accounting Officer
and Controller of the Columbia Funds and of the
Liberty All-Star Funds from February 1998 to
October 2000); Vice President of Columbia
Management Advisors, Inc. since April
2003; Treasurer of the Galaxy Funds since
September 2002; (formerly Treasurer of the
Columbia Management Multi-Strategy Hedge Fund,
LLC from December 2002 to December 2004; formerly
Vice President of Colonial Management
Associates, Inc.from February 1998 to October
2000).
Mary Joan Hoene (55) Chief 2004 Senior Vice President and Chief Compliance
40 West 57th Street Compliance Officer of the Columbia Funds, the Galaxy Fund,
New York, NY 10019 Officer Nations Funds and of the Liberty All-Star Funds
since August 2004 and the BACAP Registered Hedge
Funds since October 2004 (formerly Partner,
Carter, Ledyard & Milburn LLP from January 2001
to August 2004; Counsel, Carter, Ledyard &
Milburn LLP from November 1999 to December 2000;
Vice President and Counsel, Equitable Life
Assurance Society of the United States from April
1998 to November 1999).
</Table>
39
<Page>
<Table>
<Caption>
POSITION YEAR FIRST
WITH LIBERTY ELECTED OR
ALL-STAR APPOINTED PRINCIPAL OCCUPATION(S) DURING
NAME (AGE) AND ADDRESS GROWTH FUND TO OFFICE PAST FIVE YEARS
OFFICERS (CONTINUED)
Michael G. Clarke (35) Chief 2004 Chief Accounting Officer of the Columbia Funds
One Financial Center Accounting and of the Liberty All-Star Funds since October
Boston, MA 02111 Officer 2004 (formerly Controller of the Columbia Funds
and of the Liberty All-Star Funds from May 2004
to October 2004; Assistant Treasurer from
June, 2002 to May 2004; Vice President, Product
Strategy & Development of the Liberty Funds Group
from February 2001 to June 2002; Assistant
Treasurer of the Liberty Funds and of the Liberty
All-Star Funds from August 1999 to February
2001; Audit Manager, Deloitte & Touche LLP from May
1997 to August 1999).
Jeffrey R. Coleman (35) Controller 2004 Controller of the Columbia Funds and of the
One Financial Center Liberty All-Star Funds since October 2004
Boston, MA 02111 (formerly Vice President of CDC IXIS Asset
Management Services, Inc. and Deputy Treasurer of
the CDC Nvest Funds and Loomis Sayles Funds from
February 2003 to September 2004; Assistant Vice
President of CDC IXIS Asset Management
Services, Inc. and Assistant Treasurer of the CDC
Nvest Funds from August 2000 to February 2003; Tax
Manager of PFPC Inc. from November 1996 to August
2000).
David A. Rozenson (50) Secretary 2003 Secretary of the Liberty All-Star Funds since
One Financial Center December 2003; Associate General Counsel of Bank
Boston, MA 02111 of America Corporation since April 2004; Senior
Counsel of FleetBoston Financial Corporation from
1996 to April 2004; Associate General Counsel of
Columbia Management Group from November 2002 to
April 2004.
</Table>
40
<Page>
[ALL STAR(R) GROWTH FUND LOGO]
FUND MANAGER
Liberty Asset Management Company
One Financial Center
Boston, Massachusetts 02111
617-772-3626
www.all-starfunds.com
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
PricewaterhouseCoopers LLP
125 High Street
Boston, Massachusetts 02110
CUSTODIAN
State Street Bank & Trust Company
225 Franklin Street
Boston, Massachusetts 02110
INVESTOR ASSISTANCE,
TRANSFER & DIVIDEND
DISBURSING AGENT & REGISTRAR
EquiServe Trust Company, N.A.
P.O. Box 43010
Providence, Rhode Island 02940-3010
1-800-LIB-FUND (1-800-542-3863)
www.equiserve.com
LEGAL COUNSEL
Kirkpatrick and Lockhart LLP
1800 Massachusetts Avenue, NW
Washington, DC 20036-1800
DIRECTORS
John A. Benning*
James E. Grinnell*
Richard W. Lowry*, Chairman
William E. Mayer
Dr. John J. Neuhauser*
OFFICERS
William R. Parmentier, Jr.,
President and Chief Executive Officer
Mark T. Haley, CFA, Vice President
Fred H. Wofford, Vice President
J. Kevin Connaughton, Treasurer
Mary Joan Hoene, Chief Compliance Officer
Michael G. Clarke, Chief Accounting Officer
Jeffrey R. Coleman, Controller
David A. Rozenson, Secretary
*Member of the audit committee.
A description of the fund's proxy voting policies and procedures is available
(i) on the Securities and Exchange Commission's website at www.sec.gov, and (ii)
without charge, upon request, by calling 1-800-542-3863. Information regarding
how the fund voted proxies relating to portfolio securities during the 12-month
period ended June 30, 2004 is available from the SEC's website. Information
regarding how the fund voted proxies relating to portfolio securities is also
available at www.all-starfunds.com.
The fund files a complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is
available on the SEC's website at www.sec.gov and may be reviewed and copied at
the SEC's Public Reference Room in Washington, DC. Information on the operation
of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
[ASG LISTED NYSE LOGO]
<Page>
[ALL STAR(R) GROWTH FUND LOGO]
Liberty Asset Management Company
Fund Manager
One Financial Center
Boston, Massachuserrs 0211
617-772-3626
www.all-starfunds.com
[ASG LISTED NYSE LOGO]
A MEMBER OF THE
[CLOSED-END FUND ASSOCIATION INC. LOGO]
www.closed-endfunds.com
IMAGE OF THE NEW YORK STOCK EXCHANGE
FACADE USED WITH PERMISSION OF NYSE.
<Page>
ITEM 2. CODE OF ETHICS.
(a) The registrant has, as of the end of the period covered by this report,
adopted a code of ethics that applies to the registrant's principal
executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant
or a third party.
(b) During the period covered by this report, there were not any amendments
to a provision of the code of ethics adopted in 2(a) above.
(c) During the period covered by this report, there were not any waivers or
implicit waivers to a provision of the code of ethics adopted in 2(a)
above.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The registrant's Audit Committee is composed of four of the registrant's
independent directors who are not affiliated with the registrant's investment
adviser. The Board has determined that each of the audit committee members is
"financially literate" and that at least one member has "accounting or related
financial management expertise" as used in the New York Stock Exchange
definitions of the terms.
Under the Sarbanes-Oxley Act, if the Board of Directors has not
determined that a "financial expert," a new term based on criteria contained in
the Sarbanes-Oxley Act, is serving on the audit committee, it must disclose this
fact and explain why the committee does not have such an expert. The Board of
Directors has determined that none of the members of its audit committee meets
the technical requirements of the definition. Moreover, it believes that for the
following reasons it is not necessary for a registered investment company such
as the registrant, with an audit committee that meets the New York Stock
Exchange requirements of financial literacy, to have a "financial expert" as a
member of the committee.
1. The financial statements of and accounting principles applying to registered
investment companies such as the registrant are relatively straightforward
and transparent compared to those of operating companies. The significant
accounting
<Page>
issues are valuation of securities and other assets (regulated under the
Investment Company Act of 1940 (the "1940 Act") and computed daily), accrual
of expenses, allocation of joint expenses shared with other entities, such as
insurance premiums, and disclosures of all related party transactions.
Equally important is a knowledge of the tax laws applying to registered
investment companies. None of the accounting issues involving corporate
America that have received recent publicity, such as sophisticated derivative
transactions and special purpose entities, are present in financial reporting
for registered investment companies.
2. During the years that the registrant has been filing financial reports under
the 1940 Act since its inception in 1986 there has never been a requirement
for a financial report or statement to be restated.
3. The current members of the audit committee have many years of aggregate
experience serving on this audit committee and in the Board's judgment,
through this experience and experience with other public corporation's
financial affairs, they have an understanding of the relevant generally
accepted accounting principles governing the registrant's financial
statements, tax laws applying to the registrant, the registrant's internal
accounting controls and audit committee functions necessary to satisfy the
objectives of the Sarbanes-Oxley Act with respect to the financial
statements, auditing process and internal controls of the registrant.
4. The audit committee has the capability of employing a consultant who
satisfies the technical definition of a "financial expert" and will do so
from time to time if circumstances warrant.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Aggregate Audit Fees billed by the principal accountant for professional
services rendered during the fiscal years ended December 31, 2004 and December
31, 2003 are approximately as follows:
2004 2003
$ 24,700 $ 27,500
Audit Fees include amounts related to the audit of the registrant's annual
financial statements or services that are normally provided by the accountant in
connection with statutory and regulatory filings or engagements for those fiscal
years. In fiscal year 2003, Audit Fees include a proxy review and issuance of a
consent letter in connection with a rights offering.
(b) Aggregate Audit-Related Fees billed by the principal accountant for
professional services rendered during the fiscal years ended December 31, 2004
and December 31, 2003 are approximately as follows:
<Page>
2004 2003
$ 4,000 $ 4,000
Audit-Related Fees include amounts for assurance and related services by the
principal accountant that are reasonably related to the performance of the audit
of the registrant's financial statements and are not reported in Audit Fees
above. In both fiscal years 2004 and 2003, Audit-Related Fees include certain
agreed-upon procedures performed for semi-annual shareholder reports.
(c) Aggregate Tax Fees billed by the principal accountant for professional
services rendered during the fiscal years ended December 31, 2004 and December
31, 2003 are approximately as follows:
2004 2003
$ 2,600 $ 2,600
Tax Fees in both fiscal years 2004 and 2003 consist primarily of the review of
annual tax returns and include amounts for professional services by the
principal accountant for tax compliance, tax advice and tax planning.
(d) Aggregate All Other Fees billed by the principal accountant for professional
services rendered during the fiscal years ended December 31, 2004 and December
31, 2003 are as follows:
2004 2003
$ 0 $ 0
All Other Fees include amounts for products and services provided by the
principal accountant, other than the services reported in paragraphs (a) through
(c) above.
None of the amounts described in paragraphs (a) through (d) above were approved
pursuant to the "de minimis" exception under paragraph (c)(7)(i)(C) of Rule 2-01
of Regulation S-X.
(e)(1) AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES
I. GENERAL OVERVIEW
The Audit Committee of the registrant has adopted a formal policy (the "Policy")
which sets forth the procedures and the conditions pursuant to which the Audit
Committee will pre-approve (i) all audit and non-audit (including audit related,
tax and all other) services provided by the registrant's independent auditor to
the registrant and individual funds (collectively "Fund Services"), and (ii) all
non-audit services provided by the registrant's independent auditor to the
funds' adviser or a control affiliate of the adviser, that relate directly to
the funds' operations and financial reporting (collectively "Fund-related
<Page>
Adviser Services"). A "control affiliate" is an entity controlling, controlled
by, or under common control with the adviser that provides ongoing services to
the funds, and the term "adviser" is deemed to exclude any unaffiliated
sub-adviser whose role is primarily portfolio management and is sub-contracted
or overseen by another investment adviser. The adviser and control affiliates
are collectively referred to as "Adviser Entities."
The Audit Committee uses a combination of specific (on a case-by-case basis as
potential services are contemplated) and general (pre-determined list of
permitted services) pre-approvals. Unless a type of service has received general
pre-approval, it will require specific pre-approval by the Audit Committee if it
is to be provided by the independent auditor.
The Policy does not delegate the Audit Committee's responsibilities to
pre-approve services performed by the independent auditor to management.
II. GENERAL PROCEDURES
On an annual basis, the Fund Treasurer and/or Director of Trustee Administration
shall submit to the Audit Committee a schedule of the types of Fund Services and
Fund-related Adviser Services that are subject to general pre-approval.
These schedules will provide a description of each type of service that is
subject to general pre-approval and, where possible, will provide estimated fees
for each instance of providing each service. This general pre-approval and
related fees (where provided) will generally cover a one-year period (for
example, from June 1 through May 31 of the following year). The Audit Committee
will review and approve the types of services and review the projected fees for
the next one-year period and may add to, or subtract from, the list of general
pre-approved services from time to time, based on subsequent determinations.
This approval acknowledges that the Audit Committee is in agreement with the
specific types of services that the independent auditor will be permitted to
perform. The fee amounts will be updated to the extent necessary at other
regularly scheduled meetings of the Audit Committee.
In addition to the fees for each individual service, the Audit Committee has the
authority to implement a fee cap on the aggregate amount of non-audit services
provided to an individual fund.
If, subsequent to general pre-approval, a fund, its investment adviser or a
control affiliate determines that it would like to engage the independent
auditor to perform a service that requires pre-approval and that is not included
in the general pre-approval list, the specific pre-approval procedure shall be
as follows:
- A brief written request shall be prepared by management detailing the
proposed engagement with explanation as to why the work is proposed to
be performed by the independent auditor;
<Page>
- The request should be addressed to the Audit Committee with copies to
the Fund Treasurer and/or Director of Trustee Administration;
- The Fund Treasurer and/or Director of Trustee Administration will
arrange for a discussion of the service to be included on the agenda
for the next regularly scheduled Audit Committee meeting, when the
Committee will discuss the proposed engagement and approve or deny the
request.
- If the timing of the project is critical and the project needs to
commence before the next regularly scheduled meeting, the Chairperson
of the Audit Committee may approve or deny the request on behalf of the
Audit Committee, or, in the Chairperson's discretion, determine to call
a special meeting of the Audit Committee for the purpose of considering
the proposal. Should the Chairperson of the Audit Committee be
unavailable, any other member of the Audit Committee may serve as an
alternate for the purpose of approving or denying the request.
Discussion with the Chairperson (or alternate, if necessary) will be
arranged by the Fund Treasurer and/or Director of Trustee
Administration. The independent auditor will not commence any such
project unless and until specific approval has been given.
III. CERTAIN OTHER SERVICES PROVIDED TO ADVISER ENTITIES
The Audit Committee recognizes that there are cases where services proposed to
be provided by the independent auditor to the adviser or control affiliates are
not Fund-related Adviser Services within the meaning of the Policy, but
nonetheless may be relevant to the Audit Committee's ongoing evaluation of the
auditor's independence and objectivity with respect to its audit services to the
funds. As a result, in all cases where an Adviser Entity engages the independent
auditor to provide audit or non-audit services that are not Fund Services or
Fund-related Adviser Services, were not subject to pre-approval by the Audit
Committee, and the projected fees for any such engagement (or the aggregate of
all such engagements during the period covered by the Policy) exceeds a
pre-determined threshold established by the Audit Committee; the independent
auditor, Fund Treasurer and/or Director of Trustee Administration will notify
the Audit Committee not later than its next meeting. Such notification shall
include a general description of the services provided, the entity that is to be
the recipient of such services, the timing of the engagement, the entity's
reasons for selecting the independent auditor, and the projected fees. Such
information will allow the Audit Committee to consider whether non-audit
services provided to the adviser and Adviser Entities, which were not subject to
Audit Committee pre-approval, are compatible with maintaining the auditor's
independence with respect to the Funds.
IV. REPORTING TO THE AUDIT COMMITTEE
The Fund Treasurer or Director of Trustee Administration shall report to the
Audit Committee at each of its regular meetings regarding all Fund Services or
Fund-related Adviser Services initiated since the last such report was rendered,
including:
- A general description of the services, and
<Page>
- Actual billed and projected fees, and
- The means by which such Fund Services or Fund-related Adviser Services
were pre-approved by the Audit Committee.
In addition, the independent auditor shall report to the Audit Committee
annually, and no more than 90 days prior to the filing of audit reports with the
SEC, all non-audit services provided to entities in the funds' "investment
company complex," as defined by SEC rules, that did not require pre-approval
under the Policy.
V. AMENDMENTS; ANNUAL APPROVAL BY AUDIT COMMITTEE
The Policy may be amended from time to time by the Audit Committee. Prompt
notice of any amendments will be provided to the independent auditor, Fund
Treasurer and Director of Trustee Administration. The Policy shall be reviewed
and approved at least annually by the Audit Committee.
*****
(e)(2) The percentage of services described in paragraphs (b) through (d) of
this Item approved pursuant to the "de minimis" exception under paragraph
(c)(7)(i)(C) of Rule 2-01 of Regulation S-X during both fiscal years ended
December 31, 2004 and December 31, 2003 was zero.
(f) Not applicable.
(g) All non-audit fees billed by the registrant's accountant for services
rendered to the registrant for the fiscal years ended December 31, 2004 and
December 31, 2003 are disclosed in (b) through (d) of this Item.
During the fiscal years ended December 31, 2004 and December 31, 2003, there
were no Audit-Related Fees, Tax Fees or All Other Fees that were approved for
services to the investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen by another
investment adviser) and any entity controlling, controlled by, or under common
control with the adviser that provides ongoing services to the registrant under
paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X.
The percentage of Audit-Related Fees, Tax Fees and All Other Fees required to be
approved under paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X that were
approved under the "de minimis" exception during both fiscal years ended
December 31, 2004 and December 31, 2003 was zero.
(h) The registrant's Audit Committee of the Board of Directors has considered
whether the provision of non-audit services that were rendered to the
registrant's adviser (not including any sub-adviser whose role is primarily
portfolio management and is subcontracted with or overseen by another investment
adviser), and any entity
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controlling, controlled by, or under common control with the investment adviser
that provides ongoing services to the registrant that were not pre-approved
pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X, is compatible
with maintaining the principal accountant's independence. The Audit Committee
determined that the provision of such services is compatible with maintaining
the principal accountant's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
The registrant has a separately-designated standing audit committee established
in accordance with Section 3(a)(58)(A) of the Exchange Act (15 U.S.C.
78c(a)(58)(A)). John A. Benning, James E. Grinnell, Richard W. Lowry and John J.
Neuhauser are each independent trustees and collectively constitute the entire
Audit Committee.
ITEM 6. SCHEDULE OF INVESTMENTS
The registrant's "Schedule I - Investments in securities of unaffiliated
issuers" (as set forth in 17 CFR 210.12-12) is included in Item 1 of this Form
N-CSR.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The Fund has delegated to Liberty Asset Management Company (the "Advisor") the
responsibility to vote proxies relating to portfolio securities held by the
Fund. In deciding to delegate this responsibility to the Advisor, the Board of
Trustees of the Trust reviewed and approved the policies and procedures adopted
by the Advisor. These included the procedures that the Advisor follows when a
vote presents a conflict between the interests of the Fund and its shareholders
and the Advisor, its affiliates, its other clients or other persons.
The Advisor's policy is to vote all proxies for Fund securities in a manner
considered by the Advisor to be in the best interest of the Fund and its
shareholders without regard to any benefit to the Advisor, its affiliates, its
other clients or other persons. The Advisor examines each proposal and votes
against the proposal, if, in its judgment, approval or adoption of the proposal
would be expected to impact adversely the current or potential market value of
the issuer's securities. The Advisor also examines each proposal and votes the
proxies against the proposal, if, in its judgment, the proposal would be
expected to affect adversely the best interest of the Fund. The Advisor
determines the best interest of the Fund in light of the potential economic
return on the Fund's investment.
The Advisor addresses potential material conflicts of interest by having
predetermined voting guidelines. For those proposals that require special
consideration or in instances where special circumstances may require varying
from the predetermined guideline, the Advisor's Proxy Committee determines the
vote in the best interest of the Fund, without consideration of any benefit to
the Advisor, its affiliates, its other clients or other persons. The Advisor's
Proxy Committee includes a representative from Liberty Asset Management Company
and representatives from the Advisor's equity investments and equity research
functions. In addition to the responsibilities described above, the Proxy
Committee has the responsibility to review, on an annual basis, the Advisor's
proxy voting policies to ensure consistency with internal policies
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and regulatory agency policies and to develop additional voting guidelines to
assist in the review of proxy proposals.
The Proxy Committee may vary from the predetermined guideline if it determines
that voting on the proposal according to the predetermined guideline would be
expected to impact adversely the current or potential market value of the
issuer's securities or to affect adversely the best interest of the client.
References to the best interest of a client refer to the interest of the client
in terms of the potential economic return on the client's investment. In
determining the vote on any proposal, the Proxy Committee does not consider any
benefit other than benefits to the owner of the securities to be voted. A member
of the Proxy Committee is prohibited from voting on any proposal for which he or
she has a conflict of interest by reason of a direct relationship with the
issuer or other party affected by a given proposal. Persons making
recommendations to the Proxy Committee or its members are required to disclose
to the Committee any relationship with a party making a proposal or other matter
known to the person that would create a potential conflict of interest.
The Advisor has retained Institutional Shareholder Services ("ISS"), a third
party vendor, to implement its proxy voting process. ISS provides proxy
analysis, record keeping services and vote disclosure services.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not yet applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
During the six month period ended December 31, 2004, there were no purchases
made by or on behalf of the registrant or any "affiliated purchaser," as defined
in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934 ("Exchange Act"),
of shares or other units of any class of the registrant's equity securities that
are registered by the registrant pursuant to Section 12 of the Exchange Act.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have not been any material changes to the procedures by which shareholders
may recommend nominees to the registrant's board of directors, since those
procedures were last disclosed in response to the requirements of Item
7(d)(2)(ii)(G) of Schedule 14A or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive officer and principal financial
officers, based on their evaluation of the registrant's disclosure
controls and procedures as of a date within 90 days of the filing of
this report, have concluded that such controls and procedures are
adequately designed to ensure that information required to be disclosed
by the registrant in Form N-CSR is accumulated and communicated to the
registrant's management, including the principal executive officer and
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principal financial officer, or persons performing similar functions,
as appropriate to allow timely decisions regarding required disclosure.
(b) There were no changes in the registrant's internal control over
financial reporting that occurred during the registrant's second fiscal
quarter of the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Code of ethics required to be disclosed under Item 2 of Form N-CSR
attached hereto as Exhibit 99.CODE ETH.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the Investment Company Act
of 1940 (17 CFR 270.30a-2(a)) attached hereto as Exhibit 99.CERT.
(a)(3) Not applicable.
(b) Certification pursuant to Rule 30a-2(b) under the Investment Company Act of
1940 (17 CFR 270.30a-2(b)) attached hereto as Exhibit 99.906CERT.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) Liberty All-Star Growth Fund, Inc.
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By (Signature and Title) /S/ William R. Parmentier, Jr.
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William R. Parmentier, Jr., President
Date March 4, 2005
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Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title) /S/ William R. Parmentier, Jr.
---------------------------------------------
William R. Parmentier, Jr., President
Date March 4, 2005
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By (Signature and Title) /S/ J. Kevin Connaughton
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J. Kevin Connaughton, Treasurer
Date March 4, 2005
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