N-30D 1 file001.txt LIBERTY HIGH YIELD MUNICIPAL FUND LIBERTY HIGH YIELD MUNICIPAL FUND Semiannual Report December 31, 2002 [Photo of woman smiling] ELIMINATE CLUTTER IN TWO EASY STEPS. POINT. CLICK. LIBERTY EDELIVERY. For more information about receiving your shareholder reports electronically, call us at 800-345-6611. To sign up for eDelivery, visit us online at www.libertyfunds.com. LIBERTY HIGH YIELD MUNICIPAL FUND Semiannual Report December 31, 2002 [Photo of woman smiling] ELIMINATE CLUTTER IN TWO EASY STEPS. POINT. CLICK. LIBERTY EDELIVERY. To sign up for eDelivery, go to www.icsdelivery.com. PRESIDENT'S MESSAGE [photo of Keith T. Banks] Dear Shareholder: The second half of 2002 brought mixed results for most segments of the US bond market. High-yield bonds underperformed other bond sectors during the first three months of the period as questions about the economy's ability to fully recover from recession continued to surface. It was an especially challenging environment for high-yield municipal bonds, as tax cuts and sluggish economic growth resulted in declining revenues for states and municipalities. The Federal Reserve signaled its concern about the economic recovery by cutting the federal funds rate one-half of one percent in order to spur economic activity. A stronger economy in the year ahead could help the high-yield sector. Because volatility across the financial markets is likely to continue, we believe it is important for shareholders to adhere to their long-term strategies and talk to their financial advisors before making major changes to their portfolios. The following report will provide you with more detailed information about fund performance and the strategies used by the fund's manager. As always, we thank you for investing in Liberty funds and for giving us the opportunity to help you build a strong financial future. Sincerely, /s/ Keith T. Banks Keith T. Banks President NET ASSET VALUE PER SHARE as of 12/31/02 ($) Class A 11.11 Class B 11.11 Class C 11.11 Class Z 11.11 DISTRIBUTIONS DECLARED PER SHARE 7/1/02 - 12/31/02 ($) Class A 0.41 Class B 0.35 Class C 0.36 Class Z 0.43 o NOT FDIC INSURED o MAY LOSE VALUE o NO BANK GUARANTEE Economic and market conditions change frequently. There is no assurance that the trends described in this report will continue or commence. PERFORMANCE INFORMATION Value of a $10,000 investment 12/31/92 - 12/31/02 PERFORMANCE OF A $10,000 INVESTMENT 12/31/92 - 12/31/02 ($) without with sales sales charge charge -------------------------------------- Class A 17,605 16,773 -------------------------------------- Class B 17,540 17,540 -------------------------------------- Class C 17,552 17,552 -------------------------------------- Class Z 17,726 n/a --------------------------------------
[mountain chart data]: Class A shares Class A shares Lehman Bros. without sales charge with sales charge Municipal Bond Index 12/1992 $10,000 $ 9,525 $10,000 10,111 9,638 10,116 10,509 10,022 10,482 10,356 9,851 10,371 10,457 9,973 10,476 10,508 10,021 10,535 10,612 10,120 10,710 10,609 10,117 10,724 10,813 10,330 10,947 10,939 10,440 11,072 10,963 10,402 11,093 10,905 10,399 10,996 11,066 10,553 11,228 11,174 10,648 11,356 10,943 10,291 11,062 10,500 10,013 10,611 10,571 10,062 10,702 10,709 10,267 10,795 10,713 10,215 10,729 10,843 10,330 10,925 10,886 10,390 10,963 10,763 10,263 10,802 10,609 9,994 10,610 10,416 10,027 10,418 10,621 10,128 10,647 11,006 10,514 10,952 11,268 10,774 11,270 11,365 10,839 11,400 11,381 10,834 11,414 11,726 11,261 11,778 11,630 11,091 11,675 11,741 11,196 11,786 11,862 11,342 11,936 11,928 11,386 12,011 12,123 11,601 12,185 12,348 11,797 12,387 12,502 11,914 12,506 12,587 11,995 12,601 12,484 11,948 12,516 12,343 11,782 12,356 12,306 11,675 12,321 12,325 11,755 12,316 12,428 11,823 12,450 12,490 12,007 12,562 12,520 11,941 12,560 12,692 12,137 12,736 12,833 12,239 12,880 13,038 12,436 13,115 13,063 12,426 13,060 13,095 12,489 13,085 13,200 12,589 13,205 13,084 12,479 13,030 13,182 12,583 13,139 13,386 12,767 13,338 13,532 12,928 13,480 13,853 13,157 13,854 13,791 13,153 13,723 13,927 13,305 13,887 14,016 13,368 13,976 14,114 13,472 14,058 14,311 13,670 14,263 14,448 13,755 14,410 14,471 13,766 14,415 14,477 13,817 14,428 14,445 13,787 14,363 14,633 13,942 14,590 14,661 13,992 14,646 14,702 14,020 14,683 14,880 14,178 14,911 14,993 14,356 15,097 14,972 14,253 15,097 15,024 14,338 15,150 15,066 14,367 15,188 15,196 14,453 15,368 15,156 14,416 15,301 15,200 14,482 15,322 15,255 14,547 15,361 15,285 14,528 15,271 15,128 14,426 15,052 15,172 14,457 15,106 15,022 14,291 14,985 14,999 14,281 14,991 14,795 14,112 14,829 14,891 14,180 14,986 14,742 14,075 14,874 14,624 13,950 14,808 14,743 14,064 14,980 14,942 14,252 15,307 14,915 14,214 15,216 14,836 14,217 15,137 15,099 14,403 15,538 15,274 14,567 15,754 15,477 14,762 15,997 15,423 14,697 15,914 15,511 14,781 16,087 15,549 14,831 16,210 15,766 15,067 16,610 15,852 15,093 16,774 15,863 15,158 16,828 15,968 15,231 16,979 15,804 15,101 16,796 15,952 15,257 16,978 16,088 15,344 17,091 16,368 15,666 17,344 16,795 16,012 17,630 16,610 15,882 17,570 16,776 16,041 17,780 16,679 15,906 17,630 16,566 15,798 17,463 16,748 15,972 17,765 16,917 16,103 17,978 16,661 15,903 17,626 16,978 16,191 17,969 17,037 16,248 18,079 17,203 16,391 18,271 17,339 16,535 18,506 17,476 16,666 18,728 17,675 16,841 19,138 17,332 16,529 18,821 17,410 16,589 18,742 12/2002 17,605 16,773 19,139
MUTUAL FUND PERFORMANCE CHANGES OVER TIME. PLEASE VISIT LIBERTYFUNDS.COM FOR DAILY PERFORMANCE UPDATES. Past performance is no guarantee of future investment results. The principal value and investment returns will fluctuate, resulting in a gain or loss on sale. The above illustration assumes a $10,000 investment made on December 31, 1992 and reinvestment of income and capital gains distributions. The Lehman Brothers Municipal Bond Index is an unmanaged index considered representative of the broad market for investment-grade, tax-exempt bonds with a maturity of at least one year, issued on or after January 1, 1991, with deal size greater than $50 million and a maturity size of at least $5 million, and having a fixed rate coupon. Unlike the fund, indexes are not investments, do not incur fees or expenses and are not professionally managed. It is not possible to invest directly in an index. Securities in the fund may not match those in an index.
Average annual total return as of 12/31/02 (%) Share class A B C Z Inception 07/31/00 07/15/02 07/15/02 03/05/84 ------------------------------------------------------------------------------------------------------------------- without with without with without with without sales sales sales sales sales sales sales charge charge charge charge charge charge charge ------------------------------------------------------------------------------------------------------------------- 6-month (cumulative) 2.37 -2.48 1.37 -2.94 1.44 1.08 2.49 ------------------------------------------------------------------------------------------------------------------- 1-year 6.31 1.22 5.92 0.93 5.99 4.99 6.85 ------------------------------------------------------------------------------------------------------------------- 5-year 4.24 3.23 4.16 3.85 4.18 4.18 4.38 ------------------------------------------------------------------------------------------------------------------- 10-year 5.82 5.31 5.78 5.78 5.79 5.79 5.89 -------------------------------------------------------------------------------------------------------------------
Past performance is no guarantee of future investment results. The principal value and investment returns will fluctuate, resulting in a gain or loss on sale. All results shown assume reinvestment of distributions. The "with sales charge" returns include the maximum 4.75% charge for class A shares, the appropriate class B contingent deferred sales charge (CDSC) for the holding period after purchase as follows: through first year-5%, second year-4%, third year-3%, fourth year-3%, fifth year-2%, sixth year-1%, thereafter-0%, and the class C sales charge of 1% which also carry a CDSC of 1.00% that is applied to shares sold within the first year after they are purchased. After holding shares for one year, you may sell them at any time without paying a CDSC. Performance for different share classes will vary based on differences in sales charges and fees associated with each class. Performance results reflect any voluntary waivers or reimbursement of fund expenses by the advisor or its affiliates. Absent these waivers or reimbursement arrangements, performance results would have been lower. Class A share (newer class shares) performance information includes returns of the fund's class Z shares (the oldest existing fund class) for periods prior to the inception of the newer class shares. Classes B and C share (newer class shares) performance information includes returns of the Fund's class A shares for periods prior to the inception of the newer class shares. These class A and Z share returns are not restated to reflect any expense differential (e.g., rule 12b-1 fees) between class A and class Z shares and the newer class shares. Had the expense differential been reflected, the returns for the periods prior to the inception of classes A, B and C shares would have been lower. 1 SEC YIELDS AS OF 12/31/02 (%) CLASS A 5.52 CLASS B 5.05 CLASS C 5.20 CLASS Z 6.00 The 30-day SEC yields reflect the portfolio's earning power net of expenses, expressed as an annualized percentage of the public Offering price at the end of the period. MATURITY BREAKDOWN AS OF 12/31/02 (%) [bar chart data]: 1 - 3 years 1.6 3 - 5 years 3.5 5 - 7 years 5.1 7 - 10 years 6.7 10 - 15 years 17.9 15 - 20 years 20.5 20 - 25 years 22.3 25 years and over 22.4 Maturity breakdowns are calculated as a percentage of net assets. Maturity breakdown is based on each security's effective maturity, which reflects pre-refundings, mandatory puts and other conditions that affect a bond's maturity. Because the fund is actively managed, there can be no guarantee the fund will continue to maintain these quality and maturity breakdowns in the future. PORTFOLIO MANAGER'S REPORT For the six-month period ended December 31, 2002, Liberty High Yield Municipal Fund class A shares delivered a total return of 2.37% without sales charge. This return trailed that of the fund's benchmark, the Lehman Brothers Municipal Bond Index, which was 4.75% for the same period. However, the fund outperformed the average return of its peer group, the Lipper Current High Yield Municipal Debt Fund Category, which was 2.03%. Questions about the strength of the economic recovery created uncertainty regarding the revenues of some high-yield issuers. As a result, investors demanded to be paid higher yields on these issues. When the bond market rallied, high-yield bonds lagged the higher-quality segments of the market. The fund lagged its benchmark because the portfolio's high-yield bonds underperformed the higher-quality segment of the market that the index measures. Airline bonds in particular were poor performers. SHORT-TERM RATES FALL, INVERSE FLOATERS PROVIDE LIFT Although returns on municipals were not on par with Treasuries, the bond market was strong overall throughout the period. Interest rates again trended downward and bond prices rose as the Federal Reserve tried to jump-start an anemic economy. Inverse floating rate bonds, which adjust their coupon rates higher as short-term interest rates decline, served as the focus of our strategy and were solid performers. We also benefited when American Maize Products (1.7% of net assets) was acquired by higher-rated Cargill.1 We experienced credit-quality upgrades as some issuers refunded their bonds. Our investment in American Airlines (0.1% of net assets) hurt the performance of the fund. American's bonds fell in the face of weak earnings and the declining outlook for the airline industry. (Private corporations can issue municipal bonds to finance projects with a public purpose.) EMPHASIS ON INTERMEDIATES, USER FEES We maintained our overweight position in bonds with intermediate maturities during the period. These bonds, with maturities typically ranging from about seven to 20 years, offer much of the income of longer-term bonds but tend to have less volatility. They also benefit from the so-called "roll down" effect, which boosts prices of bonds as they move closer to maturity. -------------- 1 Holdings are disclosed as of December 31, 2002 and are subject to change. 2 In addition, we are favoring bonds issued for essential services projects, such as water and sewer, where user fees bring in revenues to support future interest payments. We believe this is an effective way to manage credit risk and will be particularly important in light of the difficult state budget pictures across the country. With so many states in financial crisis as a result of struggling economies and shrinking tax receipts, cutbacks are expected to be widespread. Revenue bonds, however, reduce our reliance on bonds that depend on tax revenues. OUTLOOK We plan to continue to emphasize bonds with intermediate maturities, which offer favorable risk/reward characteristics, and bonds with stable revenue streams. Our expectation is that these areas will fare the best if the US economy shows only gradual improvement in the period ahead. We think this is likely given that consumers, who have so far supported the economy with purchasing power fueled by low interest rates and mortgage refinancings, may have already begun pulling back. Corporate spending would have to kick in if we are going to see a meaningful recovery. If businesses don't sense that a return to profitability is on the horizon, spending--and the recovery--will more likely be muted. /s/ Maureen G. Newman Maureen G. Newman, portfolio manager of Liberty High-Yield Municipal Fund, is a senior vice president of Colonial Management Associates, Inc., an affiliate of Columbia Management Group. Ms. Newman received her BA in economics from Boston College and her MBA from Babson College. She is a Chartered Financial Analyst, a member of the Boston Security Analysts Society and former chairman of the National Federation of Municipal Analysts. Tax-exempt investing offers current tax-free income, but it also involves certain risks. Investing in high-yield bonds involves greater credit than investing in higher-quality bonds. The value of the fund will be affected by interest rate changes and the creditworthiness of issues held in the fund. The municipal bond management team seeks to identify opportunities and attempts to react quickly to market changes. QUALITY BREAKDOWN AS OF 12/31/02 (%) [bar chart data]: AAA 14.6 AA 2.6 A 10.2 BBB 18.0 BB 6.6 CCC 0.6 CC 0.1 Non-rated 47.3 Quality breakdown is calculated as a percentage of net assets. Ratings shown in the quality breakdown represent the lowest rating assigned to a particular bond by one of the following respected rating agencies: Standard & Poor's, Moody's or Fitch. Because the fund is actively managed, there can be no guarantee the fund will continue to maintain this breakdown in the future. 3 INVESTMENT PORTFOLIO December 31, 2002 (Unaudited) MUNICIPAL BONDS - 96.6% PAR VALUE ------------------------------------------------------- EDUCATION - 4.5% EDUCATION - 2.1% CA California Statewide Communities Development Authority, Crossroads School, Series 1998, 6.000% 08/01/28 $1,030,000 $ 1,069,933 San Francisco Art Institute, Series 2002, 7.375% 04/01/32 750,000 759,307 IL State Development Finance Authority, Latin School of Chicago, Series 1998, 5.650% 08/01/28 1,725,000 1,682,548 IL University of Illinois, Certificate of Participation, Utilities Infrastructure Projects, Series 2001 A, 5.500% 08/15/16 1,425,000 1,579,513 MA State Development Finance Agency, Western New England College, Series 2002, 6.125% 12/01/32 300,000 300,762 WV State University, Series 2000 A, (a) 04/01/19 1,250,000 564,713 (a) 04/01/25 2,750,000 851,318 ----------- 6,808,094 ----------- STUDENT LOAN - 2.4% OH Student Loan Funding Corporation, Series 1992 B, 6.750% 01/01/07 1,075,000 1,076,763 NE Nebhelp, Inc., Series 1993 A-6, 6.450% 06/01/18 4,000,000 4,553,040 NM State Educational Assistance Foundation, Series 1996 A-2, 6.650% 11/01/25 1,955,000 1,955,000 TX Brazos Higher Educational Facilities Authority, Series 1993 C-2, 5.875% 06/01/04 390,000 391,240 ----------- 7,976,043 ----------- ------------------------------------------------------- HEALTHCARE - 25.1% CONGREGATE CARE RETIREMENT - 7.3% CA Statewide Community Development Authority, Eskaton Village - Grass Valley, Series 2000, 8.250% 11/15/31 1,750,000 1,870,995 PAR VALUE ------------------------------------------------------- CA La Verne, Brethren Hillcrest Homes, Series 2003 B, 6.625% 02/15/25 $ 685,000 $ 680,219 FL Capital Projects Finance Authority, Glenridge on Palmer Ranch, Series 2002 A, 8.000% 06/01/32 1,250,000 1,201,687 FL Orange County Health Facilities Authority, Orlando Lutheran Towers, Inc., Series 1996, 8.625% 07/01/20 1,500,000 1,603,365 IL State Health Facilities Authority, Lutheran Senior Ministries, Series 2001, 7.375% 08/15/31 550,000 558,476 KY State Economic Development Finance Authority, Christian Church Homes, Series 1998, 5.500% 11/15/30 115,000 104,798 MA Boston Industrial Development Financing Authority, Springhouse, Inc., 5.875% 07/01/20 500,000 438,400 MA State Development Finance Agency, Loomis Community Project: Series 1999 A, 5.625% 07/01/15 650,000 609,225 Series 2002 A, 6.900% 03/01/32 220,000 221,808 MO State Health & Educational Facilities Authority, Lutheran Senior Services, Series 1997, 5.750% 02/01/17 2,000,000 2,041,700 NH State Higher Educational & Health Facilities Authority, Rivermead at Peterborough, Series 1998: 5.625% 07/01/18 500,000 455,065 5.750% 07/01/28 1,665,000 1,463,235 NJ State Economic Development Authority: Seabrook Village, Inc., Series 2000 A, 8.250% 11/15/30 1,125,000 1,210,354 Winchester Gardens, Series 1996 A, 8.625% 11/01/25 2,000,000 2,117,700 PA State Authority for Industrial Development, Baptist Home of Philadelphia, Series 1998, 5.500% 11/15/18 530,000 460,533 See notes to investment portfolio. 4 INVESTMENT PORTFOLIO (CONTINUED) December 31, 2002 (Unaudited) MUNICIPAL BONDS (CONTINUED) PAR VALUE ------------------------------------------------------- HEALTHCARE (CONTINUED) CONGREGATE CARE RETIREMENT (CONTINUED) PA Chartiers Valley Industrial & Commercial Development Authority, Asbury Health Center, Series 1999, 6.375% 12/01/24 $ 750,000 $ 710,392 PA Lancaster Industrial Development Authority, Garden Spot Village, Series 2000 A, 7.625% 05/01/31 825,000 858,611 TN Metropolitan Government, Nashville and Davidson County, Blakeford at Green Hills, Series 1998, 5.650% 07/01/24 1,825,000 1,605,708 TX Abilene Health Facilities Development Corp., Sears Methodist Retirement Obligation Group, Series 1998 A, 5.900% 11/15/25 1,850,000 1,651,476 WI State Health & Educational Facilities Authority: Attic Angel Obligated Group, Series 1998, 5.750% 11/15/27 2,125,000 1,824,185 Clement Manor, Series 1998, 5.750% 08/15/24 2,200,000 1,907,884 Lutheran Program for the Aging, Series 1998, 5.700% 03/01/28 750,000 645,278 ----------- 24,241,094 ----------- HEALTH SERVICES - 0.7% IL State Health Facilities Authority, Midwest Physicians Group, Ltd., Series 1998, 5.500% 11/15/19 90,000 69,935 MA State Development Finance Agency, Boston Biomedical Research Institute, Series 1999: 5.650% 02/01/19 370,000 349,450 5.750% 02/01/29 550,000 510,147 MA State Health & Educational Facilities Authority, Civic Investments, Inc., Series 2002 A, 9.000% 12/15/15 1,250,000 1,347,787 ----------- 2,277,319 ----------- PAR VALUE ------------------------------------------------------- HOSPITAL - 9.5% AZ Health Facilities Authority, Phoenix Memorial Hospital, Series 1991, 8.125% 06/01/12 (b) $2,167,774 $ 606,977 CA Wittier, Presbyterian Intercommunity Hospital, Series 2002, 5.750% 06/01/31 1,000,000 1,010,790 CO La Junta, Arkansas Valley Regional Medical Center, Series 1999, 6.100% 04/01/24 900,000 878,148 CO State Health Care Facilities Authority: National Jewish Medical & Research Center, Series 1998, 5.375% 01/01/23 1,080,000 1,021,810 Parkview Medical Center, Inc., Series 2001, 6.600% 09/01/25 300,000 330,477 FL Orange County Health Facilities Authority, Orlando Regional Healthcare System: Series 1999 E, 6.000% 10/01/26 875,000 901,302 Series 2002, 5.750% 12/01/32 350,000 354,732 FL West Orange Healthcare District, Series 2001 A, 5.650% 02/01/22 1,450,000 1,455,843 GA Forsyth County Hospital Authority, Baptist Hospital Worth County, Series 1998, 6.000% 10/01/08 880,000 974,160 IL Southwestern Illinois Development Authority, Anderson Hospital, Series 1999: 5.500% 08/15/20 500,000 478,285 5.625% 08/15/29 250,000 232,893 IL State Health Facilities Authority, Thorek Hospital & Medical Center, Series 1998, 5.375% 08/15/28 500,000 437,580 MA State Health & Educational Facilities Authority, Milford- Whitinsville Hospital, Series 2002 D, 6.350% 07/15/32 500,000 507,190 See notes to investment portfolio. 5 INVESTMENT PORTFOLIO (CONTINUED) December 31, 2002 (Unaudited) MUNICIPAL BONDS (CONTINUED) PAR VALUE ------------------------------------------------------- HEALTHCARE (CONTINUED) HOSPITAL (CONTINUED) MI Dickinson County, Series 1999, 5.800% 11/01/24 $1,000,000 $ 950,680 MI Flint Hospital Building Authority, Hurley Medical Center: Series 1998 A, 5.375% 07/01/20 465,000 412,483 Series 1998 B, 5.375% 07/01/28 1,250,000 1,061,075 MN St. Paul Housing & Redevelopment Authority, HealthEast Project, Series 1993 B, 6.625% 11/01/17 250,000 214,193 MN Washington Housing & Redevelopment Authority, HealthEast Project, Series 1998, 5.250% 11/15/12 1,250,000 1,012,400 MS Mississippi Business Finance Corporation, Rush Medical Foundation, Inc., Series 1998, 5.625% 07/01/23 725,000 621,477 NC State Medical Care Commission, Stanly Memorial Hospital, Series 1999, 6.375% 10/01/29 1,000,000 1,074,320 NH State Higher Educational & Health Facilities Authority, Littleton Hospital Assoc., Inc.: Series 1998 A: 5.900% 05/01/18 500,000 415,000 6.000% 05/01/28 1,000,000 796,160 Series 1998 B, 5.900% 05/01/28 675,000 530,030 Catholic Medical Center, Series 2002 A, 6.125% 07/01/32 400,000 394,360 NY New York City Industrial Development Agency, Staten Island University Hospital, Series 2001 B, 6.375% 07/01/31 1,250,000 1,260,175 OH Belmont County Health Systems Revenue, Ohio Valley Medical Center, Inc., Series 1998, 5.700% 01/01/13 1,500,000 1,288,890 PAR VALUE ------------------------------------------------------- OH Highland County Joint Township Hospital District, Series 1999, 6.750% 12/01/29 $1,925,000 $ 1,808,961 OH Miami County, Upper Valley Medical Center, Inc.: Series 1996 A, 6.250% 05/15/16 500,000 518,255 Series 1996 C, 6.250% 05/15/13 285,000 299,464 Series 1996 D, 6.375% 05/15/26 1,015,000 1,031,707 OH Sandusky County, Memorial Hospital, Series 1998, 5.150% 01/01/10 250,000 246,540 PA Allegheny County Hospital Development Authority, Ohio Valley General Hospital, Series 1997, 5.450% 01/01/28 1,550,000 1,397,449 PA Pottsville Hospital Authority, Pottsville Hospital & Warne Clinic, Series 1998, 5.625% 07/01/24 1,000,000 860,790 TX Lufkin Health Facilities Development Corp., Memorial Health Systems of East Texas, Series 1998, 5.700% 02/15/28 750,000 598,950 TX Richardson Hospital Authority, Baylor Richardson Medical Center, Series 1998, 5.625% 12/01/28 1,000,000 1,000,260 TX Tyler Health Facilities Development Corp., Mother Frances Hospital: Series 1997 A, 5.625% 07/01/13 1,785,000 1,785,357 Series 2001, 6.000% 07/01/31 750,000 751,073 WA State Health Care Facilities Authority, Kadlec Medical Center, Series 2001, 5.875% 12/01/21 600,000 642,852 WI State Health & Educational Facilities Authority, Wheaton Franciscan Services, Series 2002, 5.750% 08/15/30 1,050,000 1,059,334 WV State Hospital Finance Authority, Charleston Medical Center, Series 2000 A, 6.750% 09/01/30 225,000 244,600 ----------- 31,467,022 ----------- See notes to investment portfolio. 6 INVESTMENT PORTFOLIO (CONTINUED) December 31, 2002 (Unaudited) MUNICIPAL BONDS (CONTINUED) PAR VALUE ------------------------------------------------------- HEALTHCARE (CONTINUED) INTERMEDIATE CARE FACILITIES - 1.7% IL State Development Finance Authority, Hoosier Care, Inc., Series 1999 A, 7.125% 06/01/34 $1,485,000 $ 1,264,151 IN State Health Facilities Financing Authority, Hoosier Care, Inc., Series 1999 A, 7.125% 06/01/34 1,220,000 1,038,562 LA State Public Facilities Authority, Progressive Healthcare Providers, Inc., Series 1998, 6.375% 10/01/28 2,000,000 1,508,460 PA State Economic Development Financing Authority, Northwestern Human Services, Series 1998 A, 5.250% 06/01/14 2,150,000 1,869,812 ----------- 5,680,985 ----------- NURSING HOME - 5.9% AK Juneau, St. Ann's Care Center, Series 1999, 6.875% 12/01/25 1,750,000 1,746,850 CO State Health Facilities Authority, Volunteers of America Care Facilities, Inc.: Series 1998 A, 5.750% 07/01/20 700,000 606,326 Series 1999 A: 5.750% 07/01/10 990,000 949,707 6.000% 07/01/29 520,000 442,094 DE State Economic Development Authority, Churchman's Village Project, Series 1991, 10.000% 03/01/21 695,000 755,945 DE Sussex County, State Healthcare Facility Project, Series 1999, 7.600% 01/01/24 970,000 850,312 IA State Finance Authority, Care Initiatives: Series 1996, 9.250% 07/01/25 500,000 591,715 Series 1998 B: 5.500% 07/01/08 565,000 553,378 5.750% 07/01/18 600,000 550,578 5.750% 07/01/28 1,475,000 1,294,637 PAR VALUE ------------------------------------------------------- IN State Health Facilities Financing Authority, Metro Health Indiana, Inc., Series 1998, 6.400% 12/01/33 (b) $2,500,000 $ 431,250 MA State Development Finance Agency, Alliance Health Care Facilities, Series 1999 A, 7.100% 07/01/32 2,250,000 2,254,275 MA State Industrial Finance Agency, GF/Mass. Inc., Series 1994, 8.300% 07/01/23 910,000 928,273 MI Cheboygan Metro Health Foundation, Inc., Series 1993, 11.000% 11/01/22 (b) 600,000 204,000 MN Carlton, Inter-Faith Social Services, Inc., Series 2000: 7.500% 04/01/19 250,000 257,563 7.750% 04/01/29 1,000,000 1,039,440 MN New Hope, North Ridge Care Center, Inc., Series 1999, 5.875% 03/01/29 300,000 277,203 MN Sartell, Foundation for Healthcare, Series 1999 A, 6.625% 09/01/29 3,000,000 2,785,560 NJ State Economic Development Authority, Voorhees Geriatric/ Medical Services, Series 1990 A, 10.500% 05/01/04 30,000 30,221 PA Chester County Industrial Development Authority, RHA/PA Nursing Home, Series 2002, 8.500% 05/01/32 400,000 375,252 PA Delaware County Authority, Main Line & Haverford Nursing, Series 1992, 9.000% 08/01/22 50,000 30,000 PA Lackawanna County Industry Development Authority, Greenridge Nursing Center Project, Series 1990, 10.500% 12/01/10 145,000 147,461 PA Luzerne County Industrial Development Authority, Millville Nursing Center Project, Series 1990, 10.500% 12/01/12 185,000 186,691 PA Montgomery County Industrial Development Authority, Senior Care Foundation, Series 1993, 8.250% 05/01/23 575,000 598,937 See notes to investment portfolio. 7 INVESTMENT PORTFOLIO (CONTINUED) December 31, 2002 (Unaudited) MUNICIPAL BONDS (CONTINUED) PAR VALUE ------------------------------------------------------- HEALTHCARE (CONTINUED) NURSING HOME (CONTINUED) TX Kirbyville Health Facilities Development Corp., Heartway III: Series 1997 A, 10.000% 03/20/18 $ 540,473 $ 502,639 Series 1997 B, 6.000% 03/20/04 (h) 100,000 5,000 WA Kitsap County Consolidated Housing Authority, Martha and Mary Health Services, Series 1996, 7.100% 02/20/36 1,000,000 1,189,320 ----------- 19,584,627 ----------- ------------------------------------------------------- HOUSING - 10.6% ASSISTED LIVING/SENIOR - 4.5% CA Abag Finance Authority for Nonprofit Corps., Eskaton Gold River Lodge, Series 1998: 6.375% 11/15/15 710,000 648,557 6.375% 11/15/28 550,000 465,174 DE Kent County, Heritage at Dover, Series 1999, 7.625% 01/01/30 2,475,000 2,143,523 GA Columbus Housing Authority, The Gardens at Calvary, Series 1999, 7.000% 11/15/29 2,000,000 1,622,620 IL State Development Finance Authority, Care Institute, Inc., Series 1995, 8.250% 06/01/25 1,945,000 1,935,936 MN Roseville Elderly Care Facility, Care Institute, Inc. Project, Series 1993, 7.750% 11/01/23 (i) 1,270,000 868,223 NC State Medical Care Commission, DePaul Community Facilities Project, Series 1999, 7.625% 11/01/29 1,990,000 2,021,064 NY Glen Cove Housing Authority, The Mayfair at Glen Cove LLC, Series 1996, 8.250% 10/01/26 1,965,000 2,030,258 NY Huntington Housing Authority, Gurwin Jewish Senior Center, Series 1999: 5.875% 05/01/19 1,900,000 1,673,862 6.000% 05/01/29 625,000 539,319 PAR VALUE -------------------------------------------------------- TX Bell County Health Facility Development Corp., Care Institute, Inc., Series 1994, 9.000% 11/01/24 $ 960,000 $ 984,797 ----------- 14,933,333 ----------- MULTI-FAMILY - 5.1% CO State Health Facilities Authority, Birchwood Manor, Series 1991 A, 7.250% 04/01/11 500,000 502,105 DE Wilmington, Electra Arms Senior Association Project, Series 1994 A, 6.250% 06/01/28 960,000 795,542 FL Broward County Housing Finance Authority, Chaves Lake Apartment Project, Series 2000 A, 7.500% 07/01/40 1,250,000 1,282,337 FL Clay County Housing Finance Authority, Madison Commons Apartments, Series 2000 A, 7.450% 07/01/40 1,250,000 1,282,413 GA Clayton County Housing Authority, Magnolia Park Apartments, Series 1999 A, 6.250% 06/01/30 1,750,000 1,537,130 IL State Development Finance Authority, Catholic Charities Housing Development Corp., Series 1993 C, 5.950% 01/01/09 1,400,000 1,453,060 IN New Castle, Raintree Apartments, Series 1988 B, (a) 03/01/18 30,625,000 76,563 MN Lakeville Multi-Family Revenue, Series 1989, 9.875% 02/01/20 700,000 700,826 MN Washington County Housing & Redevelopment Authority, Cottages of Aspen Project, Series 1992, 9.250% 06/01/22 470,000 485,501 MN White Bear Lake Multi-Family Revenue, Series 1989, 9.750% 07/15/19 750,000 761,197 OH Greater Allen County Housing Development Authority, Steiner-McBride Apartments, Series 1987, 10.250% 09/01/03 365,000 366,040 See notes to investment portfolio. 8 INVESTMENT PORTFOLIO (CONTINUED) December 31, 2002 (Unaudited) MUNICIPAL BONDS (CONTINUED) PAR VALUE ------------------------------------------------------- HOUSING (CONTINUED) MULTI-FAMILY (CONTINUED) OH Lake County, North Madison Properties, Ltd. Project: Series 1993, 8.819% 09/01/11 $ 515,000 $ 498,922 Pass Through Certificates, Series 1993, 8.500% 12/01/16 455,481 456,315 SC State Housing Finance & Development Authority, Local or GTD Housing, Series 1990, 9.500% 09/01/20 579,000 579,510 TN Franklin Industrial Development Board, Landings Apartment Project, Series 1996 B, 8.750% 04/01/27 1,635,000 1,720,134 TX El Paso County Housing Finance Corp., American Village Communities: Series 2000 C, 8.000% 12/01/32 590,000 602,856 Series 2000 D, 10.000% 12/01/32 695,000 709,282 TX Galveston, Greystone Driftwood LP, Series 1994 A, 8.000% 08/01/23 1,000,000 1,048,750 TX State Affordable Housing Corp., NHT/GTEX LLC, Series 2001 C, 10.000% 10/01/31 1,570,000 1,560,706 VA Alexandria Redevelopment & Housing Authority, Article 1 Associates LLP, Series 1990 A, 10.000% 01/01/21 500,000 439,000 ----------- 16,858,189 ----------- SINGLE FAMILY - 1.0% CO Housing and Finance Authority: Series 1995 D-1, 7.375% 06/01/26 610,000 640,512 Series 1997 A-2, 7.250% 05/01/27 280,000 291,474 IA State Housing Finance Authority, Series 1984 A, (a) 09/01/16 2,235,000 498,517 ID State Housing Agency, Series 1990 B, 7.500% 07/01/24 855,000 864,585 PA State Housing Finance Authority, Series 1994-42, 6.850% 04/01/25 750,000 781,148 PAR VALUE ------------------------------------------------------- UT State Housing Finance Agency, Series 1991 C-3, 7.550% 07/01/23 $ 50,000 $ 50,364 ----------- 3,126,600 ----------- ------------------------------------------------------- INDUSTRIAL - 8.1% FOOD PRODUCTS - 2.8% IN Hammond, American Maize Products Co., Series 1994 A, 8.000% 12/01/24 5,010,000 5,506,892 LA Port Lake Charles, Continental Grain Co., Project, Series 1993, 7.500% 07/01/13 2,000,000 2,055,900 MI State Strategic Fund, Michigan Sugar Co.: Carollton Project, Series 1998 C, 6.550% 11/01/25 1,500,000 1,080,735 Sebewaing Project, Series 1998 A, 6.250% 11/01/15 1,000,000 722,550 ----------- 9,366,077 ----------- FOREST PRODUCTS - 2.8% GA Rockdale County Development Authority, Solid Waste Disposal, Visy Paper, Inc., Series 1993, 7.500% 01/01/26 2,800,000 2,819,936 LA Beauregard Parish, Boise Cascade Project, Series 2002, 6.800% 02/01/27 1,750,000 1,741,652 LA De Soto Parish, International Paper Company, Series 1994 A, 7.700% 11/01/18 1,500,000 1,597,080 MI Delta County Economic Development Corp., Mead Westvaco Escambia Project, Series 2002 B, 6.450% 04/01/23 750,000 744,045 MS Lowndes County, Weyerhaeuser Corp., Series 1992 A, 6.800% 04/01/22 1,995,000 2,244,235 ----------- 9,146,948 ----------- MANUFACTURING - 1.0% IL Will-Kankakee Regional Development Authority, Flanders Corp./Precisionaire, Series 1997, 6.500% 12/15/17 850,000 816,433 KS Wichita Airport Authority, Cessna Citation Service Center, Series 2002 A, 6.250% 06/15/32 1,875,000 1,924,575 See notes to investment portfolio. 9 INVESTMENT PORTFOLIO (CONTINUED) December 31, 2002 (Unaudited) MUNICIPAL BONDS (CONTINUED) PAR VALUE ------------------------------------------------------- INDUSTRIAL (CONTINUED) MANUFACTURING (CONTINUED) MN Brooklyn Park Industrial Development Revenue, TL Systems Corp., Series 1991, 10.000% 09/01/16 $ 455,000 $ 479,252 ----------- 3,220,260 ----------- METALS & MINING - 0.4% MD Baltimore County Pollution Control, Bethlehem Steel Corp, Project, Series 1994 B, 7.500% 06/01/15 (b) 1,000,000 40,000 NV State Department of Business & Industry, Wheeling-Pittsburgh Steel Corp., Series 1999 A, 8.000% 09/01/14 (b) 500,000 350,000 VA Greensville County Industrial Development Authority, Wheeling-Pittsburgh Steel Corp., Series 1999 A: 6.375% 04/01/04 (b) 160,000 112,000 7.000% 04/01/14 (b) 930,000 651,000 ----------- 1,153,000 ----------- OIL AND GAS - 1.1% TX Gulf Coast Industrial Development Authority, Citgo Petroleum Project, Series 1998, 8.000% 04/01/28 875,000 905,126 TX Texas City Industrial Development Corp., Arco Pipe Line Co. Project, Series 1990, 7.375% 10/01/20 2,000,000 2,606,140 VI Government of United States Virgin Islands, Hovensa Coker Project, Series 2002, 6.500% 07/01/21 125,000 126,096 ----------- 3,637,362 ----------- ------------------------------------------------------- OTHER - 8.7% OTHER - 1.2% CA Southern California Tobacco Securitization Authority, Series 2002 B, 6.000% 06/01/43 1,500,000 1,475,280 LA Tobacco Settlement Financing Corp., Series 2001 B, 5.875% 05/15/39 1,000,000 913,140 MD Baltimore Economic Development Revenue, Park Charles Project, Series 1986, 8.000% 01/01/15 472,402 479,115 PAR VALUE ------------------------------------------------------- SC Tobacco Settlement Revenue Management Authority, Series 2001 B, 6.375% 05/15/28 $1,000,000 $ 991,830 ----------- 3,859,365 ----------- REFUNDED/ESCROWED (C) - 7.5% CO Adams County, Series 1991 B: 11.250% 09/01/11 (d) 905,000 1,376,063 11.250% 09/01/12 1,440,000 2,320,762 CT State Development Authority, New Haven Residuals, Series 1996, 8.250% 12/01/06 580,000 670,550 CO State Department of Transportation Revenue, Series 2001 832R-B, 8.920% 06/15/15 2,000,000 2,643,000 FL Tampa Bay, Utility System Revenue, Series 1999, 9.390% 10/01/23 7,500,000 9,997,125 GA State Municipal Electric Authority, Series 1991 V, 6.600% 01/01/18 690,000 861,237 MA State Health & Educational Facilities Authority, CIL Realty of Massachusetts, Inc., Series 1993, 8.100% 07/01/18 535,000 563,339 NC Eastern Municipal Power Agency, Series 1991 A, 6.500% 01/01/18 3,320,000 4,180,478 NC Lincoln County, Lincoln County Hospital Project, Series 1991, 9.000% 05/01/07 190,000 220,138 TN Shelby County Health Educational & Housing Facilities Board, Open Arms Care Corp., Series 1992 A, 9.750% 08/01/19 600,000 772,428 WV State Hospital Finance Authority, Charleston Medical Center, Series 2000 A, 6.750% 09/01/30 925,000 1,151,236 ----------- 24,756,356 ----------- ------------------------------------------------------- OTHER REVENUE - 1.2% HOTEL - 0.6% PA Philadelphia Authority for Industrial Development, Starwood Hotels & Resorts, Series 1997 A, 6.500% 10/01/27 2,000,000 1,985,600 ----------- See notes to investment portfolio. 10 INVESTMENT PORTFOLIO (CONTINUED) December 31, 2002 (Unaudited) MUNICIPAL BONDS (CONTINUED) PAR VALUE ------------------------------------------------------- OTHER REVENUE (CONTINUED) RECREATION - 0.6% CT Mohegan Indians Tribe, Gaming Authority, Series 2001, 6.250% 01/01/31 $ 475,000 $ 489,488 FL Capital Trust Agency, Seminole Tribe Convention Center, Series 2002 A, 10.000% 10/01/33 1,250,000 1,296,087 NM Red River, Red River Ski Area Project, Series 1998, 6.450% 06/01/07 210,000 210,733 ----------- 1,996,308 ----------- ------------------------------------------------------- RESOURCE RECOVERY - 1.7% DISPOSAL - 0.7% IL Development Finance Authority, Waste Management, Inc., Series 1997, 5.050% 01/01/10 250,000 243,820 MA State Development Finance Agency, Peabody Monofill Associates, Inc. Project, Series 1994, 9.000% 09/01/05 460,000 482,765 UT Carbon County, Solid Waste Disposal Revenue, Laidlaw Environmental, Series 1997 A, 7.450% 07/01/17 1,500,000 1,509,990 ----------- 2,236,575 ----------- RESOURCE RECOVERY - 1.0% MA State Development Finance Agency, Ogden Haverhill Project: Series 1998 A, 5.500% 12/01/13 500,000 449,730 Series 1999 A, 6.700% 12/01/14 750,000 742,680 PA Delaware County Industrial Development Authority, American Ref-Fuel Co., Series 1997 A, 6.200% 07/01/19 2,225,000 2,241,087 ----------- 3,433,497 ----------- ------------------------------------------------------- TAX-BACKED - 12.7% LOCAL APPROPRIATED - 1.2% MO St. Louis Industrial Development Authority, St. Louis Convention Center Hotel, Series 2000, (a) 07/15/18 3,000,000 1,459,740 PAR VALUE ------------------------------------------------------- PA Philadelphia Municipal Authority, Series 1993 D, 6.250% 07/15/13 $2,500,000 $ 2,574,975 ----------- 4,034,715 ----------- LOCAL GENERAL OBLIGATIONS - 3.0% CA Empire Union School District, Series 1987-1 A, (a) 10/01/21 1,665,000 642,906 CA Los Angeles Unified School District: Series 1997 E, 5.125% 01/01/27 3,800,000 3,910,884 Series 2002, 5.750% 07/01/16 800,000 945,872 CA Modesto High School District, Series 2002 A, (a) 08/01/19 2,650,000 1,175,937 NY New York City, Series 1995 B, 7.250% 08/15/07 1,000,000 1,164,640 TX Dallas County Flood Control District, Series 2002, 7.250% 04/01/32 1,000,000 1,001,990 WA Clark County School District #37 Vancouver, Series 2001B, (a) 12/01/18 2,500,000 1,164,150 ----------- 10,006,379 ----------- SPECIAL NON-PROPERTY TAX - 2.1% CO State Department of Transportation Revenue, Series 2001 832R-A, 8.920% 06/15/14 3,000,000 3,766,770 MO St. Louis County Industrial Development Authority, Kiel Center Arena, Series 1992, 7.875% 12/01/24 3,000,000 3,069,900 ----------- 6,836,670 ----------- SPECIAL PROPERTY TAX - 3.6% CA Carson Improvement Board Act 1915, Series 1992, 7.375% 09/02/22 160,000 163,573 CA Huntington Beach Community Facilities District, Grand Coast Resort, Series 2000-1, 6.450% 09/01/31 1,250,000 1,295,675 CA Orange County Community Facilities District, Ladera Ranch, Series 1999 A, 6.500% 08/15/21 1,000,000 1,064,250 CA Pleasanton Joint Powers Financing Authority, Series 1993 B, 6.750% 09/02/17 1,740,000 1,814,089 See notes to investment portfolio. 11 INVESTMENT PORTFOLIO (CONTINUED) December 31, 2002 (Unaudited) MUNICIPAL BONDS (CONTINUED) PAR VALUE ------------------------------------------------------- TAX-BACKED (CONTINUED) SPECIAL PROPERTY TAX (CONTINUED) FL Double Branch Community Development District, Series 2002 A, 6.700% 05/01/34 $ 700,000 $ 702,121 FL Heritage Palms Community Development District, Series 1999, 6.250% 11/01/04 670,000 680,037 FL Lexington Oaks Community Development District: Series 1998 A, 6.125% 05/01/19 270,000 272,608 Series 1998 B, 5.500% 05/01/05 200,000 201,062 Series 2000 A: 7.200% 05/01/30 695,000 730,174 6.700% 05/01/33 250,000 255,895 Series 2000 B, 6.700% 05/01/07 200,000 207,352 FL Northern Palm Beach County Improvement District, Series 1999: 5.900% 08/01/19 500,000 509,735 6.000% 08/01/29 750,000 764,077 FL Orlando, Conroy Road Interchange Project, Series 1998 A: 5.500% 05/01/10 325,000 329,046 5.800% 05/01/26 600,000 593,898 FL Stoneybrook Community Development District: Series 1998 A, 6.100% 05/01/19 830,000 838,499 Series 1998 B, 5.700% 05/01/08 330,000 335,198 MI Pontiac Finance Authority, Development Area No. 3, Series 2002, 6.375% 06/01/31 1,000,000 1,003,080 ----------- 11,760,369 ----------- STATE APPROPRIATED - 0.7% NY Triborough Bridge & Tunnel Authority, Javits Convention Center Project, Series 1990 E, 7.250% 01/01/10 2,000,000 2,374,540 ----------- STATE GENERAL OBLIGATIONS - 2.1% MA Massachusetts Bay Transportation Authority, Series 1992 B, 6.200% 03/01/16 5,825,000 7,086,287 ----------- PAR VALUE ------------------------------------------------------- TRANSPORTATION - 8.8% AIR TRANSPORTATION - 3.3% CA Los Angeles Regional Airports Improvement Corp., American Airlines, Inc., Series 2002 C, 7.500% 12/01/24 $ 500,000 $ 413,120 IL Chicago O'Hare International Airport, United Airlines, Inc., Series 2000 A, 6.750% 11/01/11 (e) 1,600,000 229,824 IN Indianapolis Airport Authority, Federal Express Corp., Series 1994, 7.100% 01/15/17 3,000,000 3,188,490 KY Kenton County Airport Board, Delta Airlines, Inc., Series 1992, 7.500% 02/01/20 500,000 411,390 MN Minneapolis & St. Paul Metropolitan Airports Commission, Northwest Airlines: Series 2001 A, 7.000% 04/01/25 825,000 604,618 Series 2001 B, 6.500% 04/01/25 500,000 475,480 NC Charlotte, US Airway, Inc.: Series 1998, 5.600% 07/01/27 (e) 500,000 233,810 Series 2000, 7.750% 02/01/28 (e) 1,250,000 625,175 PA Philadelphia Authority for Industrial Development, Aero Philadelphia, Series 1999: 5.250% 01/01/09 400,000 371,524 5.500% 01/01/24 1,000,000 784,170 TX Alliance Airport Authority, AMR Corp., Series 1991, 7.000% 12/01/11 4,070,000 1,809,074 TX Houston Industrial Development Corp., United Parcel Service, Series 2002, 6.000% 03/01/23 1,100,000 1,109,669 WA Port Seattle, Northwest Airlines, Inc., Series 2001, 7.250% 04/01/30 925,000 679,958 ----------- 10,936,302 ----------- AIRPORT - 1.4% NC Charlotte Airport Revenue, Series 1999, 8.240% 04/20/19 (d) 4,000,000 4,732,480 ----------- See notes to investment portfolio. 12 INVESTMENT PORTFOLIO (CONTINUED) December 31, 2002 (Unaudited) MUNICIPAL BONDS (CONTINUED) PAR VALUE ------------------------------------------------------- TRANSPORTATION (CONTINUED) PORTS - 2.0% WA Port of Seattle, Series 2000: 9.860% 08/01/07 $1,250,000 $ 1,625,375 9.860% 08/01/08 3,750,000 4,848,337 ----------- 6,473,712 ----------- TOLL FACILITIES - 1.6% CO E-470 Public Highway Authority, Series 2000 B: (a) 09/01/18 4,000,000 1,885,120 (a) 09/01/35 17,500,000 1,595,825 CO Northwest Parkway Public Highway Authority, Series 2001 D, 7.125% 06/15/41 1,750,000 1,820,770 ----------- 5,301,715 ----------- TRANSPORTATION - 0.5% NV State Department of Business & Industry, Las Vegas Monorail Project, Series 2000, 7.375% 01/01/40 1,750,000 1,707,650 ----------- ------------------------------------------------------- UTILITY - 15.2% INDEPENDENT POWER PRODUCER - 5.5% MI Midland County Economic Development Corp., Series 2000 A, 6.875% 07/23/09 1,650,000 1,655,692 NY Port Authority of New York & New Jersey, KIAC Power Project, Series 1996, 6.750% 10/01/11 1,000,000 1,051,640 PA State Economic Development Financing Authority, Colver Project, Series 1994 D, 7.150% 12/01/18 1,650,000 1,714,598 PA State Economic Development Financing Authority, Northampton Generating: Series 1994 A, 6.500% 01/01/13 3,000,000 3,037,770 Series 1994 B, 6.750% 01/01/07 3,000,000 3,080,910 VA Pittsylvania County Industrial Development Authority, Multitrade of Pittsyvania, Series 1994 A: 7.450% 01/01/09 3,500,000 3,584,315 7.500% 01/01/14 500,000 508,905 7.550% 01/01/19 3,600,000 3,664,044 ----------- 18,297,874 ----------- PAR VALUE ------------------------------------------------------- INVESTOR OWNED - 3.8% AZ Maricopa County Pollution Control Corp., Series 2002 A, 6.250% 05/01/37 $1,000,000 $ 1,006,290 IN Petersburg, Indiana Power & Light, Series 1991, 5.750% 08/01/21 1,000,000 938,230 LA Calcasieu Parish Industrial Development Board, Entergy Gulf States, Inc., Series 1999, 5.450% 07/01/10 500,000 499,690 LA West Feliciana Parish, Entergy Gulf States, Inc., Series 1999 B, 6.600% 09/01/28 250,000 253,280 MS State Business Finance Corp., Systems Energy Resources, Inc., Series 1999, 5.900% 05/01/22 1,250,000 1,153,262 NM Farmington, Tucson Electric Power Co., Series 1997 A, 6.950% 10/01/20 2,000,000 2,053,060 NV Humboldt County Pollution Control Revenue, Idaho Power Co. Project, Series 1984, 8.300% 12/01/14 2,000,000 2,177,020 PA Beaver County Industrial Development Authority, Toledo Edison Co., Series 1995, 7.625% 05/01/20 2,000,000 2,119,660 TX Brazos River Authority, Texas Utilities Electric Co. Project, Series 2001, 5.750% 05/01/36 2,300,000 2,185,069 ----------- 12,385,561 ----------- JOINT POWER AUTHORITY - 1.8% GA State Municipal Electric Authority, Series 1991 V, 6.600% 01/01/18 3,375,000 4,146,997 NC Eastern Municipal Power Agency, Series 1991 A, 6.500% 01/01/18 1,680,000 1,899,895 ----------- 6,046,892 ----------- MUNICIPAL ELECTRIC - 2.5% TX Lower Colorado River Authority, Series 1999, 8.890% 05/15/16 7,500,000 8,335,500 ----------- WATER & SEWER - 1.6% LA Louisiana Public Facilities Authority Revenue, Belmont Water, 9.000% 09/15/24 (i) 585,000 409,500 See notes to investment portfolio. 13 INVESTMENT PORTFOLIO (CONTINUED) December 31, 2002 (Unaudited) MUNICIPAL BONDS (CONTINUED) PAR VALUE ------------------------------------------------------- UTILITY (CONTINUED) WATER & SEWER (CONTINUED) MS Water System Revenue, V Lakes Utility District, Series 1994, 8.250% 07/15/24 $ 400,000 $ 378,000 NH State Industrial Development Authority, Pennichuck Water Works, Inc., Series 1988, 7.500% 07/01/18 505,000 558,333 PA Dauphin County Industrial Development Authority, Dauphin Water Supply Co., Series 1992 A, 6.900% 06/01/24 3,200,000 3,948,960 ----------- 5,294,793 ----------- TOTAL MUNICIPAL BONDS (cost of $325,606,104) 319,356,093 ----------- MUNICIPAL PREFERRED STOCKS - 1.1% SHARES ------------------------------------------------------- HOUSING - 1.1% MULTI-FAMILY - 1.1% Charter Municipal Mortgage Acceptance Co.: 6.625% 06/30/49 (f) 2,000,000 2,117,500 7.600% 11/30/50 (f) 1,500,000 1,657,500 ----------- TOTAL MUNICIPAL PREFERRED STOCKS (cost of $3,500,000) 3,775,000 ----------- SHORT-TERM OBLIGATIONS - 0.9% ------------------------------------------------------- MUTUAL FUND - 0.0% Federated Tax Free Obligations Fund 100,000 100,000 ----------- VARIABLE RATE DEMAND NOTES (g) - 0.9% PAR AZ Phoenix Industrial Development Authority, Valley of the Sun YMCA Project, Series 2001, 1.850% 01/01/31 $ 300,000 300,000 IA State Higher Education Loan Authority, Loras College Project, Series 2000, 1.800% 11/01/30 100,000 100,000 IA State Finance Authority, Drake University Project, Series 2001, 1.850% 07/01/31 400,000 400,000 IA Woodbury County, Siouxland Medical Education Foundation, Series 1996, 1.650% 11/01/16 700,000 700,000 PAR VALUE ------------------------------------------------------- IL Quad Cities Regional Economic Development Authority, Two Rivers YMCA Project, Series 2002, 1.850% 12/01/31 $ 400,000 $ 400,000 KS State Development Finance Authority, Hays Medical Center, Series 2000 N, 1.850% 05/15/26 100,000 100,000 MN Minneapolis, Series 1996, 1.650% 12/01/16 500,000 500,000 NY New York City, Series 1993, 1.700% 08/01/21 300,000 300,000 ----------- 2,800,000 ----------- TOTAL SHORT-TERM OBLIGATIONS (cost of $2,900,000) 2,900,000 ----------- TOTAL INVESTMENTS - 98.6% (cost of $332,006,104) (j) 326,031,093 ----------- OTHER ASSETS & LIABILITIES, NET - 1.4% 4,548,900 ------------------------------------------------------- NET ASSETS - 100.0% $330,579,993 ============ (a) Zero coupon bond. (b) As of December 31, 2002, the Fund held securities of certain issuers that have filed for bankruptcy protection under Chapter 11 representing 0.72% of net assets. These issuers are in default of certain debt covenants. Income is not being accrued. (c) The Fund has been informed that each issuer has placed direct obligations of the U.S. Government in an irrevocable trust solely for the purpose of the payment of principal and interest. (d) These securities, or a portion thereof, with a total market value of $778,233 are being used to collateralize open futures contracts. (e) As of December 31, 2002, the Fund held securities of certain issuers that have filed for bankruptcy protection under Chapter 11 representing 0.3% of net assets. Income is being accrued. (f) These securities are exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At December 31, 2002, the value of these securities amounted to $3,775,000 or 1.1% of net assets. (g) Variable rate demand notes are considered short-term obligations. Interest rates change periodically on specified dates. These securities are payable on demand and are secured either by letters of credit or other credit support agreements from banks. The rates listed are as of December 31, 2002. (h) Income is not being fully accrued. (i) Issuer is in default of certain debt covenants. Income is not being fully accrued. (j) Cost for federal income tax purposes is $326,137,153. See notes to financial statements. 14 INVESTMENT PORTFOLIO (CONTINUED) December 31, 2002 (Unaudited) Long futures contracts open at December 31, 2002: PAR VALUE UNREALIZED COVERED BY EXPIRATION APPRECIATION TYPE CONTRACTS MONTH AT 12/31/02 --------------------------------------------------------- U.S. Treasury $11,400,000 March $475,886 Bonds Short futures contracts open at December 31, 2002: PAR VALUE UNREALIZED COVERED BY EXPIRATION DEPRECIATION TYPE CONTRACTS MONTH AT 12/31/02 --------------------------------------------------------- 10 Year U.S. $53,400,000 March $(1,279,531) Treasury Notes See notes to financial statements. 15 STATEMENT OF ASSETS AND LIABILITIES December 31, 2002 (Unaudited) ASSETS: Investments, at cost $332,006,104 ------------ Investments, at value $326,031,093 Cash 77,389 Receivable for: Fund shares sold 238,637 Interest 6,369,471 Futures variation margin 72,811 Deferred Trustees' compensation plan 6,077 Other assets 35,227 ------------ Total Assets 332,830,705 ------------ LIABILITIES: Payable for: Investments purchased 679,811 Fund shares repurchased 630,380 Distributions 600,562 Management fee 118,606 Administration fee 34,175 Transfer agent fee 19,585 Pricing and bookkeeping fees 9,503 Merger expense 135,557 Deferred Trustees' fee 6,077 Other liabilities 16,456 ------------ Total Liabilities 2,250,712 ------------ NET ASSETS $330,579,993 ============ COMPOSITION OF NET ASSETS: Paid-in capital $349,934,988 Overdistributed net investment income (2,874,826) Accumulated net realized loss (9,701,513) Net unrealized depreciation on: Investments (5,975,011) Futures contracts (803,645) ------------ NET ASSETS $330,579,993 ============ CLASS A: Net assets $ 72,900,037 Shares outstanding 6,564,286 ------------ Net asset value per share $ 11.11(a) ------------ Maximum offering price per share ($11.11/0.9525) $ 11.66(b) ============ CLASS B: Net assets $ 53,484,577 Shares outstanding 4,816,060 ------------ Net asset value and offering price per share $ 11.11(a) ============ CLASS C: Net assets $ 4,406,650 Shares outstanding 396,792 ------------ Net asset value and offering price per share $ 11.11(a) ============ CLASS Z: Net assets $199,788,729 Shares outstanding 17,989,892 ------------ Net asset value, offering and redemption price per share $ 11.11 ============ (a) Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge. (b) On sales of $50,000 or more the offering price is reduced. STATEMENT OF OPERATIONS For the Six Months Ended December 31, 2002 (Unaudited) INVESTMENT INCOME: Interest $11,211,824 ------------ EXPENSES: Expenses Allocated from Portfolio 41,043 Management fee 673,056 Administration fee 205,595 Distribution fee: Class B 197,651 Class C 16,696 Service fee: Class A 68,383 Class B 52,707 Class C 4,453 Pricing and bookkeeping fees 64,806 Transfer agent fee 256,891 Trustees' fee 5,824 Custody fee 7,384 Registration fee 83,607 Merger expense 3,053 Other expenses 16,876 ------------ Total Expenses 1,698,025 Fees waived by Distributor - Class C (3,337) Custody earnings credit (1,030) ------------ Net Expenses 1,693,658 ------------ Net Investment Income 9,518,166 ------------ NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FUTURES CONTRACTS: Net realized gain (loss) on: Investments 989,415 Futures contracts (2,357,570) ------------ Net realized loss (1,368,155) ------------ Net change in unrealized appreciation/ depreciation on: Investments (367,491) Futures contracts (581,116) ------------ Net change in unrealized appreciation/depreciation (948,607) ------------ Net Loss (2,316,762) ------------ Net Increase in Net Assets from Operations $ 7,201,404 ============ See notes to financial statements. 16 STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED) SIX MONTHS ENDED YEAR ENDED INCREASE (DECREASE) DECEMBER 31, JUNE 30, IN NET ASSETS: 2002 (a) 2002 ------------------------------------------------------ OPERATIONS: Net investment income $ 9,518,166 $ 12,426,070 Net realized gain (loss) on investments and futures contracts (1,368,155) 230,094 Net change in unrealized appreciation/depreciation on investments and futures contracts (948,607) 2,710,228 ----------- ------------ Net Increase from Operations 7,201,404 15,366,392 ----------- ------------ DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income: Class A (2,597,698) (166) Class B (1,756,991) -- Class C (152,563) -- Class Z (7,849,821) (12,751,456) ----------- ------------ Total Distributions Declared to Shareholders (12,357,073) (12,751,622) ----------- ------------ SHARE TRANSACTIONS: Class A: Subscriptions 4,051,310 40,656 Proceeds received in connection with merger 76,068,209 -- Distributions reinvested 1,129,462 56 Redemptions (7,006,337) -- ----------- ------------ Net Increase 74,242,644 40,712 ----------- ------------ Class B: Subscriptions 2,402,550 -- Proceeds received in connection with merger 58,601,899 -- Distributions reinvested 806,390 -- Redemptions (7,308,752) -- ----------- ------------ Net Increase 54,502,087 -- ----------- ------------ Class C: Subscriptions 796,494 -- Proceeds received in connection with merger 4,760,489 -- Distributions reinvested 54,804 -- Redemptions (1,119,491) -- ----------- ------------ Net Increase 4,492,296 -- ----------- ------------ Class Z: Subscriptions 23,292,616 32,494,590 Distributions reinvested 6,118,706 7,872,926 Redemptions (40,225,223) (54,660,074) ----------- ------------ Net Decrease (10,813,901) (14,292,558) ----------- ------------ Net Increase (Decrease) from Share Transactions 122,423,126 (14,251,846) ----------- ------------ Total Increase (Decrease) in Net Assets 117,267,457 (11,637,076) (UNAUDITED) SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, 2002 (a) 2002 ------------------------------------------------------ NET ASSETS: Beginning of period $213,312,536 $224,949,612 ----------- ------------ End of period (including overdistributed net investment income of $(2,874,826) and $(35,919), respectively) $330,579,993 $213,312,536 =========== ============ CHANGES IN SHARES: Class A: Subscriptions 355,223 3,622 Issued in connection with merger 6,725,748 -- Issued for distributions reinvested 100,941 5 Redemptions (621,348) -- ----------- ------------ Net Increase 6,560,564 3,627 ----------- ------------ Class B: Subscriptions 212,426 -- Issued in connection with merger 5,181,423 -- Issued for distributions reinvested 72,081 -- Redemptions (649,870) -- ----------- ------------ Net Increase 4,816,060 -- ----------- ------------ Class C: Subscriptions 70,872 -- Issued in connection with merger 420,910 -- Issued for distributions reinvested 4,903 -- Redemptions (99,893) -- ----------- ------------ Net Increase 396,792 -- ----------- ------------ Class Z: Subscriptions 2,071,133 2,871,106 Issued for distributions reinvested 546,248 700,510 Redemptions (3,568,238) (4,865,513) ----------- ------------ Net Decrease (950,857) (1,293,897) ----------- ------------ (a) On July 29, 2002, the existing Fund Class S shares were redesignated Class Z shares. Class B and Class C shares were initially offered on July 15, 2002. See notes to financial statements. 17 NOTES TO FINANCIAL STATEMENTS December 31, 2002 (Unaudited) NOTE 1. ACCOUNTING POLICIES ORGANIZATION: Liberty High-Yield Municipal Fund (the "Fund") (formerly, Stein Roe High-Yield Municipals Fund), a series of Liberty-Stein Roe Funds Municipal Trust (the "Trust"), is a diversified, open-end management investment company organized as a Massachusetts business trust. The Fund's investment goal is to seek a high level of total return consisting of current income exempt from federal income tax and opportunities for capital appreciation. The Fund may issue an unlimited number of shares. The Fund offers four classes of shares: Class A, Class B, Class C and Class Z. Class A shares are sold with a front-end sales charge. A 1.00% contingent deferred sales charge is assessed on redemptions made within eighteen months on an original purchase of $1 million to $25 million. Class B shares are subject to a contingent deferred sales charge. Class B shares will convert to Class A shares in three, four or eight years after purchase, depending on the program under which shares were purchased. Class C shares are subject to a contingent deferred sales charge on redemptions made within one year after purchase. Class Z shares are offered continuously at net asset value. There are certain restrictions on the purchase of Class Z shares, as described in the Fund's prospectus. As of the end of business on July 12, 2002, Stein Roe High Yield Municipals Fund acquired all the net assets of Liberty High Yield Municipals Fund pursuant to a plan of reorganization approved by Liberty High Yield Municipals Fund shareholders on June 28, 2002. All assets of Liberty High Yield Municipals Fund were transferred to Stein Roe High Yield Municipals Fund in a tax-free exchange and shareholders of Liberty High Yield Municipals Fund received shares of Stein Roe High Yield Municipals Fund in exchange for their shares as follows: STEIN ROE LIBERTY HIGH HIGH YIELD YIELD MUNICIPAL MUNICIPALS FUND FUND NET UNREALIZED SHARES ISSUED ASSETS RECEIVED DEPRECIATION1 ------------- -------------- ------------- 12,328,081 $139,430,597 $(2,690,498) 1 Unrealized depreciation is included in the Net Assets Received amount above. NET ASSETS NET ASSETS NET ASSETS OF LIBERTY OF STEIN ROE OF STEIN ROE HIGH YIELD HIGH YIELD HIGH YIELD MUNICIPAL FUND MUNICIPALS FUND MUNICIPALS FUND IMMEDIATELY IMMEDIATELY PRIOR TO PRIOR TO AFTER COMBINATION COMBINATION COMBINATION ------------- -------------- ------------- $218,007,534 $139,430,597 $357,438,131 Prior to July 15, 2002, the Fund invested substantially all of its assets in the SR&F High-Yield Municipals Portfolio (the "Portfolio") as part of a master/feeder structure. The Portfolio allocated income, expenses, realized and unrealized gains (losses) to its investors on a daily basis, based on methods in compliance with the Internal Revenue Service. Prior to the reorganization described above, the Fund's pro-rata share of the Portfolio were distributed to Stein Roe High Yield Municipals Fund based on allocation methods in compliance with the Internal Revenue Service. Differing amortization policies between the Liberty High Yield Municipal Fund and the Stein Roe High Yield Municipals Fund resulted in a reclassification as follows: UNREALIZED PAID-IN DEPRECIATION CAPITAL ---------------- -------------- $(5,571,390) $5,571,390 Effective July 15, 2002, Stein Roe High-Yield Municipals Fund was renamed Liberty High Yield Municipal Fund and began offering Class B and Class C shares. Effective July 29, 2002, the Class S shares were subsequently redesignated as Class Z shares. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses for 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 AND TRANSACTIONS: Municipal securities are valued at a fair value using a procedure determined in good faith by the Board of Trustees, which has authorized the use of bid valuations provided by a pricing service. Futures contracts are valued based on the difference between the last sale price and the opening price of the contract. Other securities and assets are valued at fair value as determined in good faith by or under the direction of the Board of Trustees. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. Short-term obligations with a maturity of 60 day or less are valued at amortized cost. Security transactions are accounted for on the date the securities are purchased, sold or mature. Cost is determined and gains (losses) are based upon the specific identification method for both financial statement and federal income tax purposes. 18 NOTES TO FINANCIAL STATEMENTS (CONTINUED) December 31, 2002 (Unaudited) DETERMINATION OF CLASS NET ASSET VALUES AND FINANCIAL HIGHLIGHTS: All income, expenses (other than Class A, Class B and Class C service fees and Class B and Class C distribution fees), and realized and unrealized gains (losses) are allocated to each class proportionately on a daily basis for purposes of determining the net asset value of each class. Class A, Class B and Class C per share data and ratios are calculated by adjusting the expense and net investment income per share data and ratios for the Fund for the entire period by the service fees applicable to Class A, Class B and Class C shares and the distribution fees applicable to Class B and Class C shares, only. INVESTMENT TRANSACTIONS AND INVESTMENT INCOME: Interest income is recorded on the accrual basis. Premium and discount are being amortized for all debt securities. DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net investment income are declared daily and paid monthly. Capital gains distributions, if any, are distributed annually. FEDERAL INCOME TAXES: Consistent with the Fund's policy to qualify as a regulated investment company and to distribute all of its taxable income, no federal income tax has been accrued. FUTURES CONTRACTS: The Fund may enter into futures contracts to either hedge against expected declines of their portfolio securities or as a temporary substitute for the purchase of individual bonds. Risks of entering into futures contracts include the possibility that there may be an illiquid market at the time a fund seeks to close out a contract, and changes in the value of the futures contract may not correlate with changes in the value of the portfolio securities being hedged. Upon entering into a futures contract, the Fund deposits cash or securities with its custodian in an amount sufficient to meet the initial margin requirements. Subsequent payments are made or received by the Fund equal to the daily change in the contract value and are recorded as variation margin payable or receivable and offset in unrealized gains or losses. The Fund recognizes a realized gain or loss when the contract is closed or expires. Refer to the Fund's Investment Portfolio for a summary of open futures contracts at December 31, 2002. NOTE 2. FEDERAL TAX INFORMATION: Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from generally accepted accounting principles. Reclassifications are made to the Fund's capital accounts to reflect income and gains available for distribution (or available capital loss carryforwards) under income tax regulations. The following capital loss carryforwards, determined as of June 30, 2002 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: YEAR OF EXPIRATION CAPITAL LOSS CARRYFORWARD ----------------------------------------------------- 2006 $3,546,402 2009 847,151 ---------- Total $4,393,553 ---------- The estimated capital loss carryforward obtained from the Liberty High Yield Municipal Fund was: $9,058,231 Utilization of Liberty High Yield Municipal Fund's capital loss carryforwards could be subject to merger limitations imposed by the Internal Revenue Code. NOTE 3. FEES AND COMPENSATION PAID TO AFFILIATES MANAGEMENT FEE: Stein Roe & Farnham Incorporated (the "Advisor") is the investment advisor of the Fund and receives a monthly fee based on the Fund's average daily net assets as follows: AVERAGE DAILY ANNUAL NET ASSETS FEE RATE ------------ --------- First $100 million 0.450% Next $100 million 0.425% Over $200 million 0.400% Prior to July 15, 2002, the management fee was paid by the Portfolio at the same rates. ADMINISTRATION FEE: The Advisor also provides accounting and other services for a monthly fee to the Fund as follows: AVERAGE DAILY ANNUAL NET ASSETS FEE RATE ------------ --------- First $100 million 0.150% Next $100 million 0.125% Over $200 million 0.100% PRICING AND BOOKKEEPING FEES: The Advisor is responsible for providing pricing and bookkeeping services to the Fund under a Pricing and Bookkeeping Agreement. Under a separate agreement (the "Outsourcing Agreement"), the Advisor has delegated those functions to State Street Bank and Trust Company ("State Street"). The Advisor pays fees to State Street under the Outsourcing Agreement. 19 NOTES TO FINANCIAL STATEMENTS (CONTINUED) December 31, 2002 (Unaudited) Under its pricing and bookkeeping agreements with the Fund, the Advisor receives from the Fund an annual flat fee of $10,000, paid monthly, and in any month that the Fund's average daily net assets are more than $50 million, a monthly fee equal to the average daily net assets of the Fund for that month multiplied by a fee rate that is calculated by taking into account the fees payable to State Street under the Outsourcing Agreement. For the six months ended December 31, 2002, the annualized net asset based fee rate was 0.036%. The Fund also pays out-of-pocket costs for pricing services. Prior to July 12, 2002, the Advisor received from the Fund an annual flat fee of $5,000. TRANSFER AGENT FEES: Liberty Funds Services, Inc. (the "Transfer Agent"), an affiliate of the Advisor, provides shareholder services for a monthly fee equal to 0.06% annually of the Fund's average daily net assets plus charges based on the number of shareholder accounts and transactions. The Transfer Agent also receives reimbursement for certain out-of-pocket expenses. UNDERWRITING DISCOUNTS, SERVICE AND DISTRIBUTION FEES: Liberty Funds Distributor, Inc. (the "Distributor"), an affiliate of the Advisor, is the Fund's principal underwriter. For the six months ended December 31, 2002, the Fund has been advised that the Distributor retained net underwriting discounts of $2,369 on sales of the Fund's Class A shares and received contingent deferred sales charges ("CDSC") of $197,450 and $35 on Class B and Class C share redemptions, respectively. The Fund has adopted a 12b-1 (the "Plan"), which requires the payment of a monthly service fee to the Distributor equal to 0.20% annually of the average daily net assets attributable to Class A, Class B and Class C shares as of the 20th of each month. The Plan also requires the payment of a monthly distribution fee to the Distributor equal to 0.75% annually of the average daily net assets attributable to Class B and Class C shares only. The Distributor has voluntarily agreed to waive a portion of the Class C share distribution fee so that it does not exceed 0.80% annually. The CDSC and the fees received from the Plan are used principally as repayment to the Distributor for amounts paid by the Distributor to dealers who sold such shares. OTHER: The Fund pays no compensation to its officers, all of whom are employees of the Advisor or its affiliates. The Fund's Independent Trustees may participate in a deferred compensation plan which may be terminated at any time. Obligations of the plan will be paid solely out of the Fund's assets. The Fund has an agreement with its custodian bank under which $1,030 of custody fees were reduced by balance credits for the six months ended December 31, 2002. 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. Expenses allocated from the Portfolio on the Statement of Operations include $36,924 paid to affiliates, prior to the liquidation of the Portfolio. These affiliated fees include: management, pricing and bookkeeping, transfer agent and trustees' fees. NOTE 4. PORTFOLIO INFORMATION INVESTMENT ACTIVITY: During the six months ended December 31, 2002, purchases and sales of investments, other than short-term obligations, were $39,813,570 and $60,863,219, respectively. Unrealized appreciation (depreciation) at December 31, 2002, for federal income tax purposes was: Gross unrealized appreciation $ 20,395,655 Gross unrealized depreciation (20,501,715) ------------ Net unrealized depreciation $ (106,060) ------------ OTHER: There are certain risks arising from geographic concentration in any state. Certain revenue or tax related events in a state may impair the ability of certain issuers of municipal securities to pay principal and interest on their obligations. The Fund may focus its investments in certain industries, subjecting it to greater risk than a fund that is more diversified. NOTE 5. LINE OF CREDIT The Fund has a fundamental policy which allows it to borrow from banks, other affiliated funds and other entities to the extent permitted by applicable law, provided that the Fund's borrowings shall not exceed 33 1/3% of the value of its total net assets (exclusive of borrowings). The Fund is part of a $200,000,000 credit facility that has been set up as a means of borrowing. Any borrowings bear interest at one of the following options determined at the inception of the loan: (1) federal funds rate plus 1/2 of 1%, (2) the lending bank's base rate or (3) IBOR offshore loan rate plus 1/2 of 1%. Other investment companies managed by the Advisor also participate in the line of credit on the same terms. In addition, a commitment fee of 0.10% per annum on the Fund's unused commitment shall be paid quarterly by each fund based on the relative asset size of each fund to the Trust as a whole. The commitment fee is included in "Other expenses" on the Statement of Operations. Because several investment companies participate, there is no assurance that an individual fund will have access to the entire $200,000,000 at any particular time. For the six months ended December 31, 2002, there were no borrowings under the agreement. 20
FINANCIAL HIGHLIGHTS Selected data for a share outstanding throughout each period is as follows: (UNAUDITED) SIX MONTHS PERIOD ENDED YEAR ENDED ENDED DECEMBER 31, JUNE 30, JUNE 30, CLASS A SHARES 2002 2002 2001 (a) ========================================================================================================================= NET ASSET VALUE, BEGINNING OF PERIOD $ 11.26 $ 11.13 $ 11.11 -------- -------- -------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (b) 0.32 0.61(c) 0.58 Net realized and unrealized gain (loss) on investments and futures contracts (0.06) 0.15(c) 0.01 -------- -------- -------- Total from Investment Operations 0.26 0.76 0.59 -------- -------- -------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.41) (0.63) (0.57) -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 11.11 $ 11.26 $ 11.13 ======== ======== ======== Total return (d) 2.37%(e) 6.93% 5.42%(e) ======== ======== ======== RATIOS TO AVERAGE NET ASSETS: Expenses (f) 1.02%(g) 1.13% 1.06%(g) Net investment income (f) 6.03%(g) 5.41%(c) 5.65%(g) Portfolio turnover rate (e) 13% 16%(h) 16%(h) Net assets, end of period (000's) $ 72,900 $ 42 $ 1
(a)From commencement of operations on July 31, 2000. (b)Per share data was calculated using average shares outstanding during the period. (c)Effective July 1, 2001, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing and accreting premium and discount on all debt securities. The effect of this change for the year ended June 30, 2002, was to increase the ratio of investment income to average net assets from 5.37% to 5.41%. The impact to the net investment income and the net realized and unrealized gain was less than $0.01. Per share data and ratios for periods prior to June 30, 2002, have not been restated to reflect this change in presentation. (d)Total return at net asset value assuming all distributions reinvested and no initial sales charge or contingent deferred sales charge. (e)Not annualized. (f)The benefits derived from custody credits and directed brokerage arrangements, if applicable, had an impact of less than 0.01%. (g)Annualized. (h)Portfolio turnover disclosed is for the SR&F High-Yield Municipals Portfolio. 21
FINANCIAL HIGHLIGHTS (CONTINUED) Selected data for a share outstanding throughout the period is as follows: (UNAUDITED) PERIOD ENDED DECEMBER 31, CLASS B SHARES 2002 (a) ================================================================================================== NET ASSET VALUE, BEGINNING OF PERIOD $ 11.31 -------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (b) 0.28 Net realized and unrealized loss on investments and futures contracts (0.13) -------- Total from Investment Operations 0.15 -------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.35) -------- NET ASSET VALUE, END OF PERIOD $ 11.11 ======== Total return (c)(d) 1.37% ======== RATIOS TO AVERAGE NET ASSETS: Expenses (e)(f) 1.77% Net investment income (e)(f) 5.28% Portfolio turnover rate (d) 13% Net assets, end of period (000's) $ 53,485
(a)Class B shares were initially offered on July 15, 2002. Per share data reflects activity from that date. (b)Per share data was calculated using average shares outstanding during the period. (c)Total return at net asset value assuming all distributions reinvested and no contingent deferred sales charge. (d)Not annualized. (e)The benefits derived from custody credits and directed brokerage arrangements, if applicable, had an impact of less than 0.01%. (f)Annualized. 22
FINANCIAL HIGHLIGHTS (CONTINUED) Selected data for a share outstanding throughout the period is as follows: (UNAUDITED) PERIOD ENDED DECEMBER 31, CLASS C SHARES 2002 (a) ============================================================================================ NET ASSET VALUE, BEGINNING OF PERIOD $ 11.31 -------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (b) 0.29 Net realized and unrealized loss on investments and futures contracts (0.13) -------- Total from Investment Operations 0.16 -------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.36) -------- NET ASSET VALUE, END OF PERIOD $ 11.11 ======== Total return (c)(d)(e) 1.44% ======== RATIOS TO AVERAGE NET ASSETS: Expenses (f)(g) 1.62% Net investment income (f)(g) 5.43% Waiver/reimbursement (f)(g) 0.15% Portfolio turnover rate (e) 13% Net assets, end of period (000's) $ 4,407
(a) Class C shares were initially offered on July 15, 2002. Per share data reflects activity from that date. (b) Per share data was calculated using average shares outstanding during the period. (c) Total return at net asset value assuming all distributions reinvested and no contingent deferred sales charge. (d) Had the Distributor not waived a portion of expenses, total return would have been reduced. (e) Not annualized. (f) The benefits derived from custody credits and directed brokerage arrangements, if applicable, had an impact of less than 0.01%. (g) Annualized. 23
FINANCIAL HIGHLIGHTS (CONTINUED) Selected data for a share outstanding throughout each period is as follows: (UNAUDITED) SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, ------------------------------------------------------------ CLASS Z SHARES 2002 (a) 2002 2001 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 11.26 $ 11.12 $ 11.04 $ 11.71 $ 11.97 $ 11.67 ------- ------- ------- ------- ------- ------- INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.33(b) 0.64(b)(c) 0.65(b) 0.65 0.63 0.65 Net realized and unrealized gain (loss) on investments and futures contracts (0.05) 0.15(c) 0.08 (0.68) (0.25) 0.30 ------- ------- ------- ------- ------- ------- Total from Investment Operations 0.28 0.79 0.73 (0.03) 0.38 0.95 ------- ------- ------- ------- ------- ------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.43) (0.65) (0.65) (0.64) (0.64) (0.65) ------- ------- ------- ------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 11.11 $ 11.26 $ 11.12 $ 11.04 $ 11.71 $ 11.97 ======= ======= ======= ======= ======= ======= Total return (d) 2.49%(e) 7.30% 6.78% (0.16)% 3.18%(f) 8.32% ======= ======= ======= ======= ======= ======= RATIOS TO AVERAGE NET ASSETS: Expenses (g) 0.87%(h) 0.88% 0.81% 0.78% 0.77% 0.75% Net investment income (g) 6.18%(h) 5.66%(c) 5.86% 5.82% 5.26% 5.48% Portfolio turnover rate 13%(e) 16%(i) 16%(i) 14%(i) 19%(i) 8%(j) Net assets, end of period (000's) $199,789 $213,271 $224,950 $253,787 $297,874 $341,780
(a) On July 29, 2002, the existing Fund Class S shares were redesignated Class Z shares. (b) Per share data was calculated using average shares outstanding during the period. (c) Effective July 1, 2001, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing and accreting premium and discount on all debt securities. The effect of this change for the year ended June 30, 2002, was to increase the net investment income per share by $0.01 and to increase the ratio of investment income to average net assets from 5.62% to 5.66%. The impact to the net investment income and the net realized and unrealized gain was less than $0.01. Per share data and ratios for periods prior to June 30, 2002, have not been restated to reflect this change in presentation. (d) Total return at net asset value assuming all distributions reinvested. (e) Not annualized. (f) 0.50% of the return is attributable to a one time revaluation of a portfolio security reflecting the restructuring of this security. Absent this revaluation, the total return would have been 2.68%. (g) The benefits derived from custody credits and directed brokerage arrangements, if applicable, had an impact of less than 0.01%. (h) Annualized. (i) Portfolio turnover disclosed is for the SR&F High-Yield Municipals Portfolio. (j) Prior to commencement of operations of the Portfolio. 24 TRANSFER AGENT IMPORTANT INFORMATION ABOUT THIS REPORT The Transfer Agent for Liberty High Yield Municipal Fund is: Liberty Funds Services, Inc. P.O. Box 8081 Boston, MA 02266-8081 The fund mails one shareholder report to each shareholder address. If you would like more than one report, please call shareholder services at 800-345-6611 and additional reports will be sent to you. This report has been prepared for shareholders of Liberty High Yield Municipal Fund. This report may also be used as sales literature when preceded or accompanied by the current prospectus which provides details of sales charges, investment objectives and operating policies of the fund and with the most recent copy of the Liberty Funds Performance Update. Semiannual Report: Liberty High Yield Municipal Fund Liberty High Yield Municipal Fund SEMIANNUAL REPORT, DECEMBER 31, 2002 [eagle head logo] LibertyFunds A Member of Columbia Managment Group (C)2003 Liberty Funds Distributor, Inc. A Member of Columbia Management Group One Financial Center, Boston, MA 02111-2621 PRSRT STD U.S. POSTAGE PAID HOLLISTON, MA PERMIT NO. 20 752-03/465M-0103 (02/03) 03/0302