-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FhC21ycNWKeD0ZDpsxFzopPxno5P2XKSaWCUJoz5SaISHxSacq/DDoKY4J2PMGX9 Qwl2Jn3XHhPUBa7GRqui0Q== 0000891804-03-001970.txt : 20030908 0000891804-03-001970.hdr.sgml : 20030908 20030908171950 ACCESSION NUMBER: 0000891804-03-001970 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030908 EFFECTIVENESS DATE: 20030908 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LIBERTY STEIN ROE FUNDS MUNICIPAL TRUST CENTRAL INDEX KEY: 0000773757 IRS NUMBER: 363376651 STATE OF INCORPORATION: MA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-04367 FILM NUMBER: 03886584 BUSINESS ADDRESS: STREET 1: ONE FINANCIAL CTR CITY: BOSTON STATE: MA ZIP: 02111 BUSINESS PHONE: 8003382550 MAIL ADDRESS: STREET 1: ONE FINANCIAL CTR CITY: BOSTON STATE: MA ZIP: 02111 FORMER COMPANY: FORMER CONFORMED NAME: STEINROE MUNICIPAL TRUST DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: STEINROE INTERMEDIATE MUNICIPALS INC DATE OF NAME CHANGE: 19880114 N-CSR 1 file001.txt LIBERTY - STEIN ROE FUNDS MUNICIPAL TRUST 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 811-4367 --------------------- Liberty - Stein Roe Funds Municipal Trust ------------------------------------------------------------------------------ (Exact name of registrant as specified in charter) One Financial Center, Boston, Massachusetts 02111 - ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip code) Russell L. Kane, Esq. Columbia Management Group, Inc. One Financial Center Boston, MA 02111 - ------------------------------------------------------------------------------ (Name and address of agent for service) Registrant's telephone number, including area code: 1-617-426-3363 ------------------- Date of fiscal year end: June 30, 2003 ------------------ Date of reporting period: June 30, 2003 ----------------- 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. ss. 3507. ITEM 1. REPORTS TO STOCKHOLDERS. LIBERTY HIGH YIELD MUNICIPAL FUND Annual Report June 30, 2003 [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 Annual Report June 30, 2003 [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 Joseph R. Palombo] Dear Shareholder: Despite the uncertainty that hung over the markets and the economy as the nation prepared to go to war in Iraq, the twelve-month period ended on a high note. Virtually all major segments of the stock and bond markets posted positive returns for the period. The economy, though still struggling, has made progress toward recovery. And a new tax law is intended to boost consumer spending power and make investing more attractive. The Jobs and Growth Tax Relief Reconciliation Act of 2003 accelerates income tax rate cuts for virtually all Americans and slashes the tax rates on dividends and long-term capital gains. The government is counting on Americans to turn their good fortune into higher spending. And the financial media has been full of advice on how to take advantage of the new rate structure. As you debate what you will do if the lower tax rate turns into a modest personal windfall, consider strategies that could have a long-term impact on your portfolio. If your take-home pay increases as a result of the tax break and any rebate check you are entitled to receive--and if it's not eaten up by higher state taxes--consider investing at least one third of it. Consider adding it to your retirement account, using it to start an education account for your child, or setting it aside for an emergency. But make a commitment and stick to it. Think of it as found money, because that is what it is. You didn't have it before. But now that you've found it, you can put it to work for a long-term goal. And, before you take advice from a television pundit or a magazine cover story, talk to your financial advisor. There may be tax-related strategies that make sense for you. But there are no one-size-fits-all solutions. Keep in mind that tax rates change, and many of the provisions of this law are set to expire in just a few short years. CONSOLIDATION AND A NEW NAME: COLUMBIA On a separate note, I am pleased to announce that, effective April 1, 2003, six of the asset management firms brought together when Columbia Management Group, Inc. was formed were consolidated and renamed Columbia Management Advisors, Inc. (Columbia Management). This consolidation does not affect the management or investment objectives of your fund and is the next step in our efforts to create a consistent identity and to streamline our organization. By consolidating these firms, we are able to create a more efficient organizational structure and strengthen certain key functions, such as research. Although the name of the asset manager familiar to you has changed, what hasn't changed is the commitment of our specialized investment teams to a multi-disciplined approach to investing, focused on our goal of offering shareholders the best products and services. The following report will provide you with more detailed information about fund performance and the strategies used by fund manager Maureen Newman. 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/ Joseph R. Palombo President - -------------------------------------------------------------------------------- MEET THE NEW PRESIDENT Joseph R. Palombo, president and chairman of the Board of Trustees for Liberty Funds, is also chief operating officer and executive vice president of Columbia Management. Mr. Palombo has over 19 years of experience in the financial services industry. Prior to joining Columbia Management, he was chief operating officer and chief compliance officer for Putnam Mutual Funds. Prior to that, he was a partner at Coopers & Lybrand. Mr. Palombo received his degree in economics/accounting from the College of the Holy Cross, where he was a member of Phi Beta Kappa. He earned his master's degree in taxation from Bentley College and participated in the Executive Program at the Amos B. Tuck School at Dartmouth College. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NET ASSET VALUE PER SHARE as of 6/30/03 ($) Class A 11.25 Class B 11.25 Class C 11.25 Class Z 11.25 DISTRIBUTIONS DECLARED PER SHARE 7/1/02 - 6/30/03 ($) Class A 0.72 Class B 0.62 Class C 0.64 Class Z 0.75 A portion of the fund's income may be subject to the alternative minimum tax. The fund may at times purchase tax-exempt securities at a discount. Some or all of this discount may be included in the fund's ordinary income, and is taxable when distributed. - -------------------------------------------------------------------------------- NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE Economic and market conditions change frequently. There is no assurance that the trends described in this report will continue or commence. The examples provided should be viewed as illustrations. They do not constitute tax or legal advice. Neither Columbia Management Advisors, Inc., nor its affiliates, including Liberty Funds Distributor, Inc., provide tax or legal advice. A tax advisor or attorney can provide you with answers to specific questions about taxes and other legal issues. PERFORMANCE INFORMATION Value of a $10,000 investment 6/30/93 -- 6/30/03 PERFORMANCE OF A $10,000 INVESTMENT 6/30/93 -- 6/30/03 ($) without with sales sales charge charge - ------------------------------------- Class A 17,275 16,455 - ------------------------------------- Class B 17,147 17,147 - ------------------------------------- Class C 17,172 17,172 - ------------------------------------- Class Z 17,414 n/a - ------------------------------------- [mountain chart data]: Lehman Brothers Class A shares Class A shares Municipal without sales charge with sales charge Bond Index 6/1993 $10,000 $ 9,525 $10,000 9,997 9,522 10,013 10,190 9,706 10,221 10,308 9,819 10,338 10,331 9,840 10,357 10,276 9,788 10,266 10,428 9,933 10,483 10,530 10,030 10,602 10,312 9,823 10,328 9,895 9,425 9,907 9,962 9,489 9,992 10,092 9,612 10,079 10,096 9,616 10,017 10,218 9,732 10,200 10,259 9,771 10,236 10,143 9,661 10,086 9,998 9,523 9,906 9,816 9,349 9,727 10,009 9,534 9,941 10,371 9,879 10,225 10,618 10,114 10,523 10,710 10,201 10,644 10,725 10,215 10,656 11,051 10,526 10,996 10,960 10,439 10,901 11,064 10,538 11,004 11,178 10,647 11,144 11,241 10,707 11,214 11,424 10,881 11,377 11,636 11,084 11,566 11,782 11,222 11,677 11,862 11,298 11,766 11,765 11,206 11,686 11,632 11,079 11,536 11,597 11,046 11,504 11,614 11,062 11,499 11,712 11,155 11,624 11,770 11,211 11,729 11,799 11,238 11,727 11,960 11,392 11,891 12,093 11,519 12,025 12,286 11,703 12,245 12,310 11,725 12,194 12,341 11,754 12,217 12,439 11,848 12,329 12,330 11,744 12,165 12,422 11,832 12,268 12,615 12,016 12,453 12,752 12,147 12,586 13,055 12,434 12,935 12,996 12,378 12,813 13,124 12,501 12,966 13,208 12,581 13,049 13,301 12,669 13,126 13,486 12,845 13,317 13,615 12,969 13,454 13,637 12,989 13,458 13,642 12,994 13,471 13,612 12,966 13,410 13,789 13,134 13,622 13,816 13,159 13,675 13,854 13,196 13,709 14,022 13,356 13,922 14,129 13,457 14,096 14,109 13,439 14,096 14,158 13,486 14,145 14,198 13,523 14,180 14,320 13,640 14,349 14,283 13,604 14,286 14,324 13,644 14,306 14,376 13,693 14,342 14,404 13,720 14,258 14,256 13,579 14,053 14,297 13,618 14,104 14,156 13,483 13,991 14,135 13,463 13,997 13,942 13,280 13,845 14,033 13,366 13,992 13,893 13,233 13,887 13,781 13,127 13,826 13,893 13,233 13,986 14,081 13,412 14,291 14,055 13,388 14,207 13,981 13,317 14,133 14,228 13,552 14,508 14,393 13,710 14,709 14,585 13,892 14,936 14,534 13,843 14,858 14,617 13,922 15,020 14,653 13,957 15,134 14,857 14,151 15,508 14,939 14,229 15,662 14,949 14,239 15,712 15,048 14,333 15,853 14,893 14,185 15,682 15,033 14,319 15,851 15,160 14,440 15,958 15,424 14,692 16,194 15,827 15,075 16,461 15,653 14,909 16,405 15,809 15,058 16,600 15,718 14,971 16,461 15,611 14,869 16,304 15,782 15,033 16,586 15,942 15,185 16,785 15,701 14,955 16,456 15,999 15,239 16,777 16,055 15,293 16,880 16,211 15,441 17,059 16,339 15,563 17,279 16,468 15,686 17,486 16,656 15,865 17,869 16,333 15,557 17,572 16,406 15,627 17,499 16,597 15,808 17,868 16,557 15,770 17,823 16,787 15,990 18,073 16,792 15,994 18,083 16,963 16,158 18,203 17,284 16,463 18,629 6/2003 17,275 16,455 18,551 MUTUAL FUND PERFORMANCE CHANGES OVER TIME. PLEASE VISIT WWW.LIBERTYFUNDS.COM FOR DAILY PERFORMANCE UPDATES. Past performance cannot predict future investment results. Share price and investment return will vary, so you may have a gain or loss when you sell your shares. The above illustration assumes a $10,000 investment made on June 30, 1993 and reinvestment of income and capital gains distributions. The Lehman Brothers Municipal Bond Index is a 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 mutual funds, indexes are not investments and do not incur fees or expenses. 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 6/30/03 (%) 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 - ------------------------------------------------------------------------------------------------------------------- 1-year 6.58 1.53 5.79 0.79 5.94 4.94 6.82 - ------------------------------------------------------------------------------------------------------------------- 5-year 4.58 3.56 4.42 4.10 4.45 4.45 4.74 - ------------------------------------------------------------------------------------------------------------------- 10-year 5.62 5.11 5.54 5.54 5.56 5.56 5.70 - -------------------------------------------------------------------------------------------------------------------
MUTUAL FUND PERFORMANCE CHANGES OVER TIME. PLEASE VISIT WWW.LIBERTYFUNDS.COM FOR DAILY PERFORMANCE UPDATES. Past performance cannot predict 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 graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. 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 6/30/03 (%) CLASS A 4.34 CLASS B 3.81 CLASS C 3.96 CLASS Z 4.76 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. TAXABLE-EQUIVALENT SEC YIELDS AS OF 6/30/03 (%) CLASS A 7.07 CLASS B 6.21 CLASS C 6.45 CLASS Z 7.75 Taxable-equivalent SEC yields are based on the combined maximum effective 38.6% federal and state income tax rate. This tax rate does not reflect the phase out of exemption or the reduction of otherwise allowable deductions that occur when adjusted gross income exceeds certain levels. PORTFOLIO MANAGER'S REPORT For the 12-month period ended June 30, 2003, class A shares of Liberty High Yield Municipal Fund returned 6.58% without sales charge. The fund trailed the 8.74% return of its benchmark, the Lehman Brothers Municipal Bond Index. The fund fell behind as higher-quality bonds, which dominate the index, outpaced high-yield bonds. The fund did, however, come out ahead of the 5.40% average return of its peer group, the Lipper Current High Yield Municipal Debt Fund Category.1 Relative to the peer group, we believe that the fund had a more sizable stake in high-grade bonds, which helped performance. INVERSE FLOATERS BOOST PERFORMANCE Bond prices moved up during the past year as interest rates continued to decline. High-yield municipal bonds, however, trailed the returns of higher-quality municipal issues amid worries that a slow economy would hurt the revenues of issuers. In this environment, the fund benefited from owning inverse floating rate bonds, whose coupons (or stated interest rates) adjust upward as short-term interest rates decline. The high quality ratings of the inverse floaters made them attractive in an unsettled market, while their high coupons provided income to the fund. The fund also benefited from specific issues that performed well, including US Airways (0.4% of net assets), which emerged from bankruptcy.2 INTERMEDIATE FOCUS AND DIVERSIFICATION LIMIT DOWNSIDE RISK We focused mainly on bonds with intermediate maturities (15-20 years), which provided most of the yield of longer maturity issues with less risk. In addition, we kept the fund well diversified. We owned small stakes in a large number of non-rated bonds, which helped generate income while reducing the risk of default. We also diversified across sectors and, within sectors, among individual securities. Our biggest focus was on essential service bonds, which are backed by revenues from user fees and tend to hold up better than other sectors in an economic downturn. - --------- 1 Lipper Inc., a widely respected data provider in the industry, calculates an average total return for mutual funds with similar investment objectives as the fund. 2 Holdings are disclosed as of June 30, 2003 and are subject to change. 2 During the period, we added to the fund's electric utilities holdings. We bought bonds issued by Portland General, PacifiCorp, and Southwest Gas (0.1%, 0.4%, and 0.3% of net assets, respectively). Utility bond prices were hit hard after the power supply crisis in California in 2001 and again after the Enron scandal in 2002. These particular bonds offered high yields and relatively short maturities. We also added exposure in the education sector, buying college bonds that tend to benefit from strong enrollment trends and the ability to raise prices even in a lackluster economy. We reduced our investment in hospital bonds that had outperformed the market. Disappointments included some nursing home bonds, which suffered from cutbacks in Medicare reimbursements, and some airlines, such as United Airlines (0.1% of net assets), that declared bankruptcy during the period. OUTLOOK IS FAVORABLE FOR HIGH YIELD SECTOR We are optimistic about the prospects for the high-yield municipal market. At mid-year, municipal bond prices looked attractive relative to Treasuries. Within the municipal bond sector, high-yield issues looked particularly cheap. During the spring, we were encouraged to see yields on high-yield bonds begin to stabilize. Going forward, we expect a slow economic recovery, stable to higher interest rates and tame inflation to benefit high-yield bonds. We will continue to emphasize diversification across sectors, individual securities and states, and expect to focus on issues with intermediate maturities. /s/ Maureen G. Newman Maureen G. Newman has managed the Liberty High Yield Municipal Fund since November 1998. Tax-exempt investing offers current tax-free income, but it also involves certain risks. Investing in high-yield bonds involves greater risk of loss due to credit deterioration than 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 manager seeks to identify opportunities and attempts to react quickly to market changes. QUALITY BREAKDOWN AS OF 6/30/03 (%) [bar chart data]: AAA 20.2 AA 2.1 A 11.2 BBB 15.4 BB 5.8 B 0.6 CCC 0.9 CC 0.1 Non-rated 37.8 Cash and equivalent 5.9 MATURITY BREAKDOWN AS OF 6/30/03 (%) [bar chart data]: 0-1 years 6.0 1-3 years 0.7 3-5 years 2.4 5-7 years 8.2 7-10 years 8.8 10-15 years 15.6 15-20 years 19.9 20-25 years 19.1 25 years and over 19.3 Quality and maturity breakdowns are calculated as a percentage of net assets. Ratings shown in the quality breakdown represent the highest rating assigned to a particular bond by one of the following nationally-recognized rating agencies: Standard & Poor's Corporation, Moody's Investors Service, Inc. or Fitch Investors Service, Inc. 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. 3 INVESTMENT PORTFOLIO June 30, 2003 MUNICIPAL BONDS - 92.2% PAR VALUE - ------------------------------------------------------- EDUCATION - 4.3% EDUCATION - 2.2% CA California Statewide Communities Development Authority, Crossroads School, Series 1998, 6.000% 08/01/28 $1,030,000 $ 1,087,000 San Francisco Art Institute, Series 2002, 7.375% 04/01/32 750,000 771,285 IL State Development Finance Authority, Latin School of Chicago Project, Series 1998, 5.650% 08/01/28 1,725,000 1,757,827 IL University of Illinois, Certificate of Participation, Utilities Infrastructure Projects, Series 2001 A, 5.500% 08/15/16 1,425,000 1,589,744 MA State Development Finance Agency, Western New England College, Series 2002, 6.125% 12/01/32 300,000 311,808 OH University of Cincinnati, Series 2003 C, 5.000% 06/01/21 1,000,000 1,064,320 WV State University, Series 2000 A: (a) 04/01/19 1,250,000 602,225 (a) 04/01/25 2,750,000 913,715 VT State Education & Health Buildings Agency, Vermont Law School Project, Series 2003 A, 5.500% 01/01/33 500,000 480,970 ------------ 8,578,894 ------------ STUDENT LOAN - 2.1% OH Student Loan Funding Corporation, Series 1992 B, 6.750% 01/01/07 1,075,000 1,077,472 NE Nebhelp, Inc., Series 1993 A-6, 6.450% 06/01/18 4,000,000 4,497,160 NM State Educational Assistance Foundation, Series 1996 A-2, 6.650% 11/01/25 1,955,000 1,961,491 TX Brazos Higher Educational Facilities Authority, Series 1993 C-2, 5.875% 06/01/04 390,000 390,047 ------------ 7,926,170 ------------ PAR VALUE - ------------------------------------------------------- HEALTHCARE - 22.4% CONGREGATE CARE RETIREMENT - 6.9% CA La Verne, Brethren Hillcrest Homes, Series 2003 B, 6.625% 02/15/25 $ 685,000 $ 691,562 CA Statewide Community Development Authority, Eskaton Village - Grass Valley, Series 2000, 8.250% 11/15/31 1,750,000 1,910,860 CT State Development Authority, The Elim Park Baptist, Inc. Project, Series 2003, 5.850% 12/01/33 660,000 677,259 FL Capital Projects Finance Authority, Glenridge on Palmer Ranch, Series 2002 A, 8.000% 06/01/32 1,250,000 1,272,238 FL Orange County Health Facilities Authority, Orlando Lutheran Towers, Inc., Series 1996, 8.625% 07/01/20 1,500,000 1,578,060 HI State Department of Budget & Finance, Kahala Nui Project, Series 2003 A: 7.875% 11/15/23 250,000 253,988 8.000% 11/15/23 1,000,000 1,017,410 IL State Health Facilities Authority, Lutheran Senior Ministries, Series 2001, 7.375% 08/15/31 550,000 566,555 MA Boston Industrial Development Financing Authority, Springhouse, Inc., Series 1998, 5.875% 07/01/20 235,000 234,037 MA State Development Finance Agency, Loomis Community Project: Series 1999 A, 5.625% 07/01/15 650,000 637,540 Series 2002 A, 6.900% 03/01/32 220,000 228,866 MO State Health & Educational Facilities Authority, Lutheran Senior Services, Series 1997, 5.750% 02/01/17 2,000,000 2,070,060 See notes to investment portfolio. 4 INVESTMENT PORTFOLIO (CONTINUED) June 30, 2003 MUNICIPAL BONDS (CONTINUED) PAR VALUE - ------------------------------------------------------- HEALTHCARE (CONTINUED) CONGREGATE CARE RETIREMENT (CONTINUED) NH State Higher Educational & Health Facilities Authority, Rivermead at Peterborough, Series 1998: 5.625% 07/01/18 $ 500,000 $ 471,870 5.750% 07/01/28 1,665,000 1,507,541 NJ State Economic Development Authority: Seabrook Village, Inc., Series 2000 A, 8.250% 11/15/30 1,125,000 1,235,250 Winchester Gardens, Series 1996 A, 8.625% 11/01/25 2,000,000 2,134,480 PA State Authority for Industrial Development, Baptist Home of Philadelphia, Series 1998, 5.500% 11/15/18 530,000 470,513 PA Chartiers Valley Industrial & Commercial Development Authority, Asbury Health Center, Series 1999, 6.375% 12/01/24 750,000 745,897 PA Lancaster Industrial Development Authority, Garden Spot Village Project, Series 2000 A, 7.625% 05/01/31 825,000 878,212 TN Metropolitan Government, Nashville and Davidson County, Blakeford at Green Hills, Series 1998, 5.650% 07/01/24 1,825,000 1,644,088 TX Abilene Health Facilities Development Corp., Sears Methodist Retirement Obligation Group: Series 1998 A, 5.900% 11/15/25 1,350,000 1,242,742 Series 2003 A, 7.000% 11/15/33 300,000 301,317 WI State Health & Educational Facilities Authority: Attic Angel Obligated Group, Series 1998, 5.750% 11/15/27 2,125,000 1,923,486 Clement Manor, Series 1998, 5.750% 08/15/24 2,200,000 2,006,224 Lutheran Program for the Aging, Series 1998, 5.700% 03/01/28 750,000 680,782 ------------ 26,380,837 ------------ PAR VALUE - ------------------------------------------------------- HEALTH SERVICES - 0.6% IL State Health Facilities Authority, Midwest Physicians Group Ltd., Series 1998, 5.500% 11/15/19 $ 90,000 $ 72,267 MA State Development Finance Agency, Boston Biomedical Research Institute, Series 1999: 5.650% 02/01/19 370,000 359,170 5.750% 02/01/29 550,000 533,495 MA State Health & Educational Facilities Authority, Civic Investments, Inc., Series 2002 A, 9.000% 12/15/15 1,250,000 1,382,775 ------------ 2,347,707 ------------ HOSPITALS - 9.1% AZ Health Facilities Authority, Phoenix Memorial Hospital, Series 1991, 8.125% 06/01/12 (b) 2,167,774 476,910 CA State Health Facilities Financing Authority Revenue, Stanford Hospital & Clinics Project, Series 2003 A, 5.000% 11/15/23 (c) 1,500,000 1,502,325 CA Whittier Health Facilities Revenue, Presbyterian Intercommunity Hospital, Series 2002, 5.750% 06/01/31 1,000,000 1,036,900 CO La Junta, Arkansas Valley Regional Medical Center Project, Series 1999, 6.100% 04/01/24 900,000 897,165 CO State Health Care Facilities Authority: National Jewish Medical & Research Center, Series 1998, 5.375% 01/01/23 1,080,000 1,064,610 Parkview Medical Center, Inc. Project, Series 2001, 6.600% 09/01/25 300,000 318,375 FL Hillsborough County Industrial Development Authority, Tampa General Hospital Project, Series 2003 B, 5.250% 10/01/34 1,000,000 971,220 See notes to investment portfolio. 5 INVESTMENT PORTFOLIO (CONTINUED) June 30, 2003 MUNICIPAL BONDS (CONTINUED) PAR VALUE - ------------------------------------------------------- HEALTHCARE (CONTINUED) HOSPITALS (CONTINUED) FL Orange County Health Facilities Authority, Orlando Regional Healthcare System: Series 1999 E, 6.000% 10/01/26 $ 875,000 $ 919,179 Series 2002, 5.750% 12/01/32 350,000 365,502 FL West Orange Healthcare District, Series 2001 A, 5.650% 02/01/22 1,450,000 1,493,341 IL Southwestern Illinois Development Authority, Anderson Hospital, Series 1999: 5.500% 08/15/20 500,000 499,305 5.625% 08/15/29 250,000 246,115 IL State Health Facilities Authority, Thorek Hospital & Medical Center, Series 1998, 5.375% 08/15/28 500,000 448,420 MA State Health & Educational Facilities Authority, Milford-Whitinsville Hospital, Series 2002 D, 6.350% 07/15/32 500,000 521,390 MD State Health & Higher Educational Facilities Authority, Adventist HealthCare, Series 2003 A: 5.000% 01/01/16 400,000 399,264 5.750% 01/01/25 600,000 612,324 MI Dickinson County, Series 1999, 5.800% 11/01/24 1,000,000 988,340 MI Flint Hospital Building Authority, Hurley Medical Center: Series 1998 A, 5.375% 07/01/20 465,000 410,683 Series 1998 B, 5.375% 07/01/28 1,050,000 873,600 MN St. Paul Housing & Redevelopment Authority, HealthEast Project, Series 1993 B, 6.625% 11/01/17 250,000 229,507 PAR VALUE - ------------------------------------------------------- MN Washington Housing & Redevelopment Authority, HealthEast Project, Series 1998, 5.250% 11/15/12 $1,250,000 $ 1,067,462 MS Mississippi Business Finance Corporation, Rush Medical Foundation, Inc., Series 1998, 5.625% 07/01/23 725,000 635,687 NC State Medical Care Commission, Stanly Memorial Hospital Project, Series 1999, 6.375% 10/01/29 1,000,000 1,086,470 NH State Higher Educational & Health Facilities Authority, Littleton Hospital Assoc., Inc.: Series 1998 A: 5.900% 05/01/18 500,000 423,850 6.000% 05/01/28 1,000,000 810,420 Series 1998 B, 5.900% 05/01/28 675,000 536,497 Catholic Medical Center, Series 2002 A, 6.125% 07/01/32 400,000 413,424 NJ State Health Care Facilities Financing Authority, Pascack Valley Hospital, Series 2003, 6.500% 07/01/23 1,000,000 1,006,260 NV Henderson Health Care Facilities Revenue, Catholic Healthcare West, Series 1998, 5.125% 07/01/28 540,000 483,052 NY State Dormitory Authority Revenue, Memorial Sloan- Kettering Cancer Center, Series 2001-1: (a) 07/01/25 3,600,000 1,217,088 (a) 07/01/26 4,400,000 1,412,840 OH Belmont County Health Systems Revenue, Ohio Valley Medical Center, Inc., Series 1998, 5.700% 01/01/13 1,500,000 1,334,850 OH Highland County Joint Township Hospital District, Series 1999, 6.750% 12/01/29 1,925,000 1,903,632 See notes to investment portfolio. 6 INVESTMENT PORTFOLIO (CONTINUED) June 30, 2003 MUNICIPAL BONDS (CONTINUED) PAR VALUE - ------------------------------------------------------- HEALTHCARE (CONTINUED) HOSPITALS (CONTINUED) OH Miami County, Upper Valley Medical Center, Inc.: Series 1996 A, 6.250% 05/15/16 $ 500,000 $ 523,715 Series 1996 C, 6.250% 05/15/13 285,000 301,704 Series 1996 D, 6.375% 05/15/26 1,015,000 1,047,206 OH Sandusky County, Memorial Hospital, Series 1998, 5.150% 01/01/10 250,000 249,180 PA Allegheny County Hospital Development Authority, Ohio Valley General Hospital, Series 1997, 5.450% 01/01/28 1,550,000 1,471,353 PA Pottsville Hospital Authority, Pottsville Hospital & Warne Clinic, Series 1998, 5.625% 07/01/24 800,000 704,456 TX Knox County Health, Educational & Housing Facilities Board, Revenue, East Tennessee Hospital, Series 2003 B, 5.750% 07/01/33 250,000 257,277 TX Lufkin Health Facilities Development Corp., Memorial Health Systems of East Texas, Series 1998, 5.700% 02/15/28 750,000 605,700 TX Richardson Hospital Authority, Baylor Richardson Medical Center, Series 1998, 5.625% 12/01/28 450,000 458,023 TX Tyler Health Facilities Development Corp., Mother Frances Hospital, Series 2001, 6.000% 07/01/31 750,000 772,590 WA State Health Care Facilities Authority, Kadlec Medical Center, Series 2001, 5.875% 12/01/21 600,000 647,214 WI State Health & Educational Facilities Authority, Wheaton Franciscan Services, Series 2002, 5.750% 08/15/30 1,050,000 1,091,611 ------------ 34,736,036 ------------ PAR VALUE - ------------------------------------------------------- INTERMEDIATE CARE FACILITIES - 1.5% IL State Development Finance Authority, Hoosier Care, Inc. Project, Series 1999 A, 7.125% 06/01/34 $1,475,000 $ 1,253,558 IN State Health Facilities Financing Authority, Hoosier Care, Inc. Project, Series 1999 A, 7.125% 06/01/34 1,215,000 1,032,592 LA State Public Facilities Authority Revenue, Progressive Healthcare Providers, Inc., Series 1998, 6.375% 10/01/28 2,000,000 1,507,800 PA State Economic Development Financing Authority, Northwestern Human Services, Series 1998 A, 5.250% 06/01/14 2,150,000 1,848,871 ------------ 5,642,821 ------------ NURSING HOMES - 4.3% AK Juneau, St. Ann's Care Center Project, Series 1999, 6.875% 12/01/25 1,750,000 1,793,995 CO State Health Facilities Authority, Volunteers of America Care Facilities, Inc.: Series 1998 A, 5.750% 07/01/20 700,000 634,676 Series 1999 A: 5.750% 07/01/10 990,000 974,655 6.000% 07/01/29 520,000 468,276 DE State Economic Development Authority, Churchman's Village Project, Series 1991, 10.000% 03/01/21 680,000 733,740 DE Sussex County, State Healthcare Facilities Project, Series 1999, 7.600% 01/01/24 955,000 836,523 IA State Finance Authority, Care Initiatives Project: Series 1996, 9.250% 07/01/25 500,000 602,950 Series 1998 B: 5.500% 07/01/08 565,000 564,316 5.750% 07/01/18 600,000 539,844 5.750% 07/01/28 1,475,000 1,270,580 See notes to investment portfolio. 7 INVESTMENT PORTFOLIO (CONTINUED) June 30, 2003 MUNICIPAL BONDS (CONTINUED) PAR VALUE - ------------------------------------------------------- HEALTHCARE (CONTINUED) NURSING HOMES (CONTINUED) IN State Health Facilities Financing Authority, Metro Health Indiana, Inc. Project, Series 1998, 6.400% 12/01/33 (b) $2,500,000 $ 325,000 MA State Development Finance Agency, Alliance Health Care Facilities, Series 1999 A, 7.100% 07/01/32 2,250,000 2,260,688 MA State Industrial Finance Agency, GF/Mass. Inc., Series 1994, 8.300% 07/01/23 910,000 932,004 MI Cheboygan, Metro Health Foundation, Inc. Project, Series 1993, 11.000% 11/01/22 (b) 600,000 204,000 MN Carlton, Inter-Faith Social Services, Inc. Project, Series 2000: 7.500% 04/01/19 250,000 261,737 7.750% 04/01/29 275,000 289,795 MN Sartell, Foundation for Healthcare Project, Series 1999 A, 6.625% 09/01/29 1,500,000 1,448,175 NJ State Economic Development Authority, Voorhees Geriatric/ Medical Services, Series 1990 A, 10.500% 05/01/04 15,000 15,038 PA Chester County Industrial Development Authority, RHA/PA Nursing Home, Series 2002, 8.500% 05/01/32 400,000 392,172 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% 12/01/10 145,000 137,965 PA Luzerne County Industrial Development Authority, Millville Nursing Center Project, Series 1990, 10.500% 12/01/12 185,000 175,985 PAR VALUE - ------------------------------------------------------- TX Kirbyville Health Facilities Development Corp., Heartway III: Series 1997 A, 10.000% 03/20/18 (d) $ 539,213 $ 431,370 Series 1997 B, 6.000% 03/20/04 100,000 5,000 WA Kitsap County Consolidated Housing Authority, Martha and Mary Health Services, Series 1996, 7.100% 02/20/36 1,000,000 1,212,960 ------------ 16,541,444 ------------ - ------------------------------------------------------- HOUSING - 8.8% ASSISTED LIVING/SENIOR - 3.9% CA Abag Finance Authority for Nonprofit Corps., Eskaton Gold River Lodge, Series 1998: 6.375% 11/15/15 710,000 650,538 6.375% 11/15/28 550,000 467,841 DE Kent County Assisted Living Facilities, Heritage at Dover Project, Series 1999, 7.625% 01/01/30 2,445,000 2,127,884 GA Columbus Housing Authority, The Gardens at Calvary Project, Series 1999, 7.000% 11/15/29 2,000,000 1,631,320 IL State Development Finance Authority, Care Institute, Inc., Series 1995, 8.250% 06/01/25 1,915,000 1,911,630 MN Roseville Elderly Care Facility, Care Institute, Inc. Project, Series 1993, 7.750% 11/01/23 (d) 1,270,000 873,430 NC State Medical Care Commission, DePaul Community Facilities Project, Series 1999, 7.625% 11/01/29 1,990,000 2,066,038 NY Glen Cove Housing Authority, The Mayfair at Glen Cove LLC, Series 1996, 8.250% 10/01/26 1,965,000 2,030,159 NY Huntington Housing Authority, Gurwin Jewish Senior Center, Series 1999: 5.875% 05/01/19 1,900,000 1,727,993 6.000% 05/01/29 625,000 549,856 See notes to investment portfolio. 8 INVESTMENT PORTFOLIO (CONTINUED) June 30, 2003 MUNICIPAL BONDS (CONTINUED) PAR VALUE - ------------------------------------------------------- HOUSING (CONTINUED) ASSISTED LIVING/SENIOR (CONTINUED) TX Bell County Health Facility Development Corp., Care Institute, Inc., Series 1994, 9.000% 11/01/24 $ 960,000 $ 983,866 ------------ 15,020,555 ------------ MULTI-FAMILY - 4.3% CO State Health Facilities Authority, Birchwood Manor Project, Series 1991 A, 7.250% 04/01/11 485,000 487,027 DE Wilmington, Electra Arms Senior Association Project, Series 1994 A, 6.250% 06/01/28 945,000 777,064 FL Broward County Housing Finance Authority, Chaves Lake Apartment Project, Series 2000 A, 7.500% 07/01/40 1,250,000 1,274,513 FL Clay County Housing Finance Authority, Madison Commons Apartments Project, Series 2000 A, 7.450% 07/01/40 1,245,000 1,269,464 GA Clayton County Housing Authority, Magnolia Park Apartments Project, Series 1999 A, 6.250% 06/01/30 1,750,000 1,393,823 IL State Development Finance Authority, Catholic Charities Housing Development Corp., Series 1993 C, 5.950% 01/01/09 1,400,000 1,444,324 IN New Castle, Raintree Apartments, Series 1988 B, (a) 03/01/18 30,625,000 76,562 MN Lakeville Multi-Family Revenue, Series 1989, 9.875% 02/01/20 700,000 700,889 MN Washington County Housing & Redevelopment Authority, Cottages of Aspen Project, Series 1992, 9.250% 06/01/22 465,000 477,992 MN White Bear Lake Multi-Family Revenue, Series 1989, 9.750% 07/15/19 750,000 757,208 PAR VALUE - ------------------------------------------------------- NC Raleigh Multi-Family Revenue, Cedar Point Apartments, Series 1999 A: 5.100% 11/01/10 $ 250,000 $ 130,622 5.875% 11/01/24 200,000 102,824 OH Lake County, North Madison Properties Ltd. Project, Series 1993, 8.819% 09/01/11 500,000 495,875 Pass Through Certificates, Series 1993, 8.500% 12/01/16 455,481 453,732 SC State Housing Finance & Development Authority, Westbridge Apartments Project, Series 1990, 9.500% 09/01/20 579,000 578,821 TN Franklin Industrial Development Board, Landings Apartment Project, Series 1996 B, 8.750% 04/01/27 1,635,000 1,709,752 TX El Paso County Housing Finance Corp., American Village Communities: Series 2000 C, 8.000% 12/01/32 590,000 607,210 Series 2000 D, 10.000% 12/01/32 695,000 720,555 TX Galveston, Greystone Driftwood LP, Series 1994 A, 8.000% 08/01/23 1,000,000 1,040,760 TX State Affordable Housing Corp., NHT/GTEX LLC Project, Series 2001 C, 10.000% 10/01/31 1,570,000 1,557,691 VA Alexandria Redevelopment & Housing Authority, Article 1 Associates LLP, Series 1990 A, 10.000% 01/01/21 500,000 429,060 ------------ 16,485,768 ------------ SINGLE FAMILY - 0.6% CO Housing and Finance Authority: Series 1995 D-1, 7.375% 06/01/26 500,000 513,980 Series 1997 A-2, 7.250% 05/01/27 215,000 219,835 IA State Housing Finance Authority, Series 1984 A, (a) 09/01/16 1,200,000 284,448 See notes to investment portfolio. 9 INVESTMENT PORTFOLIO (CONTINUED) June 30, 2003 MUNICIPAL BONDS (CONTINUED) PAR VALUE - ------------------------------------------------------- HOUSING (CONTINUED) SINGLE FAMILY (CONTINUED) ID State Housing Agency, Series 1990 B, 7.500% 07/01/24 $ 685,000 $ 690,925 PA State Housing Finance Authority, Series 1994-42, 6.850% 04/01/25 710,000 735,879 UT State Housing Finance Agency, Series 1991 C-3, 7.550% 07/01/23 20,000 20,004 ------------ 2,465,071 ------------ - ------------------------------------------------------- INDUSTRIAL - 7.1% FOOD PRODUCTS - 2.2% IN Hammond, American Maize Products Co. Project, Series 1994 A, 8.000% 12/01/24 3,760,000 4,095,881 LA Port Lake Charles, Continental Grain Co., Project, Series 1993, 7.500% 07/01/13 2,000,000 2,059,760 MI State Strategic Fund, Michigan Sugar Co.: Carollton Project, Series 1998 C, 6.550% 11/01/25 1,500,000 1,269,960 Sebewaing Project, Series 1998 A, 6.250% 11/01/15 1,000,000 919,830 ------------ 8,345,431 ------------ FOREST PRODUCTS - 2.5% GA Rockdale County Development Authority, Solid Waste Disposal, Visy Paper, Inc., Series 1993, 7.500% 01/01/26 2,800,000 2,841,076 LA Beauregard Parish, Boise Cascade Project, Series 2002, 6.800% 02/01/27 1,750,000 1,773,187 LA De Soto Parish Environmental Improvement Revenue, International Paper Company, Series 1994 A, 7.700% 11/01/18 1,500,000 1,619,565 MI Delta County Economic Development Corp., Mead Westvaco Escambia Project, Series 2002 B, 6.450% 04/01/23 750,000 785,753 PAR VALUE - ------------------------------------------------------- MS Lowndes County, Weyerhaeuser Corp., Series 1992 A, 6.800% 04/01/22 $1,995,000 $ 2,434,040 VA Bedford County Industrial Development Revenue, Nekoosa Packaging Corp. Project, Series 1998, 5.600% 12/01/25 400,000 309,944 ------------ 9,763,565 ------------ MANUFACTURING - 0.9% IL Will-Kankakee Regional Development Authority, Flanders Corp./Precisionaire, Series 1997, 6.500% 12/15/17 850,000 844,687 KS Wichita Airport Authority, Cessna Citation Service Center, Series 2002 A, 6.250% 06/15/32 1,875,000 2,006,156 MN Brooklyn Park Industrial Development Revenue, TL Systems Corp., Series 1991, 10.000% 09/01/16 455,000 468,090 ------------ 3,318,933 ------------ METALS & MINING - 0.3% MD Baltimore County Pollution Control, Bethlehem Steel Corp., Project, Series 1994 B, 7.500% 06/01/15 (b) 1,000,000 20,000 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 Steel, Series 1999 A: 6.375% 04/01/04 (b) 160,000 112,002 7.000% 04/01/14 (b) 930,000 651,000 ------------ 1,133,002 ------------ OIL & GAS - 1.2% NV Clark County Industrial Development Revenue, Southwest Gas Corp. Project, Series 2003 E, 5.800% 03/01/38 1,000,000 1,036,980 TX Gulf Coast Industrial Development Authority, Citgo Petroleum Project, Series 1998, 8.000% 04/01/28 875,000 883,041 See notes to investment portfolio. 10 INVESTMENT PORTFOLIO (CONTINUED) June 30, 2003 MUNICIPAL BONDS (CONTINUED) PAR VALUE - ------------------------------------------------------- INDUSTRIAL (CONTINUED) OIL & GAS (CONTINUED) TX Texas City Industrial Development Corp., Arco Pipe Line Co. Project, Series 1990, 7.375% 10/01/20 $2,000,000 $ 2,657,220 VI Government of United States Virgin Islands, Hovensa Coker Project, Series 2002, 6.500% 07/01/21 125,000 127,617 ------------ 4,704,858 ------------ - ------------------------------------------------------- OTHER - 8.1% OTHER - 1.2% CA Golden State Tobacco Securitization Authority, Series 2003 A-1, 6.750% 06/01/39 1,460,000 1,318,278 LA Tobacco Settlement Financing Corp., Series 2001 B, 5.875% 05/15/39 1,000,000 804,340 NJ State Economic Development Authority, Motor Vehicle Commission, Series 2003 A, (a) 07/01/14 2,500,000 1,638,000 SC Tobacco Settlement Revenue Management Authority, Series 2001 B, 6.375% 05/15/28 1,000,000 876,450 ------------ 4,637,068 ------------ REFUNDED/ESCROWED (E) - 6.9% CO Adams County, Series 1991 B: 11.250% 09/01/11 (f) 905,000 1,384,026 11.250% 09/01/12 1,440,000 2,342,678 CO State Department of Transportation Revenue: Series 2001 832R-B, 8.920% 06/15/15 2,000,000 2,732,380 CT State Development Authority, New Haven Residuals, Series 1996, 8.250% 12/01/06 580,000 658,091 FL Tampa Bay, Utility Systems Revenue, Series 1999, 10.400% 10/01/23 (g) 7,500,000 10,456,125 GA Forsyth County Hospital Authority, Baptist Hospital Worth County, Series 1998, 6.000% 10/01/08 880,000 973,078 PAR VALUE - ------------------------------------------------------- GA State Municipal Electric Authority, Series 1991 V, 6.600% 01/01/18 $ 690,000 $ 883,138 MA State Health & Educational Facilities Authority, CIL Realty of Massachusetts, Inc., Series 1993, 8.100% 07/01/18 535,000 545,700 NC Eastern Municipal Power Agency, Series 1991 A, 6.500% 01/01/18 3,320,000 4,290,768 NC Lincoln County, Lincoln County Hospital Project, Series 1991, 9.000% 05/01/07 160,000 186,938 TN Shelby County Health Educational & Housing Facilities Board, Open Arms Care Corp., Series 1992 A, 9.750% 08/01/19 600,000 782,496 WV State Hospital Finance Authority, Charleston Medical Center, Series 2000 A, 6.750% 09/01/30 925,000 1,169,755 ------------ 26,405,173 ------------ - ------------------------------------------------------- OTHER REVENUE - 1.1% HOTEL - 0.5% PA Philadelphia Authority for Industrial Development, Starwood Hotels & Resorts, Series 1997 A, 6.500% 10/01/27 2,000,000 2,022,800 ------------ RECREATION - 0.6% CT Mohegan Indians Tribe, Gaming Authority, Series 2001, 6.250% 01/01/31 475,000 505,234 FL Capital Trust Agency, Seminole Tribe Convention Center, Series 2002 A, 10.000% 10/01/33 1,250,000 1,427,826 NM Red River Sports Facilities Revenue, Red River Ski Area Project, Series 1998, 6.450% 06/01/07 170,000 172,915 ------------ 2,105,975 See notes to investment portfolio. 11 INVESTMENT PORTFOLIO (CONTINUED) June 30, 2003 MUNICIPAL BONDS (CONTINUED) PAR VALUE - ------------------------------------------------------- RESOURCE RECOVERY - 1.5% DISPOSAL - 0.6% IL Development Finance Authority, Waste Management, Inc. Project, Series 1997, 5.050% 01/01/10 $ 250,000 $ 257,608 MA State Development Finance Agency, Peabody Monofill Associates, Inc. Project, Series 1994, 9.000% 09/01/05 460,000 481,556 UT Carbon County, Solid Waste Disposal Revenue, Laidlaw Environmental, Series 1997 A, 7.450% 07/01/17 1,500,000 1,455,720 ------------ 2,194,884 ------------ RESOURCE RECOVERY - 0.9% MA State Development Finance Agency, Ogden Haverhill Project: Series 1998 A, 5.500% 12/01/13 (b) 500,000 486,360 Series 1999 A, 6.700% 12/01/14 (b) 750,000 788,933 PA Delaware County Industrial Development Authority, American Ref-Fuel Co., Series 1997 A, 6.200% 07/01/19 2,225,000 2,292,662 ------------ 3,567,955 ------------ - ------------------------------------------------------- TAX-BACKED - 13.7% LOCAL APPROPRIATED - 1.1% MO St. Louis Industrial Development Authority, St. Louis Convention Center Hotel, Series 2000, (a) 07/15/18 3,000,000 1,536,090 PA Philadelphia Municipal Authority, Series 1993 D, 6.250% 07/15/13 2,500,000 2,554,550 ------------ 4,090,640 ------------ LOCAL GENERAL OBLIGATIONS - 3.1% CA Empire Union School District, Series 1987-1 A, (a) 10/01/21 1,665,000 685,680 CA Los Angeles Unified School District: Series 1997 E, 5.125% 01/01/27 3,800,000 4,014,548 Series 2002, 5.750% 07/01/16 800,000 968,064 PAR VALUE - ------------------------------------------------------- CA Modesto High School District, Series 2002 A, (a) 08/01/19 $2,650,000 $ 1,249,263 NY New York City: Series 1995 B, 7.250% 08/15/07 1,000,000 1,180,300 Series 2003 J, 5.500% 06/01/18 1,500,000 1,604,550 TX Dallas County Flood Control District, Series 2002, 7.250% 04/01/32 1,000,000 1,026,880 WA Clark County School District #37 Vancouver, Series 2001B, (a) 12/01/18 2,500,000 1,228,750 ------------ 11,958,035 ------------ SPECIAL NON-PROPERTY TAX - 2.6% CO State Department of Transportation Revenue, Series 2001 832R-A, 8.920% 06/15/14 3,000,000 3,968,040 FL Northern Palm Beach County Improvement District, Series 1999: 5.900% 08/01/19 500,000 558,740 6.000% 08/01/29 750,000 844,388 MO St. Louis County Industrial Development Authority, Kiel Center Arena, Series 1992, 7.875% 12/01/24 3,000,000 3,105,540 PR Commonwealth Highway & Transportation Authority, Series 2003 AA, 5.500% 07/01/18 1,225,000 1,455,275 ------------ 9,931,983 ------------ SPECIAL PROPERTY TAX - 3.3% CA Carson Improvement Board Act 1915, Series 1992, 7.375% 09/02/22 160,000 163,597 CA Huntington Beach Community Facilities District, Grand Coast Resort, Series 2000-1, 6.450% 09/01/31 1,250,000 1,296,050 CA Orange County Community Facilities District, Ladera Ranch: Series 1999 A, 6.500% 08/15/21 1,000,000 1,062,000 Series 2003 A, 5.550% 08/15/33 1,000,000 979,870 See notes to investment portfolio. 12 INVESTMENT PORTFOLIO (CONTINUED) June 30, 2003 MUNICIPAL BONDS (CONTINUED) PAR VALUE - ------------------------------------------------------- TAX-BACKED (CONTINUED) SPECIAL PROPERTY TAX (CONTINUED) CA Pleasanton Joint Powers Financing Authority, Series 1993 B, 6.750% 09/02/17 $1,740,000 $ 1,785,379 FL Celebration Community Development District, Series 2003A, 6.400% 05/01/34 1,000,000 1,022,510 FL Colonial Country Club Community Development District, Series 2003, 6.400% 05/01/33 750,000 753,863 FL Double Branch Community Development District, Series 2002 A, 6.700% 05/01/34 700,000 717,696 FL Heritage Palms Community Development District, Series 1999, 6.250% 11/01/04 585,000 593,564 FL Lexington Oaks Community Development District: Series 1998 A, 6.125% 05/01/19 260,000 264,888 Series 1998 B, 5.500% 05/01/05 135,000 136,226 Series 2000 A: 7.200% 05/01/30 685,000 725,038 6.700% 05/01/33 250,000 260,878 Series 2000 B, 6.700% 05/01/07 50,000 52,163 FL Orlando, Conroy Road Interchange Project, Series 1998 A: 5.500% 05/01/10 325,000 334,032 5.800% 05/01/26 600,000 605,856 FL Stoneybrook Community Development District: Series 1998 A, 6.100% 05/01/19 805,000 820,561 Series 1998 B, 5.700% 05/01/08 230,000 232,985 MI Pontiac Finance Authority, Development Area No. 3, Series 2002, 6.375% 06/01/31 1,000,000 1,013,200 ------------ 12,820,356 ------------ PAR VALUE - ------------------------------------------------------- STATE APPROPRIATED - 0.6% NY Triborough Bridge & Tunnel Authority, Javits Convention Center Project, Series 1990 E, 7.250% 01/01/10 $2,000,000 $ 2,357,280 ------------ STATE GENERAL OBLIGATIONS - 3.0% CA State, Series 2003: 5.250% 02/01/18 2,000,000 2,170,260 5.250% 02/01/20 (c) 2,000,000 2,139,980 MA Massachusetts Bay Transportation Authority, Series 1992 B, 6.200% 03/01/16 5,825,000 7,260,105 ------------ 11,570,345 ------------ - ------------------------------------------------------- TRANSPORTATION - 7.9% AIR TRANSPORTATION - 2.8% CA Los Angeles Regional Airports Improvement Corp., American Airlines, Inc., Series 2002 C, 7.500% 12/01/24 500,000 408,940 FL Capital Trust Agency, Air Cargo Orlando Project, Series 2003, 6.750% 01/01/32 650,000 625,326 IL Chicago O'Hare International Airport, United Airlines, Inc., Series 2000 A, 6.750% 11/01/11 (b) 1,600,000 340,576 IN Indianapolis Airport Authority, Federal Express Corp. Project, Series 1994, 7.100% 01/15/17 1,000,000 1,062,930 KY Kenton County Airport Board, Delta Airlines, Inc. Project, Series 1992, 7.500% 02/01/20 500,000 427,100 MN Minneapolis & St. Paul Metropolitan Airports Commission, Northwest Airlines Project: Series 2001 A, 7.000% 04/01/25 825,000 674,528 Series 2001 B, 6.500% 04/01/25 500,000 432,660 NC Charlotte, US Airway, Inc.: Series 1998, 5.600% 07/01/27 500,000 364,615 Series 2000, 7.750% 02/01/28 1,250,000 996,875 See notes to investment portfolio. 13 INVESTMENT PORTFOLIO (CONTINUED) June 30, 2003 MUNICIPAL BONDS (CONTINUED) PAR VALUE - ------------------------------------------------------- TRANSPORTATION (CONTINUED) AIR TRANSPORTATION (CONTINUED) NJ State Economic Development Authority, Continental Airlines, Inc. Project, Series 2003, 9.000% 06/01/33 $1,000,000 $ 1,018,150 PA Philadelphia Authority for Industrial Development, Aero Philadelphia, Series 1999: 5.250% 01/01/09 350,000 329,486 5.500% 01/01/24 1,000,000 802,230 TX Alliance Airport Authority, AMR Corp., Series 1991, 7.000% 12/01/11 2,070,000 1,342,850 TX Houston Industrial Development Corp., United Parcel Service, Series 2002, 6.000% 03/01/23 1,100,000 1,128,622 WA Port Seattle, Northwest Airlines, Inc. Project, Series 2001, 7.250% 04/01/30 925,000 769,341 ------------ 10,724,229 ------------ AIRPORT - 1.3% NC Charlotte Airport Revenue, Series 1999, 10.810% 04/20/19 (f) 4,000,000 5,018,200 ------------ PORTS - 1.7% WA Port of Seattle: Series 2000 A, 10.710% 02/01/10 1,250,000 1,662,775 Series 2000 B, 10.710% 02/01/11 3,750,000 5,010,675 ------------ 6,673,450 ------------ TOLL FACILITIES - 1.7% CO E-470 Public Highway Authority, Series 2000 B: (a) 09/01/18 4,000,000 1,994,640 (a) 09/01/35 17,500,000 1,670,900 CO Northwest Parkway Public Highway Authority, Series 2001 D, 7.125% 06/15/41 1,750,000 1,832,600 MA State Turnpike Authority, Series 1997 C (a) 01/01/20 2,000,000 932,120 ------------ 6,430,260 ------------ TRANSPORTATION - 0.4% NV State Department of Business & Industry, Las Vegas Monorail Project, Series 2000, 7.375% 01/01/40 1,750,000 1,591,957 ------------ PAR VALUE - ------------------------------------------------------- UTILITY - 17.3% INDEPENDENT POWER PRODUCERS - 4.8% MI Midland County Economic Development Corp., Series 2000 A, 6.875% 07/23/09 $1,650,000 $ 1,686,284 NY Port Authority of New York & New Jersey, KAIC Power Project, Series 1996, 6.750% 10/01/11 1,000,000 1,049,080 PA State Economic Development Financing Authority, Colver Project, Series 1994 D, 7.150% 12/01/18 1,650,000 1,715,290 PA State Economic Development Financing Authority, Northampton Generating: Series 1994 A, 6.500% 01/01/13 3,000,000 3,063,630 Series 1994 B, 6.750% 01/01/07 3,000,000 3,115,110 VA Pittsylvania County Industrial Development Authority, Multi-Trade of Pittsyvania, Series 1994 A: 7.450% 01/01/09 3,500,000 3,606,820 7.500% 01/01/14 500,000 512,435 7.550% 01/01/19 3,600,000 3,689,424 ------------ 18,438,073 ------------ INVESTOR OWNED - 3.6% AZ Maricopa County Pollution Control Corp., El Paso Electric Co. Project, Series 2002 A, 6.250% 05/01/37 1,000,000 1,014,090 IN Petersburg, Indiana Power & Light Co., Series 1991, 5.750% 08/01/21 1,000,000 988,580 LA Calcasieu Parish Industrial Development Board, Entergy Gulf States, Inc., Series 1999, 5.450% 07/01/10 500,000 504,280 LA West Feliciana Parish, Entergy Gulf States, Inc., Series 1999 B, 6.600% 09/01/28 250,000 255,603 MS State Business Finance Corp., Systems Energy Resources, Inc. Project, Series 1999, 5.900% 05/01/22 1,500,000 1,494,795 MT Forsyth Pollution Control Revenue, Portland General Electric Co., Series 1998 A, 5.200% 05/01/33 375,000 383,775 See notes to investment portfolio. 14 INVESTMENT PORTFOLIO (CONTINUED) June 30, 2003 MUNICIPAL BONDS (CONTINUED) PAR VALUE - ------------------------------------------------------- UTILITY (CONTINUED) INVESTOR OWNED (CONTINUED) NM Farmington Pollution Control Revenue, Tucson Electric Power Co., Series 1997 A, 6.950% 10/01/20 $2,000,000 $ 2,041,340 NV Humboldt County Pollution Control Revenue, Idaho Power Co. Project, Series 1984, 8.300% 12/01/14 1,000,000 1,057,890 PA Beaver County Industrial Development Authority, Toledo Edison Co. Project, Series 1995, 7.625% 05/01/20 2,000,000 2,151,920 TX Brazos River Authority, Texas Utilities Electric Co. Project, Series 2001, 5.750% 05/01/36 2,300,000 2,406,352 WY Converse County Pollution Control Revenue, PacifiCorp, Series 1988, 3.900% 01/01/14 1,500,000 1,493,730 ------------ 13,792,355 ------------ JOINT POWER AUTHORITY - 1.9% GA State Municipal Electric Authority, Series 1991 V, 6.600% 01/01/18 3,375,000 4,232,689 NC Eastern Municipal Power Agency: Series 1991 A, 6.500% 01/01/18 1,680,000 1,960,543 Series 2003 C, 5.375% 01/01/17 1,000,000 1,034,970 ------------ 7,228,202 ------------ MUNICIPAL ELECTRIC - 5.6% MN Western Municipal Power Agency, Series 2003 B, 5.000% 01/01/15 (c) 500,000 561,945 NY Long Island Power Authority: Series 1998-8 C, 5.000% 04/01/10 2,000,000 2,251,240 Series 2003 A, 5.000% 06/01/09 2,000,000 2,205,720 TX Lower Colorado River Authority, Series 1999 A, 5.500% 05/15/21 15,000,000 16,344,150 ------------ 21,363,055 ------------ PAR VALUE - ------------------------------------------------------- WATER & SEWER - 1.4% LA Louisiana Public Facilities Authority Revenue, Belmont Water, 9.000% 09/15/24 (d) $ 585,000 $ 409,500 MS Water System Revenue, V Lakes Utility District, Series 1994, 8.250% 07/15/24 400,000 392,328 NH State Industrial Development Authority, Pennichuck Water Works, Inc. Project, Series 1988, 7.500% 07/01/18 505,000 572,559 PA Dauphin County Industrial Development Authority, Dauphin Water Supply Co., Series 1992 A, 6.900% 06/01/24 3,200,000 4,084,768 ------------ 5,459,155 ------------ TOTAL MUNICIPAL BONDS (cost of $348,094,615) 353,772,522 ------------ MUNICIPAL PREFERRED BONDS - 1.0% - ------------------------------------------------------- HOUSING - 1.0% MULTI-FAMILY - 1.0% Charter Municipal Mortgage Acceptance Co.: 6.625% 06/30/09 (h) 2,000,000 2,194,640 7.600% 11/30/10 (h) 1,500,000 1,690,425 ------------ TOTAL MUNICIPAL PREFERRED BONDS (cost of $3,500,000) 3,885,065 ------------ PURCHASED PUT OPTION - 0.1% - ------------------------------------------------------- U.S. Treasury Notes, Strike Price $115.00, Expires 08/31/03 (cost of $439,912) 518,000 226,625 ------------ SHORT-TERM OBLIGATIONS - 6.1% SHARES - -------------------------------------------------------- MUTUAL FUND - 0.1% Federated Tax Free Obligations Fund, 300,000 300,000 VARIABLE RATE DEMAND NOTES (i) - 6.0% PAR AZ Phoenix Industrial Development Authority, Valley of the Sun YMCA Project, Series 2001, 1.050% 01/01/31 $ 1,400,000 1,400,000 See notes to investment portfolio. 15 INVESTMENT PORTFOLIO (CONTINUED) June 30, 2003 SHORT-TERM OBLIGATIONS (CONTINUED) PAR VALUE - ------------------------------------------------------- VARIABLE RATE DEMAND NOTES (h) (CONTINUED) FL Alachua County Health Facilities Authority, Oak Hammock University Project, Series 2002 A, 1.000% 10/01/32 $1,100,000 $ 1,100,000 IA State Finance Authority: Drake University Project, Series 2001, 1.050% 07/01/31 200,000 200,000 Village Court Associates, Series 1985, 1.000% 11/01/15 300,000 300,000 IA State Higher Education Loan Authority, Loras College Project, Series 2000, 1.000% 11/01/30 700,000 700,000 IA Woodbury County, Siouxland Medical Education Foundation, Series 1996, 1.050% 11/01/16 1,500,000 1,500,000 IL Quad Cities Regional Economic Development Authority, Two Rivers YMCA Project, Series 2002 1.050% 12/01/31 1,900,000 1,900,000 IL State Health Facilities Authority Revenue: Bromenn Healthcare Inc., Series 2002, 1.000% 08/15/32 800,000 800,000 OSF Healthcare System, Series 2002, 0.950% 11/15/27 2,100,000 2,100,000 IN State Health Facilities Financing Authority Revenue, Golden Years Homestead, Series 2002 A, 1.000% 06/01/25 100,000 100,000 MI State Strategic Funding, Detroit Symphony Orchestra, Series 2001 A, 1.000% 06/01/31 1,700,000 1,700,000 MN Minneapolis: Series 1995 B, 1.050% 12/01/05 700,000 700,000 Series 1996, 1.050% 12/01/06 500,000 500,000 Series 2000, 1.050% 12/01/18 400,000 400,252 PAR VALUE - ------------------------------------------------------- MN State Department of Revenue: Brooklyn Center, Brookdale Corp. II Project, Series 2001, 1.050% 12/01/14 $ 300,000 $ 300,000 Mankato, Bethany Lutheran College, Series 2000 B, 1.050% 11/01/15 400,000 400,000 MO State Health & Education Facilities Revenue: Rockhurst University, Series 2002, 1.000% 11/01/32 1,700,000 1,700,000 Washington University, Series 1996 C, 1.000% 09/01/30 300,000 300,000 MS Jackson County Pollution Control Agency, Chevron USA, Inc. Project, Series 1993, 0.900% 06/01/23 1,200,000 1,200,000 ND Ward County Health Care Facilities Revenue, Trinity Health, Series 2002 A, 1.050% 07/01/29 200,000 200,000 NM Farmington Pollution Control Revenue, Arizona Public Service Co.: Series 1994 A, 0.900% 05/01/24 300,000 300,000 Series 1994 B, 0.900% 09/01/24 800,000 800,000 NY New York City: Series 1993 A-4, 0.950% 08/01/22 700,000 700,000 Series 1993 A-9, 0.950% 08/01/17 500,000 500,000 Series 1993 A-10, 0.950% 08/01/16 2,200,000 2,200,000 WI State Health & Education Facilities Authority, ProHealth Care Inc., Series 2001 B, 1.050% 08/15/30 400,000 400,000 WY Uinta County Pollution Control Revenue, Chevron Corporation, Series 1992, 0.900% 12/01/22 500,000 500,000 ------------ 22,900,252 ------------ TOTAL SHORT-TERM OBLIGATIONS (cost of $23,200,252) 23,200,252 ------------ See notes to investment portfolio. 16 INVESTMENT PORTFOLIO (CONTINUED) June 30, 2003 VALUE - ------------------------------------------------------- TOTAL INVESTMENTS - 99.4% (cost of $375,234,779)(j) $381,084,464 ------------ OTHER ASSETS & LIABILITIES, NET - 0.6% 2,436,987 ------------ NET ASSETS - 100.0% $383,521,451 ============ (a) Zero coupon bond. (b) As of June 30, 2003, the Fund held securities of certain issuers that have filed for bankruptcy protection under Chapter 11, representing 1.0% of net assets. These issuers are in default of certain debt covenants. Income is not being accrued. (c) Security purchased on a delayed delivery basis. (d) This issuer is in default of certain debt covenants. Income is not being fully accrued. (e) 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. (f) These securities, or a portion thereof, with a total market value of $853,393 are being used to collateralized open futures contracts. (g) Variable rate security. the rate reported is the rate in effect at June 30, 2003. (h) 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 June 30, 2003, the value of these securities amounted to $3,885,065 or 1.0% of net assets. (i) Variable rate demand notes (VRDN) 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 credits or other credit support agreements from banks. The rates listed are as of June 30, 2003. (j) Cost for federal income tax purposes is $374,668,950. Long futures contracts open at June 30, 2003: PAR VALUE UNREALIZED COVERED BY EXPIRATION DEPRECIATION TYPE CONTRACTS MONTH AT 06/30/03 - -------------------------------------------------------- U.S. Treasury $2,600,000 Sept-03 $(32,230) Bonds Short futures contracts open at June 30, 2003: PAR VALUE UNREALIZED COVERED BY EXPIRATION APPRECIATION TYPE CONTRACTS MONTH AT 06/30/03 - --------------------------------------------------------- 10 Year U.S. $53,400,000 Sept-03 $222,480 Treasury Notes See notes to financial statements. 17 STATEMENT OF ASSETS AND LIABILITIES June 30, 2003 ASSETS: Investments, at cost $375,234,779 ------------ Investments, at value $381,084,464 Cash 84,663 Receivable for: Fund shares sold 1,932,561 Interest 6,226,969 Deferred Trustees' compensation plan 8,848 ------------ Total Assets 389,337,505 ------------ LIABILITIES: Payable for: Investments purchased on a delayed delivery basis 4,249,260 Fund shares repurchased 185,924 Futures variation margin 182,375 Distributions 723,651 Management fee 129,587 Administration fee 36,767 Transfer agent fee 82,884 Pricing and bookkeeping fees 3,393 Merger fee 37,424 Deferred Trustees' fees 8,848 Other liabilities 175,941 ------------ Total Liabilities 5,816,054 ------------ NET ASSETS $383,521,451 ============ COMPOSITION OF NET ASSETS: Paid-in capital $399,132,343 Overdistributed net investment income (646,929) Accumulated net realized loss (21,003,898) Net unrealized appreciation on: Investments 5,849,685 Futures contracts 190,250 ------------ NET ASSETS $383,521,451 ============ CLASS A: Net assets $ 78,335,083 Shares outstanding 6,965,797 ------------ Net asset value per share $ 11.25(a) ============ Maximum offering price per share ($11.25/0.9525) $ 11.81(b) ============ CLASS B: Net assets $ 51,292,214 Shares outstanding 4,560,549 ------------ Net asset value and offering price per share $ 11.25(a) ============ CLASS C: Net assets $ 9,109,962 Shares outstanding 810,019 ------------ Net asset value and offering price per share $ 11.25(a) ============ CLASS Z: Net assets $244,784,192 Shares outstanding 21,767,440 ------------ Net asset value, offering and redemption price per share $ 11.25 ============ (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 Year Ended June 30, 2003 INVESTMENT INCOME: Interest $21,922,411 ----------- EXPENSES: Expenses Allocated from Portfolio 41,043 Management fee 1,394,639 Administration fee 413,885 Distribution fee: Class B 391,994 Class C 39,097 Service fee: Class A 142,238 Class B 104,532 Class C 10,314 Pricing and bookkeeping fees 125,419 Transfer agent fee 602,922 Trustees' fee 15,074 Custody fee 20,946 Registration fee 221,866 Merger expense 3,053 Other expenses 79,407 ----------- Total Expenses 3,606,429 Fees waived by Distributor - Class C (8,155) Custody earnings credit (1,614) ----------- Net Expenses 3,596,660 ----------- Net Investment Income 18,325,751 ----------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FUTURES CONTRACTS: Net realized gain (loss) on: Investments 1,861,684 Futures contracts (5,357,990) ----------- Net realized loss (3,496,306) ----------- Net change in unrealized appreciation/ depreciation on: Investments 5,922,102 Futures contracts 412,779 ----------- Net change in unrealized appreciation/depreciation 6,334,881 ----------- Net Gain 2,838,575 ----------- Net Increase in Net Assets from Operations $21,164,326 ----------- See notes to financial statements. 18 STATEMENT OF CHANGES IN NET ASSETS YEAR ENDED JUNE 30, INCREASE (DECREASE) -------------------------- IN NET ASSETS: 2003 (a) 2002 - ------------------------------------------------------- OPERATIONS: Net investment income $ 18,325,751 $ 12,426,070 Net realized gain (loss) on investments and futures contracts (3,496,306) 230,094 Net change in unrealized appreciation/depreciation on investments and futures contracts 6,334,881 2,710,228 ------------ ----------- Net Increase from Operations 21,164,326 15,366,392 ------------ ----------- DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income: Class A (4,696,423) (166) Class B (3,013,907) -- Class C (296,718) -- Class Z (13,994,707) (12,751,456) ------------ ----------- Total Distributions Declared to Shareholders (22,001,755) (12,751,622) ------------ ----------- SHARE TRANSACTIONS: Class A: Subscriptions 18,354,905 40,656 Proceeds received in connection with merger 76,068,209 -- Distributions reinvested 2,010,003 56 Redemptions (17,674,390) -- ------------ ----------- Net Increase 78,758,727 40,712 ------------ ----------- Class B: Subscriptions 7,804,555 -- Proceeds received in connection with merger 58,601,899 -- Distributions reinvested 1,355,241 -- Redemptions (16,111,056) -- ------------ ----------- Net Increase 51,650,639 -- ------------ ----------- Class C: Subscriptions 6,010,197 -- Proceeds received in connection with merger 4,760,489 -- Distributions reinvested 110,517 -- Redemptions (1,770,277) -- ------------ ----------- Net Increase 9,110,926 -- ------------ ----------- Class Z: Subscriptions 81,763,744 32,494,590 Distributions reinvested 10,235,595 7,872,926 Redemptions (60,473,287) (54,660,074) ------------ ----------- Net Increase (Decrease) 31,526,052 (14,292,558) ------------ ----------- Net Increase (Decrease) from Share Transactions 171,046,344 (14,251,846) ------------ ----------- Total Increase (Decrease) in Net Assets 170,208,915 (11,637,076) YEAR ENDED JUNE 30, -------------------------- 2003 (a) 2002 - ------------------------------------------------------- NET ASSETS: Beginning of period $213,312,536 $224,949,612 ------------ ------------ End of period (including overdistributed net investment income of $(646,929) and $(35,919), respectively) $383,521,451 $213,312,536 ============ ============ CHANGES IN SHARES: Class A: Subscriptions 1,639,804 3,622 Issued in connection with merger 6,725,748 -- Issued for distributions reinvested 177,053 5 Redemptions (1,580,530) -- ------------- ------------ Net Increase 6,962,075 3,627 ------------- ------------ Class B: Subscriptions 696,631 -- Issued in connection with merger 5,181,423 -- Issued for distributions reinvested 121,313 -- Redemptions (1,438,818) -- ------------- ------------ Net Increase 4,560,549 -- ------------- ------------ Class C: Subscriptions 537,281 -- Issued in connection with merger 420,910 -- Issued for distributions reinvested 9,891 -- Redemptions (158,063) -- ------------- ------------ Net Increase 810,019 -- ------------- ------------ Class Z: Subscriptions 7,296,394 2,871,106 Issued for distributions reinvested 915,399 700,510 Redemptions (5,385,102) (4,865,513) ------------- ------------ Net Increase (Decrease) 2,826,691 (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. 19 NOTES TO FINANCIAL STATEMENTS June 30, 2003 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 ("CDSC") 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 CDSC. 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 CDSC 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, the Stein Roe High-Yield Municipals Fund acquired all the net assets of Liberty High Yield Municipal Fund pursuant to a plan of reorganization approved by Liberty High Yield Municipal 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 Municipal 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 $(2,726,785) 1 Unrealized depreciation is included in the Net Assets Received amount shown 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 was distributed to Stein Roe High-Yield Municipals Fund based on allocation methods in compliance with the Internal Revenue Service. 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 15, 2002, the Class S shares were subsequently redesignated as Class Z shares. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 VALUATIONS 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. Investments for which market quotations are not readily available, or quotations which management believes are not appropriate, are valued at fair value under procedures approved by 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. 20 NOTES TO FINANCIAL STATEMENTS (CONTINUED) June 30, 2003 Cost is determined and gains (losses) are based upon the specific identification method for both financial statement and federal income tax purposes. The Fund may trade securities on other than normal settlement terms. This may increase the risk if the other party to the transaction fails to deliver and causes the Fund to subsequently invest at less advantageous prices. DETERMINATION OF CLASS NET ASSET VALUES: 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. INVESTMENT INCOME, DEBT DISCOUNT AND PREMIUM: Interest income is recorded on the accrual basis. Premium and discount are being amortized and accreted, respectively, 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 June 30, 2003. NOTE 2. FEDERAL TAX INFORMATION Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from accounting principles generally accepted in the United States of America. These differences are primarily due to discount accretion on debt securities, straddle deferrals, mark-to-market on futures contracts, current year distribution payable, capital loss carryforwards, defaulted bond interest, non-deductible expenses and non-deductible expenses. 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. For the year ended June 30, 2003, permanent items identified and reclassified among the components of net assets are as follows: UNDISTRIBUTED ACCUMULATED NET INVESTMENT NET REALIZED PAID-IN INCOME LOSS CAPITAL ------------- ------------- ------------- $3,064,994 $(9,174,234) $6,109,240 Net investment income, net realized gains (losses) and net assets were not affected by this reclassification. Included in the reclassification are book to tax timing differences totaling $10,306,012 which were acquired as part of the merger. These timing differences are mostly comprised of capital loss carryforwards, defaulted bond interest, non-deductible expenses, discount accretion on debt securities and straddle reversals. The tax character of distributions paid for the years ended June 30, 2003 and 2002 was as follows: 2003 2002 ---- ---- Tax-Exempt Income $21,999,954 $12,751,513 Ordinary Income 1,801 109 As of June 30, 2003, the components of distributable earnings on a tax basis were as follows: UNDISTRIBUTED TAX-EXEMPT UNREALIZED INCOME APPRECIATION ------------- ------------- $520,746 $6,188,889 21 NOTES TO FINANCIAL STATEMENTS (CONTINUED) June 30, 2003 The following capital loss carryforwards, determined as of June 30, 2003, 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 - ------------------ ------------------------- 2005 $ 1,525,965 2006 5,933,974 2007 1,931,613 2008 2,738,332 2009 1,928,565 2010 1,780,434 2011 697,947 =========== Total $16,536,830 =========== Of the capital loss carryforwards attributable to Liberty High Yield Municipal Fund, $9,056,612 ($684,212 expired June 30, 2003, $1,525,965 expiring June 30, 2005, $1,931,613 expiring June 30, 2007, $2,738,332 expiring June 30, 2008, $1,081,414 expiring June 30, 2009 and $1,095,076 expiring June 30, 2010) was obtained in the merger with the Liberty High Yield Municipal Fund, of which $8,372,400 remains (See Note 1). Utilization of the Fund's capital loss carryforwards above could be subject to limitations imposed by the Internal Revenue Code. Expired capital loss carryforwards, if any are treated as a reduction in paid-in capital. NOTE 3. FEES AND COMPENSATION PAID TO AFFILIATES On April 1, 2003, Stein Roe & Farnham Incorporated ("Stein Roe"), the investment advisor and administrator to the Fund, and Colonial Management Associates, Inc. ("Colonial"), the pricing and bookkeeping agent, merged into Columbia Management Advisors, Inc. ("Columbia"), formerly known as Columbia Management Co., an indirect, wholly-owned subsidiary of FleetBoston Financial Corporation. At the time of the merger, Columbia assumed the obligations of Stein Roe and Colonial with respect to the Fund. The merger did not change the way the Fund is managed, the investment personnel assigned to manage the Fund or the fees paid by the Fund. MANAGEMENT FEE: Columbia is the investment advisor of the Fund and receives a monthly fee 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: Columbia 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: Columbia 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 Bank and Trust Company ("State Street"). Columbia pays fees to State Street under the Outsourcing Agreement. Under its pricing and bookkeeping agreements 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 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 year ended June 30, 2003, the net asset based fee rate was 0.030%. 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 FEE: Liberty Funds Services, Inc. (the "Transfer Agent"), an affiliate of Columbia, 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 Columbia, is the Fund's principal underwriter. For the year ended June 30, 2003, the Fund has been advised that the Distributor retained net underwriting discounts of $18,260 on sales of the Fund's Class A shares and received CDSC of $2, $237,500 and $121 on Class A, Class B and Class C share redemptions, respectively. 22 NOTES TO FINANCIAL STATEMENTS (CONTINUED) June 30, 2003 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 0.60% 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 Columbia 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 $1,614 of custody fees were reduced by balance credits for the year ended June 30, 2003. 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 year ended June 30, 2003, purchases and sales of investments, other than short-term obligations, were $63,050,398 and $55,827,978, respectively. Unrealized appreciation (depreciation) at June 30, 2003, for federal income tax purposes was: Gross unrealized appreciation $ 23,502,025 Gross unrealized depreciation (17,313,136) ------------ Net unrealized appreciation $ 6,188,889 ============ OTHER: Investing in high-yield securities offers the potential for high current income and attractive total returns, but involves greater credit and other risks not associated with investing in higher-quality bonds. Bond investing also involves interest rate risk, which means that bond prices may change as interest rates increase or decrease. 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. NOTE 5. LINE OF CREDIT The Fund and other affiliated funds participate in a $350,000,000 credit facility which is used for temporary or emergency purposes to facilitate portfolio liquidity. Interest is charged to the Fund based on its borrowings. In addition, the Fund has agreed to pay commitment fees on its pro-rata portion of the line of credit. The commitment fee is included in "Other expenses" on the Statement of Operations. Prior to April 26, 2003, the Fund participated in a separate credit agreement with similar terms to its existing agreement. For the year ended June 30, 2003, there were no borrowings under these agreements. 23 FINANCIAL HIGHLIGHTS Selected data for a share outstanding throughout each period is as follows:
PERIOD YEAR ENDED JUNE 30, ENDED -------------------------- JUNE 30, CLASS A SHARES 2003 2002 2001 (a) ========================================================================================================================== NET ASSET VALUE, BEGINNING OF PERIOD $ 11.26 $ 11.13 $ 11.11 ------- ------- ------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (b) 0.60 0.61(c) 0.58 Net realized and unrealized gain on investments and futures contracts 0.11 0.15(c) 0.01 ------- ------- ------- Total from Investment Operations 0.71 0.76 0.59 ------- ------- ------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.72) (0.63) (0.57) ------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 11.25 $ 11.26 $ 11.13 ======= ======= ======= Total return (d) 6.58% 6.93% 5.42%(e) ======= ======= ======= RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA: Expenses (f) 1.07% 1.13% 1.06%(g) Net investment income (f) 5.39% 5.41%(c) 5.65%(g) Portfolio turnover rate 17% 16%(h) 16%(h) Net assets, end of period (000's) $ 78,335 $ 42 $ 1
(a)Class A shares were initially offered on July 31, 2002. Per share data and total return reflect activity from that date. (b)Per share data was calculated using average shares outstanding during the period. (c)Effective July 1, 2001, the Portfolio adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium and accreting discount on all debt securities. The effect of this change for the year ended June 30, 2002, was to increase the ratio of net 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. 24 FINANCIAL HIGHLIGHTS (CONTINUED) Selected data for a share outstanding throughout the period is as follows:
PERIOD ENDED JUNE 30, CLASS B SHARES 2003 (a) =============================================================================================== NET ASSET VALUE, BEGINNING OF PERIOD $ 11.31 ------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (b) 0.51 Net realized and unrealized gain on investments and futures contracts 0.05 ------- Total from Investment Operations 0.56 ------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.62) ------- NET ASSET VALUE, END OF PERIOD $ 11.25 ======= Total return (c)(d) 5.14% ======= RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA: Expenses (e)(f) 1.81% Net investment income (e)(f) 4.70% Portfolio turnover rate 17% Net assets, end of period (000's) $ 51,292
(a)Class B shares were initially offered on July 15, 2002. Per share data and total return reflect 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. 25 FINANCIAL HIGHLIGHTS (CONTINUED) Selected data for a share outstanding throughout the period is as follows:
PERIOD ENDED JUNE 30, CLASS C SHARES 2003 (a) =============================================================================================== NET ASSET VALUE, BEGINNING OF PERIOD $ 11.31 ------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (b) 0.51 Net realized and unrealized gain on investments and futures contracts 0.07 ------- Total from Investment Operations 0.58 ------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income Total Distributions Declared to Shareholders (0.64) ------- NET ASSET VALUE, END OF PERIOD $ 11.25 ======= Total return (c)(d)(e) 5.29% ======= RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA: Expenses (f)(g) 1.67% Net investment income (f)(g) 4.75% Waiver/reimbursement (g) 0.15% Portfolio turnover rate 17% Net assets, end of period (000's) $ 9,110
(a)Class C shares were initially offered on July 15, 2002. Per share data and total return reflect 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. 26 FINANCIAL HIGHLIGHTS (CONTINUED) Selected data for a share outstanding throughout each period is as follows:
YEAR ENDED JUNE 30, --------------------------------------------------------------- CLASS Z SHARES 2003 (a) 2002 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 11.26 $ 11.12 $ 11.04 $ 11.71 $ 11.97 -------- -------- -------- ------- -------- INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.63(b) 0.64(b)(c) 0.65(b) 0.65 0.63 Net realized and unrealized gain (loss) on investments and futures contracts 0.11 0.15(c) 0.08 (0.68) (0.25) -------- -------- -------- ------- -------- Total from Investment Operations 0.74 0.79 0.73 (0.03) 0.38 -------- -------- -------- ------- -------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.75) (0.65) (0.65) (0.64) (0.64) -------- -------- -------- ------- -------- NET ASSET VALUE, END OF PERIOD $ 11.25 $ 11.26 $ 11.12 $ 11.04 $ 11.71 ======== ======== ======== ======= ======== Total return (d) 6.82%(e) 7.30% 6.78% (0.16)% 3.18%(e) ======== ======== ======== ======= ======== RATIOS TO AVERAGE NET ASSETS/ SUPPLEMENTAL DATA: Expenses (f) 0.86% 0.88% 0.81% 0.78% 0.77% Net investment income (f) 5.59% 5.66%(c) 5.86% 5.82% 5.26% Portfolio turnover rate 17% 16%(g) 16%(g) 14%(g) 19%(g) Net assets, end of period (000's) $244,784 $213,271 $224,950 $253,787 $297,874
(a)On July 15, 2002, the existing Fund Class S shares were redesignated Class Z shares. (b)Per share was calculated using average shares outstanding during the period. (c)Effective July 1, 2001, the Portfolio adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium and accreting discount on all debt securities. The effect of this change for the year ended June 30, 2002, was to increase the ratio of net 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)0.50% of the return is attributable to a one time revaluation of portfolio security reflecting the restructuring of this security. Absent this revaluation, total return would have been 2.68%. (f)The benefits derived from custody credits and directed brokerage arrangements, if applicable, had an impact of less than 0.01%. (g)Portfolio turnover disclosed is for the SR&F High-Yield Municipals Portfolio. 27 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF LIBERTY-STEIN ROE FUNDS MUNICIPAL TRUST LIBERTY HIGH YIELD MUNICIPAL FUND We have audited the accompanying statement of assets and liabilities, including the investment portfolio, of Liberty High Yield Municipal Fund (formerly, Stein Roe High-Yield Municipals Fund) (the "Fund") (a series of Liberty-Stein Roe Funds Municipal Trust) as of June 30, 2003, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the periods indicated therein. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights. Our procedures included confirmation of securities owned as of June 30, 2003, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Liberty High Yield Municipal Fund (a series of Liberty-Stein Roe Funds Municipal Trust) at June 30, 2003, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the periods indicated therein, in conformity with accounting principles generally accepted in the United States. /s/ Earnst & Young LLP Boston, Massachusetts August 19, 2003 28 UNAUDITED INFORMATION FEDERAL INCOME TAX INFORMATION: 99.99% of the distributions from net investment income will be treated as exempt income for federal income tax purposes. 29 TRUSTEES AND OFFICERS The Trustees serve terms of indefinite duration. The names, addresses and ages of the Trustees and officers of the Liberty Funds, the year each was first elected or appointed to office, their principal business occupations during at least the last five years, the number of portfolios overseen by each Trustee and other directorships they hold are shown below. Each officer listed below serves as an officer of each of the Liberty Funds. The Statement of Additional Information (SAI) contains additional information about the Trustees and is available without charge upon request by calling the fund's distributor at 800-345-6611.
Number of Year First Portfolios in Elected or Liberty Funds Other Position with Appointed Principal Occupation(s) Complex Overseen Directorships Name, Address and Age Liberty Funds to Office1 During Past Five Years by Trustee Held - ------------------------------------------------------------------------------------------------------------------------------------ DISINTERESTED TRUSTEES Douglas A. Hacker (Age 47) Trustee 1996 Executive Vice President - Strategy of United 85 None P.O. Box 66100 Airlines (airline) since December, 2002 (formerly Chicago, IL 60666 President of UAL Loyalty Services (airline) from September, 2001 to December, 2002; Executive Vice President and Chief Financial Officer of United Airlines from March, 1993 to September, 2001; Senior Vice President and Chief Financial Officer of UAL, Inc. prior thereto). Janet Langford Kelly (Age 45) Trustee 1996 Executive Vice President-Corporate Development 85 None One Kellogg Square and Administration, General Counsel and Secretary, Battle Creek, MI 49016 Kellogg Company (food manufacturer), since September, 1999; Senior Vice President, Secretary and General Counsel, Sara Lee Corporation (branded, packaged, consumer-products manufacturer) from January, 1995 to September, 1999. Richard W. Lowry (Age 67) Trustee 1995 Private Investor since August, 1987 (formerly 87(4) None 10701 Charleston Drive Chairman and Chief Executive Officer, U.S. Plywood Vero Beach, FL 32963 Corporation (building products manufacturer)). Charles R. Nelson (Age 60) Trustee 1981 Professor of Economics, University of Washington, 120(2) None Department of Economics since January, 1976; Ford and Louisa Van Voorhis University of Washington Professor of Political Economy, University of Seattle, WA 98195 Washington, since September, 1993; Director, Institute for Economic Research, University of Washington, since September, 2001; Adjunct Professor of Statistics, University of Washington, since September, 1980; Associate Editor, Journal of Money Credit and Banking, since September, 1993; consultant on econometric and statistical matters. John J. Neuhauser (Age 60) Trustee 1985 Academic Vice President and Dean of Faculties since 88(4,5) Saucony, Inc. 84 College Road August, 1999, Boston College (formerly Dean, Boston (athletic Chestnut Hill, MA 02467-3838 College School of Management from September, 1977 footwear); to September, 1999. SkillSoft Corp. (E-Learning) Thomas E. Stitzel (Age 67) Trustee 1998 Business Consultant since 1999 (formerly Professor of 85 None 2208 Tawny Woods Place Finance from 1975 to 1999 and Dean from 1977 to 1991, Boise, ID 83706 College of Business, Boise State University); Chartered Financial Analyst.
30 TRUSTEES AND OFFICERS (CONTINUED)
Number of Year First Portfolios in Elected or Liberty Funds Other Position with Appointed Principal Occupation(s) Complex Overseen Directorships Name, Address and Age Liberty Funds to Office1 During Past Five Years by Trustee Held - ------------------------------------------------------------------------------------------------------------------------------------ DISINTERESTED TRUSTEES Thomas C. Theobald (Age 66) Trustee 1996 Managing Director, William Blair Capital Partners 85 Anixter 27 West Monroe Street, Suite 3500 (private equity investing) since September, 1994 International Chicago, IL 60606 (formerly Chief Executive Officer and Chairman (network support of the Board of Directors, Continental Bank equipment Corporation prior thereto). distributor), Jones Lang LaSalle (real estate management services) and MONY Group (life insurance). Anne-Lee Verville (Age 58) Trustee 1998 Author and speaker on educational systems needs 86(5) Chairman of 359 Stickney Hill Road (formerly General Manager, Global Education the Board of Hopkinton, NH 03229 Industry from 1994 to 1997, and President, Directors, Applications Solutions Division from 1991 to 1994, Enesco Group, IBM Corporation (global education and Inc. (designer, global applications)). importer and distributor of giftware and collectibles). INTERESTED TRUSTEES William E. Mayer3 (Age 63) Trustee 1994 Managing Partner, Park Avenue Equity Partners 87(4) Lee Enterprises 399 Park Avenue (private equity) since February, 1999 (formerly (print media), Suite 3204 Founding Partner, Development Capital LLC WR Hambrecht + Co. New York, NY 10022 from November 1996 to February, 1999; Dean and (financial service Professor, College of Business and Management, provider) and University of Maryland from October, 1992 to First Health November, 1996). (healthcare). Joseph R. Palombo3 (Age 50) Trustee, 2000 Executive Vice President and Chief Operating Officer 86(6) None One Financial Center Chairman of of Columbia Management Group, Inc. (Columbia Boston, MA 02111 the Board and Management) since December, 2001 and Director, President Executive Vice President and Chief Operating Officer of the Advisor since April, 2003 (formerly Chief Operations Officer of Mutual Funds, Liberty Financial Companies, Inc. from August, 2000 to November, 2001; Executive Vice President of Stein Roe & Farnham Incorporated (Stein Roe) from April, 1999 to April, 2003; Director of Colonial Management Associates, Inc. (Colonial) from April, 1999 to April, 2003; Director of Stein Roe from September, 2000 to April, 2003) President of Liberty Funds and Galaxy Funds since February, 2003 (formerly Vice President from September 2002 to February 2003); Manager of Stein Roe Floating Rate Limited Liability Company since October, 2000; (formerly Vice President of the Liberty Funds from April, 1999 to August, 2000; Chief Operating Officer and Chief Compliance Officer, Putnam Mutual Funds from December, 1993 to March, 1999).
1 In December, 2000, the boards of each of the Liberty Funds and former Stein Roe funds were combined into one board of trustees with common membership. The date shown is the earliest date on which a trustee was elected to either the Liberty Funds board or the former Stein Roe funds board. 2 In addition to serving as a disinterested Trustee of the Liberty Funds, Mr. Nelson serves as a disinterested Director or Trustee of the Columbia Funds and CMG Funds, currently consisting of 15 funds and 20 funds, respectively, which are advised by the Advisor. 3 Mr. Mayer is an "interested person" (as defined in the Investment Company Act of 1940 (1940 Act)) by reason of his affiliation with WR Hambrecht + Co. Mr. Palombo is an interested person as an employee of the Advisor. 4 In addition to serving as trustees of Liberty Funds, Messrs. Lowry, Neuhauser and Mayer each serve as a director/trustee of the Liberty All-Star Funds, currently consisting of 2 funds, which are advised by an affiliate of the Advisor. 5 In addition to serving as disinterested trustees of the Liberty Funds, Mr. Neuhauser and Ms. Verville serve as disinterested directors of Columbia Management Multi-Strategy Hedge Fund, LLC, which is advised by the Advisor. 6 In addition to serving as an interested trustee of the Liberty Funds, Mr. Palombo serves as an interested director of Columbia Management Multi-Strategy Hedge Fund, LLC, which is advised by the Advisor. 31
OFFICERS AND TRANSFER AGENT Year First Elected or Position with Appointed Name, Address and Age Liberty Funds to Office Principal Occupation(s) During Past Five Years - ------------------------------------------------------------------------------------------------------------------------------------ OFFICERS Vicki L. Benjamin (Age 41) Chief 2001 Controller of the Liberty Funds and of the Liberty All-Star Funds since May, One Financial Center Accounting 2002; Chief Accounting Officer of the Liberty Funds and Liberty All-Star Boston, MA 02111 Officer and Funds since June, 2001; Controller and Chief Accounting Officer of the Controller Galaxy Funds since September, 2002 (formerly Vice President, Corporate Audit, State Street Bank and Trust Company from May, 1998 to April, 2001; Audit Manager from July, 1994 to June, 1997; Senior Audit Manager from July, 1997 to May, 1998, Coopers & Lybrand, LLP). J. Kevin Connaughton (Age 39) Treasurer 2000 Treasurer of the Liberty Funds and of the Liberty All-Star Funds since One Financial Center December, 2000; Vice President of the Advisor since April, 2003 (formerly Boston, MA 02111 Controller of the Liberty Funds and of the Liberty All-Star Funds from February, 1998 to October, 2000); Treasurer of the Galaxy Funds since September, 2002; Treasurer, Columbia Management Multi-Strategy Hedge Fund, LLC since December, 2002 (formerly Vice President of Colonial from February, 1998 to October, 2000 and Senior Tax Manager, Coopers & Lybrand, LLP from April, 1996 to January, 1998).
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. Annual Report: Liberty High Yield Municipal Fund [THIS PAGE INTENTIONALLY LEFT BLANK] Liberty High Yield Municipal Fund ANNUAL REPORT, JUNE 30, 2003 [eagle head logo] LibertyFunds A Member of Columbia Management 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. 20 752-02/618O-0603 (08/03) 03/2209 LIBERTY MANAGED MUNICIPALS FUND Annual Report June 30, 2003 [photo of man 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 MANAGED MUNICIPALS FUND Annual Report June 30, 2003 [photo of man 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 Joseph R. Palombo] Dear Shareholder: Despite the uncertainty that hung over the markets and the economy as the nation prepared to go to war in Iraq, the twelve-month period ended on a high note. Virtually all major segments of the stock and bond markets posted positive returns for the period. The economy, though still struggling, has made progress toward recovery. And a new tax law is intended to boost consumer spending power and make investing more attractive. The Jobs and Growth Tax Relief Reconciliation Act of 2003 accelerates income tax rate cuts for virtually all Americans and slashes the tax rates on dividends and long-term capital gains. The government is counting on Americans to turn their good fortune into higher spending. And the financial media has been full of advice on how to take advantage of the new rate structure. As you debate what you will do if the lower tax rate turns into a modest personal windfall, consider strategies that could have a long-term impact on your portfolio. If your take-home pay increases as a result of the tax break and any rebate check you are entitled to receive--and if it's not eaten up by higher state taxesinvesting at least one third of it. Consider adding it to your retirement account, using it to start an education account for your child or setting it aside for an emergency. But make a commitment and stick to it. Think of it as found money, because that is what it is. You didn't have it before. But now that you've found it, you can put it to work for a long-term goal. And, before you take advice from a television pundit or a magazine cover story, talk to your financial advisor. There may be tax-related strategies that make sense for you. But there are no one-size-fits-all solutions. Keep in mind that tax rates change, and many of the provisions of this law are set to expire in just a few short years. CONSOLIDATION AND A NEW NAME: COLUMBIA On a separate note, I am pleased to announce that, effective April 1, 2003, six of the asset management firms brought together when Columbia Management Group, Inc. was formed were consolidated and renamed Columbia Management Advisors, Inc. (Columbia Management). This consolidation does not affect the management or investment objectives of your fund and is the next step in our efforts to create a consistent identity and to streamline our organization. By consolidating these firms, we are able to create a more efficient organizational structure and strengthen certain key functions, such as research. Although the name of the asset manager familiar to you has changed, what hasn't changed is the commitment of our specialized investment teams to a multi-disciplined approach to investing, focused on our goal of offering shareholders the best products and services. The following report will provide you with more detailed information about Liberty Managed Municipals Fund's performance and the strategies used by fund manager Kimberly Campbell. 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/ Joseph R. Palombo Joseph R. Palombo President - -------------------------------------------------------------------------------- MEET THE NEW PRESIDENT Joseph R. Palombo, president and chairman of the Board of Trustees for Liberty Funds, is also chief operating officer and executive vice president of Columbia Management. Mr. Palombo has over 19 years of experience in the financial services industry. Prior to joining Columbia Management, he was chief operating officer and chief compliance officer for Putnam Mutual Funds. Prior to that, he was a partner at Coopers & Lybrand. Mr. Palombo received his degree in economics/accounting from the College of the Holy Cross, where he was a member of Phi Beta Kappa. He earned his master's degree in taxation from Bentley College and participated in the Executive Program at the Amos B. Tuck School at Dartmouth College. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NET ASSET VALUE PER SHARE as of 06/30/03 ($) Class A 9.38 Class B 9.38 Class C 9.38 Class Z 9.38 DISTRIBUTIONS DECLARED PER SHARE 07/01/02 - 06/30/03 ($) Class A 0.26 Class B 0.21 Class C 0.23 Class Z 0.40 TAXABLE-EQUIVALENT SEC YIELDS as of 06/30/2003 (%) Class A 4.76 Class B 3.76 Class C 4.27 Class Z 5.34 Taxable-equivalent SEC yields are based on the maximum effective 38.6% federal and state income tax rate. This tax rate does not reflect the phase out of exemptions or the reduction of otherwise allowable deductions that occur when adjusted gross income exceeds certain levels. - -------------------------------------------------------------------------------- NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE Economic and market conditions change frequently. There is no assurance that the trends described in this report will continue or commence. The examples provided should be viewed as illustrations. They do not constitute tax or legal advice. Neither Columbia Management Advisors, Inc., nor its affiliates, including Liberty Funds Distributor, Inc., provide tax or legal advice. A tax advisor or attorney can provide you with answers to specific questions about taxes and other legal issues. PERFORMANCE INFORMATION Value of a $10,000 investment 6/30/93 - 6/30/03 PERFORMANCE OF A $10,000 INVESTMENT 6/30/93 - 6/30/03 ($) without with sales sales charge charge - ------------------------------------- Class A 17,822 16,972 - ------------------------------------- Class B 17,736 17,736 - ------------------------------------- Class C 17,766 17,766 - ------------------------------------- Class Z 17,850 n/a - ------------------------------------- [mountain chart data]: Lehman Brothers Class A shares Class A shares Municipal without sales charge with sales charge Bond Index 6/1993 $10,000 $ 9,525 $10,000 10,002 9,527 10,013 10,208 9,723 10,221 10,318 9,828 10,338 10,332 9,841 10,357 10,237 9,750 10,266 10,433 9,938 10,483 10,557 10,056 10,602 10,279 9,790 10,328 9,886 9,416 9,907 9,932 9,461 9,992 10,014 9,538 10,079 9,970 9,496 10,017 10,109 9,629 10,200 10,147 9,665 10,236 10,011 9,535 10,086 9,851 9,383 9,906 9,690 9,230 9,727 9,870 9,402 9,941 10,159 9,676 10,225 10,406 9,912 10,523 10,504 10,005 10,644 10,494 9,995 10,656 10,798 10,285 10,996 10,679 10,172 10,901 10,755 10,244 11,004 10,880 10,363 11,144 10,966 10,445 11,214 11,140 10,611 11,377 11,375 10,835 11,566 11,513 10,966 11,677 11,589 11,038 11,766 11,447 10,904 11,686 11,260 10,725 11,536 11,221 10,688 11,504 11,235 10,701 11,499 11,350 10,810 11,624 11,453 10,909 11,729 11,440 10,897 11,727 11,621 11,069 11,891 11,765 11,206 12,025 11,998 11,428 12,245 11,948 11,380 12,194 11,962 11,394 12,217 12,077 11,503 12,329 11,905 11,340 12,165 11,998 11,428 12,268 12,187 11,608 12,453 12,321 11,735 12,586 12,687 12,084 12,935 12,551 11,955 12,813 12,718 12,114 12,966 12,788 12,180 13,049 12,855 12,245 13,126 13,064 12,443 13,317 13,189 12,563 13,454 13,169 12,544 13,458 13,156 12,531 13,471 13,098 12,476 13,410 13,310 12,678 13,622 13,352 12,717 13,675 13,381 12,745 13,709 13,596 12,951 13,922 13,753 13,100 14,096 13,709 13,058 14,096 13,750 13,097 14,145 13,782 13,127 14,180 13,958 13,295 14,349 13,851 13,193 14,286 13,851 13,193 14,306 13,906 13,245 14,342 13,800 13,145 14,258 13,575 12,930 14,053 13,623 12,976 14,104 13,488 12,847 13,991 13,456 12,816 13,997 13,289 12,658 13,845 13,394 12,758 13,992 13,308 12,676 13,887 13,211 12,583 13,826 13,392 12,756 13,986 13,677 13,027 14,291 13,577 12,932 14,207 13,465 12,825 14,133 13,829 13,173 14,508 14,035 13,369 14,709 14,288 13,609 14,936 14,157 13,484 14,858 14,318 13,638 15,020 14,478 13,791 15,134 14,972 14,261 15,508 15,057 14,342 15,662 15,148 14,428 15,712 15,261 14,537 15,853 14,871 14,164 15,682 15,069 14,353 15,851 15,233 14,509 15,958 15,618 14,876 16,194 16,005 15,245 16,461 15,847 15,094 16,405 16,134 15,368 16,600 15,785 15,036 16,461 15,541 14,803 16,304 15,839 15,087 16,586 16,085 15,321 16,785 15,645 14,902 16,456 16,029 15,267 16,777 16,123 15,357 16,880 16,309 15,534 17,059 16,496 15,713 17,279 16,666 15,875 17,486 17,075 16,264 17,869 16,656 15,865 17,572 16,546 15,760 17,499 17,016 16,208 17,868 16,855 16,054 17,823 17,235 16,417 18,073 17,185 16,369 18,083 17,395 16,569 18,203 18,002 17,147 18,629 6/2003 17,822 16,972 18,551 MUTUAL FUND PERFORMANCE CHANGES OVER TIME. PLEASE VISIT WWW.LIBERTYFUNDS.COM FOR DAILY PERFORMANCE UPDATES. Past performance cannot predict future investment results. Share price and investment return will vary, so you may have a gain or loss when you sell your shares. The above illustration assumes a $10,000 investment made on June 30, 1993 and reinvestment of income and capital gains distributions. The CS First Boston High Yield Index is a broad-based, unmanaged index that tracks the performance of high-yield bonds. Unlike mutual funds, indexes are not investments and do not incur fees or expenses. It is not possible to invest in an index.
Average annual total return as of 6/30/03 (%) Share class A B C Z Inception 11/1/02 11/1/02 11/1/02 2/23/77 - ------------------------------------------------------------------------------------------------------------------- without with without with without with without sales sales sales sales sales sales sales charge charge charge charge charge charge charge - ------------------------------------------------------------------------------------------------------------------- 1-year 9.33 4.10 8.80 3.80 9.01 8.01 9.50 - ------------------------------------------------------------------------------------------------------------------- 5-year 5.95 4.92 5.85 5.53 5.89 5.89 5.98 - ------------------------------------------------------------------------------------------------------------------- 10-year 5.95 5.43 5.90 5.90 5.92 5.92 5.97 - -------------------------------------------------------------------------------------------------------------------
MUTUAL FUND PERFORMANCE CHANGES OVER TIME. PLEASE VISIT WWW.LIBERTYFUNDS.COM FOR DAILY PERFORMANCE UPDATES. Past performance cannot predict future investment results. The principal value investment returns will fluctuate, resulting in a gain or loss on sale. All results shown assume reinvestment of distributions. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. The "with sales charge" returns include the maximum 4.75% charge for class A shares, the appropriate class B contingent deferred sales charge 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 contingent deferred sales charge of 1% for the first year only. 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. Classes A, B and C 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. These class Z share returns are not restated to reflect any expense differential (e.g., rule 12b-1 fees) between 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 6/30/03 (%) CLASS A 2.92 CLASS B 2.31 CLASS C 2.62 CLASS Z 3.28 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. TOP 10 ISSUERS as of 6/30/03 (%) MASSACHUSETTS BAY TRANSPORTATION AUTHORITY 5.0 GA FULTON COUNTY 3.3 NC EASTERN MUNICIPAL POWER AGENCY 2.9 GA CARTERSVILLE DEVELOPMENT AUTHORITY 2.2 TX HOUSTON WATER & SEWER SYSTEM REVENUE 2.2 MA STATE HEALTH & EDUCATIONAL FACILITIES AUTHORITY 2.1 WA STATE PUBLIC POWER SUPPLY SYSTEM 2.1 NJ STATE TRANSPORTATION TRUST FUND AUTHORITY 1.4 AK NORTH SLOPE BOROUGH 1.4 MA STATE COLLEGE BUILDING AUTHORITY PROJECT 1.3 Portfolio holdings are calculated as a percentage of net assets. Because the fund is actively managed, there can be no guarantee the fund will continue to maintain the same portfolio holdings in the future. ABOUT DURATION Duration is a measure, expressed in years, of interest-rate sensitivity. We use duration as a tactical tool to anticipate or respond to interest rate changes. Because bond prices move in the opposite direction of interest rates, we lower duration when we expect interest rates to rise. We raise duration when we expect interest rates to fall. These adjustments provide the potential to benefit performance. If we are wrong and interest rates rise after we lengthen duration or fall after we shorten duration, fund performance could be hurt. PORTFOLIO MANAGER'S REPORT For the 12-month period ended June 30, 2003, Liberty Managed Municipals Fund class A shares returned 7.06% without sales charge. The fund underperformed its benchmark, the Lehman Brothers Municipal Bond Index, which returned 8.74% for the same period. The fund came out ahead of the Lipper General Municipal Debt Fund Category's 7.50% return.1 The fund's above-average sensitivity to interest rate changes and high concentration in intermediate term bonds helped performance. DECLINING INTEREST RATES PREVAILED Municipal bond prices rallied throughout the period, driven by falling interest rates and economic uncertainty. The economy remained under pressure as corporate America continued to deal with the excesses of the `90s and the aftermath of corporate governance scandals. Weak investor confidence, a high unemployment rate and the prospect of war with Iraq further hampered growth. Although interest rates reached record lows and the major military campaign against Iraq came to a quick end, the economy remained in low gear during the spring as unemployment edged higher. LONGER DURATION AND INTERMEDIATE FOCUS BENEFITED PERFORMANCE With the expectation of a continued decline in interest rates, we positioned the portfolio with a longer-than-average duration relative to its peers. Duration is a measure of interest rate sensitivity. (See sidebar on duration.) The fund's longer duration contributed to greater price appreciation as interest rates fell. We focused on high quality bonds with intermediate maturities (12 to 19 years). Intermediate bonds offered much of the yield of long-term bonds without as much volatility. In addition, the municipal yield curve--the difference between long-term and short-term rates--was steep, which meant the yield on intermediate bonds was more generous than usual. Within the intermediate area, we focused on premium coupon bonds that were either non-callable or had a 10-year call protection. (A bond issued at a premium has a stated interest rate that is higher than the prevailing market rate, and therefore, provides added income. Non-callable bonds cannot be called or redeemed before maturity.) The fund also owned zero coupon bonds, which sell at a deep discount to face value and pay no interest. Bond holders receive the - ------------ 1 Lipper Inc., a widely respected data provider in the industry, calculates an average total return for mutual funds with similar investment objectives as the fund. 2 face value at maturity. As yields fell and municipal bond prices rose, both zero coupon and premium non-callable bonds beat bonds with shorter call dates. CONCENTRATION ON LESS ECONOMICALLY SENSITIVE SECTORS WORKED We targeted our purchases toward sectors that tend to be less affected by an economic downturn. The fund invested in essential service bonds, which include water and sewer bonds. We also invested in bonds backed by dedicated revenue streams, such as turnpike tolls and gasoline sales tax revenues. Finally, we owned bonds backed by user fees, including electric utility bonds whose prices had earlier become depressed. We sold some hospital bonds that had done well. CONTINUED LOW INTEREST RATES SEEM LIKELY We expect interest rates to remain low as high productivity, limited pricing power, relatively low inflation, restrained global demand and weak business spending continue to restrain economic growth near term. In the long run, we believe the Federal Reserve board's willingness to keep interest rates low, combined with continued productivity growth, should improve the economy. Since economic growth often presents risks to municipal interest rates, there is need for caution. We will continue to manage the fund's duration to help benefit performance as interest rates change. If interest rates linger for some time in a relatively narrow and low range, bond prices are not likely to change dramatically. Furthermore, if the municipal yield curve remains relatively steep, it is likely that rolldown on the yield curve will make a significant contribution to total return. Rolldown on the curve is gauged by how much incremental increase in price a bond receives as time passes and how much its yield declines as its maturity is reduced by one year. We also plan to continue to concentrate on intermediate-maturity bonds with desirable features that should offer good return potential. /s/ Kimberly A. Campbell Kimberly A. Campbell Kimberly A. Campbell has managed the Liberty Managed Municipals Fund since December 2001. From 1995 to 2001, Kim was the chief trader for municipal investments. She has 23 years of experience in the municipal investment industry. - ------------- Tax-exempt investing offers current tax-free income, but it also involves certain risks. Investing in high yield bonds involves greater risk of loss due to credit deterioration than 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 manager seeks to identify opportunities and attempts to react quickly to market changes. QUALITY BREAKDOWN AS OF 6/30/03 (%) [bar chart data]: AAA 65.9 AA 8.7 A 8.1 BBB 6.7 BB 0.1 B 0.5 CCC 0.3 CC 0.3 Non-Rated 7.5 Net Cash & Equivalent 1.9 MATURITY BREAKDOWN AS OF 6/30/03 (%) [bar chart data]: 0-1 years 0.3 1-3 years 0.3 3-5 years 1.0 5-7 years 9.4 7-10 years 13.2 10-15 years 42.8 15-20 years 18.5 20-25 years 7.5 25 years and over 7.0 Quality and maturity breakdowns are calculated as a percentage of net assets. Ratings shown in the quality breakdown represent the highest rating assigned to a particular bond by one of the following nationally-recognized rating agencies: Standard & Poor's Corporation, Moody's Investors Service, Inc. or Fitch Investors Service, Inc. 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. 3 INVESTMENT PORTFOLIO June 30, 2003 MUNICIPAL BONDS - 96.8% PAR VALUE - ------------------------------------------------------- EDUCATION - 3.5% EDUCATION - 2.8% CA State Educational Facilities Authority, Loyola Marymount University, Series 2001 A, (a) 10/01/20 $1,000,000 $ 439,670 MI State, University of Mississippi Medical Center, Series 1998 B, 5.500% 12/01/23 1,000,000 1,150,100 OH State, University of Akron, Series 1999, 5.750% 01/01/12 1,000,000 1,156,130 OH State Higher Educational Facilities Reserve, Case Western Reserve University, Series 1994, 6.250% 10/01/17 4,340,000 5,501,558 TX State, University of Texas, Series 2002 A, 5.250% 08/15/19 1,500,000 1,717,305 VA State College Building Authority, Washington and Lee University, Series 2001, 5.375% 01/01/21 2,000,000 2,313,560 WV State University, Series 2000 A, (a) 04/01/18 3,800,000 1,951,072 ------------ 14,229,395 ------------ STUDENT LOAN - 0.7% ME State Educational Loan Marketing Corp., Series 1994 B-1, 6.500% 11/01/09 3,000,000 3,381,570 ------------ - ------------------------------------------------------- HEALTHCARE - 6.7% CONGREGATE CARE RETIREMENT - 0.2% FL Capital Project Finance Authority, Glenridge on Palmer Ranch, Series 2002 A, 8.000% 06/01/32 500,000 508,895 OH Hamilton County Health Care Facilities Revenue, Twin Towers, Series 1998 A, 5.125% 10/01/18 500,000 474,730 ------------ 983,625 ------------ PAR VALUE - ------------------------------------------------------- HEALTH SERVICES - 0.4% MA State Development Finance Agency, Boston Biomedical Research Institute, Series 1999, 5.650% 02/01/19 $ 310,000 $ 300,926 WI State Health & Educational Facilities Authority, Marshfield Clinic, Series 1999, 6.250% 02/15/29 1,600,000 1,789,824 ------------ 2,090,750 ------------ HOSPITAL - 5.5% FL Hillsborough County Industrial Development Authority, Tampa General Hospital Project, Series 2003 A: 5.000% 10/01/18 825,000 812,658 5.250% 10/01/24 800,000 789,048 FL West Orange Healthcare District, Series 2001 A, 5.650% 02/01/22 1,050,000 1,081,384 ID State Health Facilities Authority Revenue, Intermountain Health Care Hospitals, Inc., Series 1992, 6.650% 02/15/21 1,200,000 1,560,624 IL State Development Finance Authority, Adventist Health System, Series 1999, 5.500% 11/15/20 1,650,000 1,690,243 IL State Health Facilities Authority, Swedish American Hospital, Series 2000, 6.875% 11/15/30 1,000,000 1,094,540 LA State Public Facilities Authority, Touro Infirmary, Series 1999 A, 5.625% 08/15/29 1,240,000 1,265,048 MA State Health & Educational Facilities Authority: Massachusetts General Hospital, Series 1992 F, 6.250% 07/01/12 5,750,000 6,868,490 South Shore Hospital, Series 1999 F: 5.625% 07/01/19 1,000,000 1,039,500 5.750% 07/01/29 2,500,000 2,575,875 See notes to investment portfolio. 4 INVESTMENT PORTFOLIO (CONTINUED) June 30, 2003 MUNICIPAL BONDS (CONTINUED) PAR VALUE - ------------------------------------------------------- HEALTHCARE (CONTINUED) HOSPITAL (CONTINUED) MD State Health & Educational Facilities Authority, University of Maryland Medical System, Series 2000, 6.750% 07/01/30 $ 500,000 $ 557,840 NV Henderson, Catholic Healthcare West, Series 1999 A, 6.750% 07/01/20 1,000,000 1,071,460 NY State Dormitory Authorization Revenue, Memorial Sloan-Kettering Cancer Center, Series 2003-1, (a) 07/01/25 600,000 202,848 OH Belmont County, Ohio Valley Medical Center, Inc., Series 1998, 5.700% 01/01/13 500,000 444,950 OH Green Springs Health Care Facilities, St. Francis Health Care Center Project, Series 1994 A, 7.000% 05/15/04 190,000 189,396 OH Highland County Joint Township Hospital District, Series 1999, 6.750% 12/01/29 485,000 479,616 OH Miami County Hospital Facilities Revenue, Upper Valley Medical Center, Series 1996 C, 6.000% 05/15/06 770,000 830,407 OH Montgomery County: Franciscan Sisters of the Poor, Series 1985 B-1, 8.100% 07/01/18 455,000 514,691 Grafton Associates, Ltd., Series 1986, 9.750% 12/01/16 705,000 676,737 TN Knox County Health and Educational Facilities Authority, East Tennessee Hospital, Series 2003 B, 5.750% 07/01/33 750,000 771,833 PAR VALUE - ------------------------------------------------------- WI State Health & Educational Facilities Authority, Wheaton Franciscan Services, Series 2002, 5.750% 08/15/30 $ 900,000 $ 935,667 WV State Hospital Finance Authority, Charlestown Area Medical Center, Series 2000 A, 6.750% 09/01/30 1,610,000 2,036,006 ------------ 27,488,861 ------------ INTERMEDIATE CARE FACILITIES - 0.4% IN State Health Facilities Financing Authority, Hoosier Care, Inc., Series 1999 A, 7.125% 06/01/34 2,425,000 2,060,935 ------------ NURSING HOME - 0.2% HI State Department of Budget and Finance, Kahala Senior Living Community Project, Series 2003 A, 7.875% 11/15/23 1,000,000 1,015,950 IN State Health Facilities Financing Authority, Metro Health Indiana, Inc., Series 1998, 6.400% 12/01/33 (b) 1,400,000 182,000 ------------ 1,197,950 ------------ - ------------------------------------------------------- HOUSING - 2.5% MULTI-FAMILY - 1.7% FL Broward County Housing Finance Authority, Chaves Lake Apartment Project, Series 2000 A, 7.500% 07/01/40 1,500,000 1,529,415 FL Clay County Housing Finance Authority, Madison Commons Apartments, Series 2000 A, 7.450% 07/01/40 740,000 754,541 FL Orange County Housing Finance Authority, Palms at Brentwood Apartments, Series 1998 K, 6.500% 12/01/34 1,960,000 1,796,712 IL State Development Finance Authority, Catholic Charities Housing Development Corp., Series 1993 C, 5.950% 01/01/09 1,450,000 1,495,907 See notes to investment portfolio. 5 INVESTMENT PORTFOLIO (CONTINUED) June 30, 2003 MUNICIPAL BONDS (CONTINUED) PAR VALUE - ------------------------------------------------------- HOUSING (CONTINUED) MULTI-FAMILY (CONTINUED) Municipal Mortgage & Equity LLC, 7.750% 11/01/10 (c) $2,000,000 $ 2,256,600 OH Lake County, North Madison Properties, Ltd. Project, Series 1993, 8.819% 09/01/11 185,000 183,474 RI State Housing & Mortgage Finance Corp., Series 1988, 7.550% 10/01/22 515,000 515,850 ------------ 8,532,499 ------------ SINGLE FAMILY - 0.8% ID State Housing Agency, Series 1990 E, 7.875% 07/01/24 465,000 465,814 NM State Mortgage Finance Authority, Series 2000 A-2, 7.100% 09/01/30 1,365,000 1,550,039 NV State Housing Division, Series 1991 A-2, 7.750% 04/01/22 765,000 766,400 OH Housing Finance Agency: Series 1994 B-2, 6.700% 03/01/25 140,000 145,233 Series 1997 A-1, 6.050% 09/01/17 790,000 842,606 ------------ 3,770,092 ------------ - ------------------------------------------------------- INDUSTRIAL - 5.0% FOOD PRODUCTS - 3.5% GA Cartersville Development Authority, Anheuser Busch Companies., Inc., Series 1999 A, 7.375% 05/01/09 (d) 9,000,000 10,996,560 IN Hammond, American Maize Products Co., Series 1994, 8.000% 12/01/24 4,560,000 4,967,345 MI State Strategic Funding, Michigan Sugar Co., Carollton Project: Series 1998 B, 6.450% 11/01/25 700,000 585,424 Series 1998 C, 6.550% 11/01/25 800,000 677,312 ------------ 17,226,641 ------------ PAR VALUE - ------------------------------------------------------- FOREST PRODUCTS - 1.1% WA Port Longview Industrial Development Corp., Weyerhaeuser Corp., Series 1992, 6.875% 10/01/08 $4,750,000 $ 5,567,523 ------------ MANUFACTURING - 0.4% MO State Development Finance Board, Proctor & Gamble Co., Series 1999, 5.200% 03/15/29 1,000,000 1,081,930 NM Albuquerque Industrial Development Authority, Motorola, Inc., Series 1983 A, 10.000% 06/01/13 1,000,000 1,022,310 ------------ 2,104,240 ------------ - ------------------------------------------------------- OTHER - 10.5% REFUNDED/ESCROWED (E) - 10.5% CA Foothill/Eastern Transportation Corridor Agency, Series 1995 A, (a) 01/01/18 10,000,000 5,296,900 CA Southern California Public Power Authority, Southern Transmission Project, Series 1988 A, (a) 07/01/14 8,155,000 5,331,576 CA State, Series 2003, 5.250% 02/01/23 (f) 2,000,000 2,102,940 FL State, Jacksonville Transportation Authority, Series 1985, 9.200% 01/01/15 2,000,000 2,924,340 GA State Municipal Electric Authority, Series 1991, 6.600% 01/01/18 3,600,000 4,632,984 GA Fulton County, Series 1992, 6.375% 01/01/14 13,270,000 16,479,615 MI State, Certificate of Participation, Series 2000, (a) 06/01/21 1,000,000 428,100 MI State Sewer Disposal Revenue, Series 2003 A, 5.500% 07/01/18 3,000,000 3,545,070 NC Eastern Municipal Power Agency, Series 1991 A, 6.500% 01/01/18 4,315,000 5,576,706 See notes to investment portfolio. 6 INVESTMENT PORTFOLIO (CONTINUED) June 30, 2003 MUNICIPAL BONDS (CONTINUED) PAR VALUE - ------------------------------------------------------- OTHER (CONTINUED) REFUNDED/ESCROWED (E) (CONTINUED) NJ Cape May County Municipal Utilities Authority, Series 2002 A, 5.750% 01/01/16 $1,000,000 $ 1,202,610 SC Calhoun County, Solid Waste Disposal Facilities, Eastman Kodak Co., Series 1992, 6.750% 05/01/17 3,000,000 3,855,060 TX Sabine River Pollution Control Revenue, TXU Energy Co. Project, Series 2003 A, 5.800% 07/01/22 500,000 500,645 TX State Municipal Power Agency, Series 1989, (a) 09/01/08 75,000 65,950 ------------ 51,942,496 ------------ - ------------------------------------------------------- OTHER REVENUE - 0.8% RECREATION - 0.5% FL Capital Trust Agency, Seminole Tribe Convention Center, Series 2002 A, 10.000% 10/01/33 1,500,000 1,713,390 OH Hamilton County Sales Tax Revenue, Series 2000 B, (a) 12/01/20 2,000,000 882,840 ------------ 2,596,230 ------------ RETAIL - 0.3% CA State Tobacco Settlement Revenue, Golden State Tobacco Securitization Corp., Series 2003 A-5, 7.875% 06/01/42 600,000 602,472 NJ State Economic Development Authority, Glimcher Properties L.P. Project, Series 1998, 6.000% 11/01/28 850,000 871,088 ------------ 1,473,560 ------------ - ------------------------------------------------------- RESOURCE RECOVERY - 0.6% DISPOSAL - 0.4% IL Development Finance Authority, Waste Management, Inc., Series 1997, 5.050% 01/01/10 500,000 515,215 MI State Strategic Fund, United Waste Systems, Inc., Series 1995, 5.200% 04/01/10 500,000 522,965 PAR VALUE - ------------------------------------------------------- OH State Air Quality Development Authority, JMG Funding Ltd. Project, Series 1997, 5.625% 01/01/23 $1,000,000 $ 1,056,750 ------------ 2,094,930 ------------ RESOURCE RECOVERY - 0.2% NV State Department of Business & Industry, Republic Services, Inc. Project, Series 2003, 5.625% 12/01/26 500,000 520,000 WY Lincoln County, Environmental Improvement Revenue, Pacificorp Project, Series 1995, 4.125% 11/01/25 500,000 499,865 ------------ 1,019,865 ------------ - ------------------------------------------------------- TAX-BACKED - 35.1% LOCAL APPROPRIATED - 2.1% CA San Bernardino County, Series 2002 A, 5.000% 07/01/15 2,210,000 2,507,090 IL Chicago Board of Education, Series 1992 A, 6.000% 01/01/16 5,000,000 6,092,250 IN Crown Point School Building Corp., Series 2000: (a) 01/15/18 1,550,000 796,638 (a) 01/15/19 1,665,000 805,144 ------------ 10,201,122 ------------ LOCAL GENERAL OBLIGATIONS - 14.9% AK North Slope Borough: Series 1999 A, (a) 06/30/10 2,515,000 2,000,582 Series 2000 B, (a) 06/30/10 2,000,000 1,588,280 Series 2001 A, (a) 06/30/12 5,000,000 3,575,750 CA Golden West School Financing Authority, Series 1999 A, (a) 08/01/15 1,500,000 896,970 CA Los Angeles Unified School District, Series 2002, 5.750% 07/01/16 400,000 484,032 CA Union Elementary School District, Series 1999 A, (a) 09/01/17 2,300,000 1,219,207 See notes to investment portfolio. 7 INVESTMENT PORTFOLIO (CONTINUED) June 30, 2003 MUNICIPAL BONDS (CONTINUED) PAR VALUE - ------------------------------------------------------- TAX-BACKED (CONTINUED) LOCAL GENERAL OBLIGATIONS (CONTINUED) CA West Contra Costa Unified School District, Series 2001 B, 6.000% 08/01/24 $ 465,000 $ 571,643 CA Yuba City Unified School District, Series 2000, (a) 09/01/18 1,160,000 578,446 IL Champaign County, Series 1999, 8.250% 01/01/20 1,015,000 1,484,580 IL Chicago Board of Education: Series 1996, 6.250% 12/01/12 2,500,000 3,091,000 Series 1998 B-1: (a) 12/01/21 1,500,000 609,120 (a) 12/01/22 3,000,000 1,138,290 (a) 12/01/23 2,500,000 891,700 IL Chicago Emergency Telephone System, Series 1999, 5.500% 01/01/23 2,250,000 2,607,277 IL Chicago Public Building Commission, Series 1999 B, 5.250% 12/01/18 2,000,000 2,293,040 IL Coles & Cumberland County's Unified School District, Series 2000, (a) 12/01/13 3,120,000 2,086,282 IL Cook County School District No. 102, Series 2001, (a) 12/01/20 3,065,000 1,332,417 IL Will County Community Unit School District No. 365 Valley View, Series 1999 B, (a) 11/01/18 1,900,000 939,265 IL Will County Forest Preservation District, Series 1999, (a) 12/01/16 1,000,000 554,710 LA New Orleans, Series 1991, (a) 09/01/12 6,250,000 4,473,687 MO Springfield School District No.R-12, Series 1991 B, 9.500% 03/01/07 600,000 757,320 OH Adams County Ohio Valley Local School District, Series 1995, 7.000% 12/01/15 3,000,000 3,914,910 PAR VALUE - ------------------------------------------------------- OH Beavercreek Local School District, Series 1996, 6.600% 12/01/15 $2,500,000 $ 3,234,000 OH Columbus, Series 1998 A, 5.000% 05/01/14 1,000,000 1,147,350 OH Crooksville Exempt Village School District, Series 1986, 7.375% 12/01/07 25,000 29,959 OH Cuyahoga County, Series 1993 A, (a) 10/01/12 1,000,000 717,520 OH Dublin City School District, Series 1997, (a) 12/01/11 900,000 673,119 OH Eastern Local School District Brown & Highland Counties, Series 1995, 6.250% 12/01/17 1,160,000 1,473,235 OH Gahanna-Jefferson City School District, Series 1993, (a) 12/01/11 795,000 597,053 OH Hilliard School District: Series 1995 A, (a) 12/01/12 2,505,000 1,788,320 Series 2000, 5.750% 12/01/24 1,000,000 1,133,460 OH Kings Local School District, Series 1995, 7.500% 12/01/16 2,110,000 2,930,115 OH Lakota Local School District, Series 2001, 5.500% 12/01/18 1,460,000 1,730,611 OH Massillion City School District, Series 2002: (a) 12/01/09 900,000 749,214 (a) 12/01/11 1,000,000 747,910 OH Monroe Local School District, Series 2002, 5.750% 12/01/19 1,195,000 1,448,149 OH North Fork Local School District, Series 2001, 5.750% 12/01/17 510,000 619,609 OH Northwest Local School District, Series 1998, 6.000% 12/01/13 1,030,000 1,272,462 OH Olmsted Falls City School District, Series 1999, 5.500% 12/01/03 400,000 406,544 OH Pickerington Local School District, Series 2001, (a) 12/01/16 1,340,000 764,108 See notes to investment portfolio. 8 INVESTMENT PORTFOLIO (CONTINUED) June 30, 2003 MUNICIPAL BONDS (CONTINUED) PAR VALUE - ------------------------------------------------------- TAX-BACKED (CONTINUED) LOCAL GENERAL OBLIGATIONS (CONTINUED) OH Plain Local School District, Series 2000, (a) 12/01/27 $1,315,000 $ 399,484 OH River Valley Local School District, Series 2001, 5.250% 11/01/23 500,000 564,660 OH Shaker Heights City School District, Series 1990 A, 7.100% 12/15/10 685,000 820,431 OH Southwest Licking Local School District, Series 1999, 5.750% 12/01/16 400,000 483,268 OH Strongville, Series 1996, 6.500% 12/01/13 165,000 193,847 OH Tri-County North Local School District, Series 1986, 8.125% 12/01/06 75,000 89,442 OH West Chester Township, Series 2002, 5.750% 12/01/20 1,000,000 1,206,740 PA Philadelphia School District, Series 2002 B, 5.625% 08/01/16 500,000 570,365 PA Pittsburgh School District, Series 2002 A, 5.500% 09/01/17 1,500,000 1,779,135 PR Puerto Rico Commonwealth, Series 1998, 6.000% 07/01/16 2,000,000 2,480,780 TX Galveston County, Series 2001: (a) 02/01/20 1,500,000 675,300 (a) 02/01/22 3,070,000 1,210,593 TX Hurst Euless Bedford Independent School District, Series 1998, 4.500% 08/15/25 2,250,000 2,194,448 TX Houston, Series 2000, 6.400% 06/01/27 2,000,000 2,287,760 WA Clark County School District No. 037, Series 2001 C, (a) 12/01/20 1,150,000 498,226 ------------ 74,005,725 ------------ PAR VALUE - ------------------------------------------------------- SPECIAL NON-PROPERTY TAX - 4.2% IL Metropolitan Pier & Exposition Authority, Series 1996 A: (a) 06/15/12 $5,000,000 $ 3,614,893 (a) 12/15/12 8,850,000 6,245,091 IL State, Series 2002-2: 5.500% 06/15/15 2,000,000 2,370,860 5.750% 06/15/18 3,000,000 3,620,640 MA State, Series 2002 A, 5.500% 06/01/15 1,000,000 1,180,670 NY State Local Government Assistance Corp., Series 1993 E, 5.000% 04/01/21 1,000,000 1,101,990 PR Commonwealth of Puerto Rico, Public Building Authority, Series 2002 C, 5.500% 07/01/15 1,000,000 1,141,880 WA Central Puget Sound Regional Transportation Authority, Series 1998, 5.250% 02/01/21 1,500,000 1,682,430 ------------ 20,958,454 ------------ SPECIAL PROPERTY TAX - 0.8% CA Huntington Beach Community Facilities District, Grand Coast Resort, Series 2001, 6.450% 09/01/31 500,000 518,420 CA Santa Margarita Water District, Series 1999, 6.250% 09/01/29 750,000 771,817 FL Double Branch Community Development District, Series 2002 A, 6.700% 05/01/34 400,000 410,112 IL State Sports Facilities Authority, Series 2001, (a) 06/15/18 1,000,000 502,050 TX Dallas County Flood Control District, Series 2002, 7.250% 04/01/32 1,500,000 1,540,320 ------------ 3,742,719 ------------ STATE APPROPRIATED - 2.0% KY State Turnpike Authority, Series 1992, (a) 01/01/10 7,500,000 6,112,800 UT State Building Ownership Authority, Series 1998 C, 5.500% 05/15/19 3,450,000 4,040,295 ------------ 10,153,095 ------------ See notes to investment portfolio. 9 INVESTMENT PORTFOLIO (CONTINUED) June 30, 2003 MUNICIPAL BONDS (CONTINUED) PAR VALUE - ------------------------------------------------------- TAX-BACKED (CONTINUED) STATE GENERAL OBLIGATIONS - 11.1% MA Massachusetts Bay Transportation Authority: Series 1992 B, 6.200% 03/01/16 $9,825,000 $ 12,245,585 Series 1994 A: 7.000% 03/01/14 3,150,000 4,075,155 7.000% 03/01/19 2,500,000 3,299,975 Series 1998 A, 4.500% 03/01/26 3,805,000 3,756,829 Series 2003 A, 5.250% 07/01/19 1,200,000 1,374,492 MA State College Building Authority Project: Series 1994 A: 7.500% 05/01/11 1,500,000 1,944,195 7.500% 05/01/14 3,500,000 4,674,915 NJ State Transportation Trust Fund Authority, Series 1999 A: 5.750% 06/15/18 5,000,000 6,002,850 5.750% 06/15/20 1,000,000 1,194,760 OH State, Series 1992, 6.100% 08/01/12 380,000 468,574 OH State Turnpike Commission, Series 1998 A, 5.500% 02/15/17 1,690,000 1,993,271 PA State, Series 1992-2, 6.250% 07/01/12 7,200,000 8,912,304 PR Commonwealth of Puerto Rico, Series 2001 A, 5.500% 07/01/16 4,230,000 5,029,555 ------------ 54,972,460 ------------ - ------------------------------------------------------- TRANSPORTATION - 7.4% AIR TRANSPORTATION - 1.5% IL Chicago O'Hare International Airport, United Airlines, Inc., Series 2000 A, 6.750% 11/01/11 (b) 1,600,000 340,576 IN Indianapolis Airport Authority, United Airlines Project, Series 1995 A, 6.500% 11/15/31 (b) 3,000,000 1,162,500 KY Kenton County Airport Board, Delta Airlines, Inc., Series 1992 A, 7.500% 02/01/20 1,000,000 854,200 PAR VALUE - ------------------------------------------------------- MN Minneapolis & St. Paul Metropolitan Airports Commission, Northwest Airlines: Series 2001 A, 7.000% 04/01/25 $1,250,000 $ 1,022,012 Series 2001 B, 6.500% 04/01/25 500,000 432,660 NC Charlotte/Douglas International Airport, U.S. Airways, Inc.: Series 1998, 5.600% 07/01/27 1,000,000 729,230 Series 2000, 7.750% 02/01/28 1,000,000 797,500 NJ State Economic Development Authority, Continental Airlines, Inc., Series 1999, 6.250% 09/15/29 2,000,000 1,594,960 TN Memphis-Shelby County Airport Authority, Federal Express Corp., Series 2002, 5.050% 09/01/12 500,000 537,950 ------------ 7,471,588 ------------ AIRPORT - 0.2% MA State Port Authority Revenue, Series 1999, 10.810% 01/01/21 1,000,000 1,221,880 ------------ PORTS - 0.6% WA Port of Seattle, Series 1999, 5.500% 09/01/17 2,445,000 2,867,643 ------------ RAILROAD - 0.0% OH Cleveland-Cuyahoga County Port Authority, Oglebay Northern Co. Project, Series 1997-1, 6.000% 03/01/07 180,000 199,508 ------------ TOLL FACILITIES - 3.4% CO E-470 Public Highway Authority, Series 2000 B, (a) 09/01/18 4,600,000 2,293,836 MA State Turnpike Authority: Series 1993 A, 5.000% 01/01/20 2,000,000 2,224,880 Series 1997 C, (a) 01/01/20 2,000,000 932,120 See notes to investment portfolio. 10 INVESTMENT PORTFOLIO (CONTINUED) June 30, 2003 MUNICIPAL BONDS (CONTINUED) PAR VALUE - ------------------------------------------------------- TRANSPORTATION (CONTINUED) TOLL FACILITIES (CONTINUED) NY Triborough Bridge & Tunnel Authority: Series 1992 Y, 6.125% 01/01/21 $5,500,000 $ 6,851,625 Series 2002 E, 5.500% 11/15/20 550,000 648,774 VA Richmond Metropolitan Authority, Series 1998, 5.250% 07/15/22 1,100,000 1,250,348 Series 2002, 5.250% 07/15/22 2,485,000 2,824,650 ------------ 17,026,233 ------------ TRANSPORTATION - 1.7% GA Metropolitan Atlanta Rapid Transit Authority, Series 1992 P, 6.250% 07/01/20 4,000,000 5,056,880 NV State Department of Business & Industry, Las Vegas Monorail Project, Series 2000: 7.375% 01/01/30 650,000 598,611 7.375% 01/01/40 500,000 454,845 OH Toledo-Lucas County Port Authority, CSX Transportation, Inc., Series 1992, 6.450% 12/15/21 2,000,000 2,181,860 ------------ 8,292,196 ------------ - ------------------------------------------------------- UTILITY - 24.7% INDEPENDENT POWER PRODUCER - 0.6% NY Suffolk County Industrial Development Agency, Nissequogue Cogen Partners, Series 1998, 5.500% 01/01/23 1,000,000 938,300 PR Commonwealth of Puerto Rico Industrial, Educational, Medical & Environmental Cogeneration Facilities, AES Project, Series 2000, 6.625% 06/01/26 650,000 683,963 PAR VALUE - ------------------------------------------------------- VA Pittsylvania County Industrial Development Authority, Multitrade of Pittsyvania, Series 1994 A, 7.550% 01/01/19 $1,500,000 $ 1,537,260 ------------ 3,159,523 ------------ INVESTOR OWNED - 1.9% IN Michigan City, Northern Indiana Public Service Co., Series 1973 A, 5.700% 10/01/03 1,105,000 1,117,111 IN Petersburg, Series 1995 C, 5.950% 12/01/29 1,500,000 1,419,690 IN State Development Finance Authority, Series 1999, 5.950% 08/01/30 1,000,000 913,140 OH State Air Quality Development Authority, Cleveland Electric Illuminating Co., Series 2002 A, 6.000% 12/01/13 2,500,000 2,631,300 TX Brazos River Authority, Texas Utilities Electric Co. Project: Series 1999 B, 6.750% 09/01/34 2,455,000 2,696,621 Series 2001 C, 5.750% 05/01/36 500,000 523,120 ------------ 9,300,982 ------------ JOINT POWER AUTHORITY - 10.2% GA State Municipal Electric Authority, Series 1991, 6.600% 01/01/18 17,700,000 22,358,994 MN Southern Minnesota Municipal Power Agency, Series 2002 A, 5.250% 01/01/17 2,000,000 2,308,680 NC Eastern Municipal Power Agency, Series 1991 A, 6.500% 01/01/18 2,185,000 2,549,873 Series 1992, (a) 01/01/09 2,260,000 1,932,006 Series 1993, 6.000% 01/01/18 5,500,000 6,715,225 Series 2003 D, 5.500% 01/01/14 3,000,000 3,238,470 OH State Municipal Electricity Generation Agency, Series 2001, (a) 02/15/29 3,000,000 852,660 See notes to investment portfolio. 11 INVESTMENT PORTFOLIO (CONTINUED) June 30, 2003 MUNICIPAL BONDS (CONTINUED) PAR VALUE - ------------------------------------------------------- UTILITY (CONTINUED) JOINT POWER AUTHORITY (CONTINUED) WA State Public Power Supply System: Nuclear Project No. 2, Series 1992 A, 6.300% 07/01/12 $3,500,000 $ 4,230,450 Nuclear Project No. 3, Series 1989 B, (a) 07/01/08 7,000,000 6,058,010 ------------ 50,244,368 ------------ MUNICIPAL ELECTRIC - 4.3% NC University of North Carolina at Chapel Hill, Series 1997, (a) 08/01/20 1,750,000 789,932 NY Long Island Power Authority, Series 2000, (a) 06/01/20 450,000 206,406 OH Cleveland Public Power System Revenue, Series 1994 A, (a) 11/15/13 2,000,000 1,357,500 PA Westmoreland County Municipal Authority, Series 2000 A, (a) 08/15/23 1,400,000 519,218 PR Puerto Rico Electric Power Authority: Series 2002 JJ, 5.375% 07/01/17 1,000,000 1,165,060 Series 2002 KK, 5.500% 07/01/16 2,000,000 2,378,040 SD Heartland Consumers Power District, Series 1992, 6.000% 01/01/17 8,000,000 9,788,480 TX Austin Electric Utility Systems Revenue, Series 2002, 5.500% 11/15/16 1,000,000 1,175,770 TX Austin Financial Service Department, Series 1998, 5.250% 05/15/25 3,710,000 4,122,107 ------------ 21,502,513 ------------ WATER & SEWER - 7.7% AZ Mesa Utility System Revenue, Series 2002, 5.250% 07/01/15 1,600,000 1,862,256 DE State Economic Development Authority, General Waterworks Corp., Series 1992 B, 6.450% 12/01/07 1,160,000 1,351,087 PAR VALUE - ------------------------------------------------------- GA Atlanta Water & Wastewater Revenue: Series 1999 A, 5.500% 11/01/22 $1,225,000 $ 1,420,142 Series 2001 A, 5.500% 11/01/27 1,500,000 1,736,985 GA Fulton County, Series 1992, 6.375% 01/01/14 430,000 526,066 NY State Environmental Facilities Corp., Clean Water and Drinking Water Revolving Fund Project, Series 2002 G, 5.500% 6/15/17 3,500,000 4,160,835 OH Cleveland Waterworks Revenue, Series 1993, 5.500% 01/01/21 3,000,000 3,475,890 OH Lakewood Water Systems Revenue, Series 1995, 5.850% 07/01/20 2,405,000 2,923,302 OH State Water Development Authority: Series 1990-1, 6.000% 12/01/16 1,000,000 1,208,880 Series 1991 B, 5.500% 06/01/18 1,000,000 1,180,900 OH Warren Waterworks Revenue, Series 1997, 5.500% 11/01/15 500,000 592,835 PA Allegheny County Sanitation Authority, Series 1991 A, (a) 06/01/07 2,370,000 2,178,338 PA Dauphin County Industrial Development Authority, Dauphin Water Supply Co., Series 1992 A, 6.900% 06/01/24 3,400,000 4,340,066 TX Houston Water & Sewer System Revenue: Series 1998, (a) 12/01/23 3,500,000 1,249,115 Series 1991 C: (a) 12/01/08 4,000,000 3,463,160 (a) 12/01/09 4,000,000 3,313,040 (a) 12/01/10 3,750,000 2,937,825 ------------ 37,920,722 ------------ TOTAL MUNICIPAL BONDS (cost of $425,092,154) 481,001,893 ------------ See notes to investment portfolio. 12 INVESTMENT PORTFOLIO (CONTINUED) June 30, 2003 MUNICIPAL PREFERRED STOCKS - 0.5% SHARES VALUE - ------------------------------------------------------- HOUSING - 0.5% MULTI-FAMILY - 0.5% Charter Municipal Mortgage Acceptance Co., 6.625% 06/30/09 (c) (cost of $2,000,000) 2,000,000 $ 2,194,640 ------------ SHORT-TERM OBLIGATIONS - 2.0% PAR - ------------------------------------------------------- VARIABLE RATE DEMAND NOTES - 2.0% IA Higher Education Loan Authority Revenue, Loras College Project, Series 2000, 1.000% 11/01/30 $ 200,000 200,000 IA State Department of Revenue, Ottumwa Regional Health Center Hospital, Series 1998, 1.000% 10/01/06 100,000 100,000 IL Health Facilities Authority Revenue, Bromenn Healthcare, Inc., Series 2002, 1.000% 08/15/32 700,000 700,000 NM Farmington Pollution Control Revenue, Arizona Public Service, Co., Series 1994 B, 0.900% 09/01/24 200,000 200,000 NY New York City, Series 1993 A, 0.950% 08/01/16 2,800,000 2,800,000 WY Lincoln County Pollution Control Revenue, Exxon Corp. Project, Series 1984 B, 0.860% 11/01/14 6,000,000 6,000,000 ------------ TOTAL SHORT-TERM OBLIGATIONS (cost of $10,000,000) 10,000,000 ------------ TOTAL INVESTMENTS - 99.3% (cost of $437,092,154) (g) 493,196,533 ------------ OTHER ASSETS & LIABILITIES, NET - 0.7% 3,724,999 - ------------------------------------------------------- NET ASSETS - 100.0% $496,921,532 ============ NOTES TO INVESTMENT PORTFOLIO: - -------------------------------------------------------------------------------- (a) Zero coupon bond. (b) As of June 30, 2003, the Fund held securities of certain issuers that have filed for bankruptcy protection under Chapter 11, representing 0.3% of net assets. These issuers are in default of certain debt covenants. Income is not being accrued. (c) These securities are exempt from registration under Rule 144A of the Securities Act of 1933 and may be resold in transactions exempt from registration, normally to qualified institutional buyers. At June 30, 2003, the value of these securities amounted to $4,451,240, which represents 0.9% of net assets. (d) This security, or a portion there of, with a total market value of $3,543,336 are being used to collateralized open futures contracts. (e) 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. (f) Security purchased on a delayed delivery basis. (g) Cost for federal income tax purposes is $436,350,655. Variable rate demand notes (VRDN) 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 credits or other credit support agreements from banks. The rates listed are as of June 30, 2003. Short futures contracts open at June 30, 2003: PAR VALUE UNREALIZED COVERED BY EXPIRATION APPRECIATION TYPE CONTRACTS MONTH AT 6/30/03 - -------------------------------------------------------- 10 Year U.S. Treasury Note $23,700,000 Sept-03 $414,198 See notes to financial statements. 13 STATEMENT OF ASSETS AND LIABILITIES June 30, 2003 ASSETS: Investments, at cost $437,092,154 ------------ Investments, at value $493,196,533 Cash 23,600 Receivable for: Fund shares sold 989,904 Interest 6,627,401 Expense reimbursement due from Distributor 3,930 Deferred Trustees' compensation plan 21,519 ------------ Total Assets 500,862,887 ------------ LIABILITIES: Payable for: Investments purchased 500,000 Investments purchased on a delayed delivery basis 2,118,580 Fund shares repurchased 247,490 Futures variation margin 88,875 Distributions 581,191 Management fee 158,269 Administration fee 42,476 Transfer agent fee 115,924 Pricing and bookkeeping fees 22,528 Merger fee 3,560 Trustees' fee 239 Deferred Trustees' fees 21,519 Other liabilities 40,704 ------------ Total Liabilities 3,941,355 ------------ NET ASSETS $496,921,532 ============ COMPOSITION OF NET ASSETS: Paid-in capital $435,936,979 Undistributed net investment income 721,332 Accumulated net realized gain 3,744,644 Net unrealized appreciation on: Investments 56,104,379 Futures contracts 414,198 ------------ NET ASSETS $496,921,532 ============ CLASS A: Net assets $ 53,979,452 Shares outstanding 5,756,439 ------------ Net asset value per share $ 9.38(a) ============ Maximum offering price per share ($9.38/0.9525) $ 9.85(b) ============ CLASS B: Net assets $ 8,955,811 Shares outstanding 955,050 ------------ Net asset value and offering price per share $ 9.38(a) ============ CLASS C: Net assets $ 1,579,454 Shares outstanding 168,474 ------------ Net asset value and offering price per share $ 9.38(a) ============ CLASS Z: Net assets $432,406,815 Shares outstanding 46,111,887 ------------ Net asset value, offering and redemption price per share $ 9.38 ============ (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 Year Ended June 30, 2003 INVESTMENT INCOME: Interest $25,989,334 ----------- EXPENSES: Management fee 2,020,198 Administration fee 561,229 Distribution fee: Class B 47,341 Class C 7,367 Service fee: Class A 73,740 Class B 12,978 Class C 2,024 Pricing and bookkeeping fees 214,339 Transfer agent fee 699,844 Trustees' fee 19,648 Custody fee 22,888 Merger expense 13,409 Other expenses 173,433 ----------- Total Expenses 3,868,438 Fees waived by Distributor - Class C (6,878) Custody earnings credit (1,914) ----------- Net Expenses 3,859,646 ----------- Net Investment Income 22,129,688 ----------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FUTURES CONTRACTS: Net realized gain (loss) on: Investments 10,875,109 Futures contracts (3,415,760) ----------- Net realized gain 7,459,349 ----------- Net change in unrealized appreciation/depreciation on: Investments 14,803,551 Futures contracts 632,901 ----------- Net change in unrealized appreciation/depreciation 15,436,452 ----------- Net Gain 22,895,801 ----------- Net Increase in Net Assets from Operations $45,025,489 ----------- See notes to financial statements. 14 STATEMENT OF CHANGES IN NET ASSETS YEAR ENDED JUNE 30, INCREASE (DECREASE) --------------------------- IN NET ASSETS: 2003 (a) 2002 - ------------------------------------------------------- OPERATIONS: Net investment income $ 22,129,688 $ 21,899,146 Net realized gain on investments and futures contracts 7,459,349 9,604,311 Net change in unrealized appreciation/depreciation on investments and futures contracts 15,436,452 (90,194) ------------ ------------ Net Increase from Operations 45,025,489 31,413,263 ------------ ------------ DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income: Class A (1,528,000) -- Class B (222,870) -- Class C (37,406) -- Class Z (19,508,563) (21,918,700) From net realized gains: Class Z -- (10,784,241) ------------ ------------ Total Distributions Declared to Shareholders (21,296,839) (32,702,941) ------------ ------------ SHARE TRANSACTIONS: Class A: Subscriptions 2,335,628 -- Proceeds received in connection with merger 56,105,119 -- Distributions reinvested 890,534 -- Redemptions (7,592,477) -- ------------ ------------ Net Increase 51,738,804 -- ------------ ------------ Class B: Subscriptions 302,522 -- Proceeds received in connection with merger 10,260,711 -- Distributions reinvested 145,914 -- Redemptions (2,149,839) -- ------------ ------------ Net Increase 8,559,308 -- ------------ ------------ Class C: Subscriptions 349,095 -- Proceeds received in connection with merger 1,808,445 -- Distributions reinvested 28,468 -- Redemptions (668,615) -- ------------ ------------ Net Increase 1,517,393 -- ------------ ------------ Class Z: Subscriptions 95,478,788 123,618,485 Distributions reinvested 13,852,730 20,950,871 Redemptions (140,614,453) (154,985,466) ------------ ------------ Net Decrease (31,282,935) (10,416,110) ------------ ------------ Net Increase (Decrease) from Share Transactions 30,532,570 (10,416,110) ------------ ------------ Total Increase (Decrease) in Net Assets 54,261,220 (11,705,788) YEAR ENDED JUNE 30, --------------------------- 2003 (a) 2002 - ------------------------------------------------------- NET ASSETS: Beginning of period $442,660,312 $454,366,100 ------------ ------------ End of period (including undistributed net investment income and overdistributed net investment income of $721,332 and $(99,213), respectively) $496,921,532 $442,660,312 ============ ============ CHANGES IN SHARES: Class A: Subscriptions 252,043 -- Issued in connection with merger 6,240,857 -- Issued for distributions reinvested 97,035 -- Redemptions (833,496) -- ------------ ------------ Net Increase 5,756,439 -- ------------ ------------ Class B: Subscriptions 32,805 -- Issued in connection with merger 1,141,022 -- Issued for distributions reinvested 15,909 -- Redemptions (234,686) -- ------------ ------------ Net Increase 955,050 -- ------------ ------------ Class C: Subscriptions 37,731 -- Issued in connection with merger 201,082 -- Issued for distributions reinvested 3,099 -- Redemptions (73,438) -- ------------ ------------ Net Increase 168,474 -- ------------ ------------ Class Z: Subscriptions 10,490,877 13,747,862 Issued for distributions reinvested 1,517,021 2,355,595 Redemptions (15,369,022) (17,188,343) ------------ ------------ Net Decrease (3,361,124) (1,084,886) ------------ ------------ (a) On July 29, 2002, the Stein Roe Managed Municipal Fund was redesignated Liberty Managed Municipal Fund, Class Z. Class A, Class B and Class C shares were initially offered on November 1, 2002. See notes to financial statements. 15 NOTES TO FINANCIAL STATEMENTS June 30, 2003 NOTE 1. ACCOUNTING POLICIES ORGANIZATION: Liberty Managed Municipals Fund (the "Fund") (formerly, Stein Roe Managed 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 consistent with prudent risk, 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 ("CDSC") 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 CDSC. 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 CDSC 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. On July 29, 2002, Stein Roe Managed Municipals Fund was renamed Liberty Managed Municipals Fund and the Fund's existing shares were redesignated as Class Z shares. The Fund began offering Class A, Class B and Class C shares on November 1, 2002. As of the end of business on November 1, 2002, the Fund acquired all the net assets of Liberty Ohio Tax-Exempt Fund pursuant to a plan of reorganization. All assets of Liberty Ohio Tax-Exempt Fund were transferred to the Fund in a tax-free exchange and shareholders of Liberty Ohio Tax-Exempt Fund received shares of Liberty Managed Municipals Fund in exchange for their shares as follows: LIBERTY LIBERTY OHIO MANAGED TAX-EXEMPT MUNICIPALS FUND FUND NET UNREALIZED SHARES ISSUED ASSETS RECEIVED APPRECIATION1 ------------- -------------- -------------- 7,582,961 $68,174,275 $5,937,882 1 Unrealized Appreciation is included in the Net Assets Received amount above. NET ASSETS NET ASSETS NET ASSETS OF LIBERTY OHIO OF LIBERTY OF LIBERTY TAX-EXEMPT MANAGED MANAGED FUND MUNICIPALS FUND MUNICIPALS FUND IMMEDIATELY IMMEDIATELY PRIOR TO PRIOR TO AFTER COMBINATION COMBINATION COMBINATION ------------- ------------- ------------- $443,275,288 $68,174,275 $511,449,563 The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. Investments for which market quotations are not readily available, or quotations which management believes are not appropriate, are valued at fair value under procedures approved by 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. The Fund may trade in securities other than normal settlement terms. This may increase the risk if the other party to the transaction fails to deliver and cause the Fund to subsequently invest at least advantageous prices. 16 NOTES TO FINANCIAL STATEMENTS (CONTINUED) June 30, 2003 DETERMINATION OF CLASS NET ASSET VALUES: 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. INVESTMENT INCOME, DISCOUNT AND PREMIUM: 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 June 30, 2003. NOTE 2. FEDERAL TAX INFORMATION Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from accounting principles generally accepted in the United States of America. These differences are primarily due to discount accretion on debt securities, straddle deferrals, mark-to-market on futures contracts, current year distribution payable, defaulted bond interest, market discount reclasses and non-deductible expenses. 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. For the year ended June 30, 2003, permanent items identified and reclassified among the components of net assets are as follows: UNDISTRIBUTED ACCUMULATED NET INVESTMENT NET REALIZED PAID-IN INCOME LOSS CAPITAL ------------- ------------- ------------- $(12,304) $(2,057,572) $2,069,876 Net investment income, net realized gains (losses) and net assets were not affected by this reclassification. Included in the reclassification are book to tax timing differences totaling $2,083,287 which were acquired as part of the merger. These timing differences are mostly comprised of capital loss carryforwards and straddle reversals. The tax character of distributions paid for the years ended June 30, 2003 and 2002 was as follows: 2003 2002 ---- ---- Tax-Exempt Income $21,266,033 $21,854,299 Ordinary Income 30,806 4,858,610 Long-Term Capital Gains -- 5,990,032 As of June 30, 2003, the components of distributable earnings on a tax basis were as follows: UNDISTRIBUTED UNDISTRIBUTED TAX-EXEMPT LONG-TERM UNREALIZED INCOME CAPITAL GAINS APPRECIATION ------------- ------------- ------------- $626,345 $7,760,037 $56,845,878 The estimated capital loss carryforward obtained from the Liberty Ohio Tax-Exempt Fund was $1,512,102, of which all was utilized by the Liberty Managed Municipals Fund for the year ended June 30, 2003. 17 NOTES TO FINANCIAL STATEMENTS (CONTINUED) June 30, 2003 NOTE 3. FEES AND COMPENSATION PAID TO AFFILIATES On April 1, 2003, Stein Roe & Farnham Incorporated ("Stein Roe"), the investment advisor and administrator to the Fund and Colonial Management Associates, Inc. ("Colonial"), the pricing and bookkeeping agent, merged into Columbia Management Advisors, Inc. ("Columbia"), formerly known as Columbia Management Co., an indirect, wholly-owned subsidiary of FleetBoston Financial Corporation. At the time of the merger, Columbia assumed the obligations of Stein Roe and Colonial with respect to the Fund. The merger did not change the way the Fund is managed, the investment personnel assigned to manage the Fund or the fees paid by the Fund. MANAGEMENT FEE: Columbia is the investment advisor of the Fund and receives a monthly fee as follows: AVERAGE DAILY NET ASSETS ANNUAL FEE RATE - ------------------------ --------------- First $100 million 0.450% Next $100 million 0.425% Next $800 million 0.400% Over $1 billion 0.375% ADMINISTRATION FEE: Columbia also provides accounting and other services for a monthly fee to the Fund as follows: AVERAGE DAILY NET ASSETS ANNUAL FEE RATE - ------------------------ --------------- First $100 million 0.150% Next $100 million 0.125% Next $800 million 0.100% Over $1 billion 0.075% PRICING AND BOOKKEEPING FEES: Columbia is responsible for providing pricing and bookkeeping services to the Fund under Pricing and Bookkeeping Agreement. Under a separate agreement (the "Outsourcing Agreement"), Columbia has delegated those functions to State Street Bank and Trust Company ("State Street"). Columbia pays fees to State Street under the Outsourcing Agreement. Under its pricing and bookkeeping agreements 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 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 year ended June 30, 2003, the net asset based fee rate was 0.034%. The Fund also pays out-of-pocket costs for pricing services. TRANSFER AGENT FEE: Liberty Funds Services, Inc. (the "Transfer Agent"), an affiliate of Columbia, 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 Columbia, is the Fund's principal underwriter. For the year ended June 30, 2003, the Fund has been advised that the Distributor retained net underwriting discounts of $2,657 on sales of the Fund's Class A shares and received contingent deferred sales charges ("CDSC") of $9,160 and $ 1,871 on Class B and Class C share redemptions, respectively. The Fund has adopted a 12b-1 (the "Plan"), for its Class A, Class B and Class C shares which requires the payment of a monthly service fee to the Distributor. The fee is calculated by adding (1) 0.10% on net assets attributable to shares of the Liberty Ohio Tax-Exempt Fund issued prior to December 1994 and (2) 0.25% on net assets attributable to all other shares. This arrangement results in a rate of service fee payable by Class A, Class B and Class C shares that is a blend between the 0.10% and 0.25% rates. For the year ended June 30, 2003, the service fee for Class A was 0.21% for Class B was 0.21% and for Class C was 0.21%. 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 0.05% 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. 18 NOTES TO FINANCIAL STATEMENTS (CONTINUED) June 30, 2003 The Fund has an agreement with its custodian bank under which $1,914 of custody fees were reduced by balance credits for the year ended June 30, 2003. 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. NOTE 4. PORTFOLIO INFORMATION INVESTMENT ACTIVITY: During the year ended June 30, 2003, purchases and sales of investments, other than short-term obligations, were $200,158,036 and $186,692,384, respectively. Unrealized appreciation/depreciation at June 30, 2003, for federal income tax purposes was: Gross unrealized appreciation $62,869,644 Gross unrealized depreciation (6,023,766) ----------- Net unrealized appreciation $56,845,878 =========== OTHER Investing in high-yield securities offers the potential for high current income and attractive total return, but involves greater credit and other risks not associated with investing in higher-quality bonds. Bond investing also involves interest rate risk, which means that bond prices may change as interest rates increase or decrease. 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. At June 30, 2003, the Fund had a significant concentration in Ohio representing 14% of net assets. 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 and other affiliated funds participate in a $350,000,000 credit facility which is used for temporary or emergency purposes to facilitate portfolio liquidity. Interest is charged to the Fund based on its borrowings. In addition, the Fund has agreed to pay commitment fees on its pro-rata portion of the line of credit. The commitment fee is included in "Other expenses" on the Statement of Operations. Prior to April 26, 2003, the Fund participated in a separate credit agreement with similar terms to its existing agreement. For the year ended June 30, 2003, there were no borrowings under this agreements. 19 FINANCIAL HIGHLIGHTS Selected data for a share outstanding throughout the period is as follows:
PERIOD ENDED JUNE 30, CLASS A SHARES 2003 (a) - ---------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.01 ------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (b) 0.26 Net realized and unrealized gain on investments and futures contracts 0.37 ------- Total from Investment Operations 0.63 ------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.26) ------- NET ASSET VALUE, END OF PERIOD $ 9.38 ======= Total return (c)(d) 7.06% ======= RATIOS TO AVERAGE NET ASSET/SUPPLEMENTAL DATA: Expenses (e)(f) 0.97% Net investment income (e)(f) 4.27% Portfolio turnover rate 40% Net assets, end of period (000's) $53,979
(a)Class A shares were initially offered on November 1, 2002. Per share data and total return reflect 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 initial sales charge or contingent deferred sales charge. (d)Not annualized. (e)The benefits derived from custody credits and directed brokerage arrangement, if applicable, had an impact of less than 0.01%. (f)Annualized. 20 FINANCIAL HIGHLIGHTS (CONTINUED) Selected data for a share outstanding throughout the period is as follows:
PERIOD ENDED JUNE 30, CLASS B SHARES 2003 (a) - ------------------------------------------------------------------------------------------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 9.01 ------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (b) 0.21 Net realized and unrealized gain on investments and futures contracts 0.37 ------- Total from Investment Operations 0.58 ------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.21) ------- NET ASSET VALUE, END OF PERIOD $ 9.38 ======= Total return (c)(d) 6.54% ======= RATIOS TO AVERAGE NET ASSET/SUPPLEMENTAL DATA: Expenses (e)(f) 1.72% Net investment income (e)(f) 3.52% Portfolio turnover rate 40% Net assets, end of period (000's) $ 8,956
(a)Class B shares were initially offered on November 1, 2002. Per share data and total return reflect 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 arrangement, if applicable, had an impact of less than 0.01%. (f)Annualized. 21 FINANCIAL HIGHLIGHTS (CONTINUED) Selected data for a share outstanding throughout the period is as follows:
PERIOD ENDED JUNE 30, CLASS C SHARES 2003 (a) - ------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.01 ------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (b) 0.25 Net realized and unrealized gain on investments and futures contracts 0.35 ------- Total from Investment Operations 0.60 ------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.23) ------- NET ASSET VALUE, END OF PERIOD $ 9.38 ------- Total return (c)(d)(e) 6.75% ------- RATIOS TO AVERAGE NET ASSET/SUPPLEMENTAL DATA: Expenses (f)(g) 1.02% Net investment income (f)(g) 4.20% Waiver/reimbursement (g) 0.70% Portfolio turnover rate 40% Net assets, end of period (000's) $ 1,579
(a)Class C shares were initially offered on November 1, 2002. Per share data and total return reflect 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)Had the Distributor not waived a portion of expenses, total return would have been reduced. (f)The benefits derived from custody credits and directed brokerage arrangement, if applicable, had an impact of less than 0.01%. (g)Annualized. 22 FINANCIAL HIGHLIGHTS (CONTINUED) Selected data for a share outstanding throughout each period is as follows:
YEAR ENDED JUNE 30, -------------------------------------------------------------------------- CLASS Z SHARES 2003 (a) 2002 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 8.95 $ 8.99 $ 8.65 $ 9.07 $ 9.38 ------- ------- ------- ------- ------- INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.42(b) 0.43(b)(c) 0.45(b) 0.47 0.47 Net realized and unrealized gain (loss) on investments and futures contracts 0.41 0.18(c) 0.41 (0.32) (0.31) ------- ------- ------- ------- ------- Total from Investment Operations 0.83 0.61 0.86 0.15 0.16 ------- ------- ------- ------- ------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.40) (0.44) (0.45) (0.47) (0.47) From net realized gains -- (0.21) (0.07) (0.10) -- ------- ------- ------- ------- ------- Total Distributions Declared to Shareholders (0.40) (0.65) (0.52) (0.57) (0.47) ------- ------- ------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 9.38 $ 8.95 $ 8.99 $ 8.65 $ 9.07 ------- ------- ------- ------- ------- Total return (d) 9.50% 7.06% 10.13% 1.86% 1.67% ------- ------- ------- ------- ------- RATIOS TO AVERAGE NET ASSET/SUPPLEMENTAL DATA: Expenses (e) 0.76% 0.76% 0.74% 0.69% 0.72% Net investment income (e) 4.58% 4.82%(c) 5.07% 5.39% 5.02% Portfolio turnover rate 40% 17% 17% 19% 17% Net assets, end of period (000's) $432,407 $442,660 $454,366 $458,205 $538,322
(a)On July 29, 2002, the Fund's existing 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 ratio of investment income to average net assets from 4.81% to 4.82%. The impact to net investment income and 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)The benefits derived from custody credits and directed brokerage arrangement, if applicable, had an impact of less than 0.01%. 23 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF LIBERTY-STEIN ROE FUNDS MUNICIPAL TRUST LIBERTY MANAGED MUNICIPALS FUND We have audited the accompanying statement of assets and liabilities, including the investment portfolio, of Liberty Managed Municipals Fund (formerly, Stein Roe Managed Municipals Fund) (the "Fund") (a series of Liberty-Stein Roe Funds Municipal Trust) as of June 30, 2003, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the periods indicated therein. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights. Our procedures included confirmation of securities owned as of June 30, 2003, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Liberty Managed Municipals Fund (a series of Liberty-Stein Roe Funds Municipal Trust) at June 30, 2003, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the periods indicated therein, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Boston, Massachusetts August 19, 2003 24 UNAUDITED INFORMATION FEDERAL INCOME TAX INFORMATION: 99.86% of the distributions from net investment income will be treated as exempt income for federal income tax purposes. For the fiscal year ended June 30, 2003, the Fund designates long-term capital gains of $7,760,037. 25 TRUSTEES AND OFFICERS The Trustees serve terms of indefinite duration. The names, addresses and ages of the Trustees and officers of the Liberty Funds, the year each was first elected or appointed to office, their principal business occupations during at least the last five years, the number of portfolios overseen by each Trustee and other directorships they hold are shown below. Each officer listed below serves as an officer of each of the Liberty Funds. The Statement of Additional Information (SAI) contains additional information about the Trustees and is available without charge upon request by calling the fund's distributor at 800-345-6611.
Number of Year First Portfolios in Elected or Liberty Funds Other Position with Appointed Principal Occupation(s) Complex Overseen Directorships Name, Address and Age Liberty Funds to Office1 During Past Five Years by Trustee Held - ------------------------------------------------------------------------------------------------------------------------------------ DISINTERESTED TRUSTEES Douglas A. Hacker (Age 47) Trustee 1996 Executive Vice President - Strategy of United 85 None P.O. Box 66100 Airlines (airline) since December, 2002 (formerly Chicago, IL 60666 President of UAL Loyalty Services (airline) from September, 2001 to December, 2002; Executive Vice President and Chief Financial Officer of United Airlines from March, 1993 to September, 2001; Senior Vice President and Chief Financial Officer of UAL, Inc. prior thereto). Janet Langford Kelly (Age 45) Trustee 1996 Executive Vice President-Corporate Development 85 None One Kellogg Square and Administration, General Counsel and Secretary, Battle Creek, MI 49016 Kellogg Company (food manufacturer), since September, 1999; Senior Vice President, Secretary and General Counsel, Sara Lee Corporation (branded, packaged, consumer-products manufacturer) from January, 1995 to September, 1999. Richard W. Lowry (Age 67) Trustee 1995 Private Investor since August, 1987 (formerly 87(4) None 10701 Charleston Drive Chairman and Chief Executive Officer, U.S. Plywood Vero Beach, FL 32963 Corporation (building products manufacturer)). Charles R. Nelson (Age 60) Trustee 1981 Professor of Economics, University of Washington, 120(2) None Department of Economics since January, 1976; Ford and Louisa Van Voorhis University of Washington Professor of Political Economy, University of Seattle, WA 98195 Washington, since September, 1993; Director, Institute for Economic Research, University of Washington, since September, 2001; Adjunct Professor of Statistics, University of Washington, since September, 1980; Associate Editor, Journal of Money Credit and Banking, since September, 1993; consultant on econometric and statistical matters. John J. Neuhauser (Age 60) Trustee 1985 Academic Vice President and Dean of Faculties since 88(4,5) Saucony, Inc. 84 College Road August, 1999, Boston College (formerly Dean, Boston (athletic Chestnut Hill, MA 02467-3838 College School of Management from September, 1977 footwear); to September, 1999. SkillSoft Corp. (E-Learning) Thomas E. Stitzel (Age 67) Trustee 1998 Business Consultant since 1999 (formerly Professor of 85 None 2208 Tawny Woods Place Finance from 1975 to 1999 and Dean from 1977 to 1991, Boise, ID 83706 College of Business, Boise State University); Chartered Financial Analyst.
26 TRUSTEES AND OFFICERS (CONTINUED)
Number of Year First Portfolios in Elected or Liberty Funds Other Position with Appointed Principal Occupation(s) Complex Overseen Directorships Name, Address and Age Liberty Funds to Office1 During Past Five Years by Trustee Held - ------------------------------------------------------------------------------------------------------------------------------------ DISINTERESTED TRUSTEES Thomas C. Theobald (Age 66) Trustee 1996 Managing Director, William Blair Capital Partners 85 Anixter 27 West Monroe Street, Suite 3500 (private equity investing) since September, 1994 International Chicago, IL 60606 (formerly Chief Executive Officer and Chairman (network support of the Board of Directors, Continental Bank equipment Corporation prior thereto). distributor), Jones Lang LaSalle (real estate management services) and MONY Group (life insurance). Anne-Lee Verville (Age 58) Trustee 1998 Author and speaker on educational systems needs 86(5) Chairman of 359 Stickney Hill Road (formerly General Manager, Global Education the Board of Hopkinton, NH 03229 Industry from 1994 to 1997, and President, Directors, Applications Solutions Division from 1991 to 1994, Enesco Group, IBM Corporation (global education and Inc. (designer, global applications)). importer and distributor of giftware and collectibles). INTERESTED TRUSTEES William E. Mayer3 (Age 63) Trustee 1994 Managing Partner, Park Avenue Equity Partners 87(4) Lee Enterprises 399 Park Avenue (private equity) since February, 1999 (formerly (print media), Suite 3204 Founding Partner, Development Capital LLC WR Hambrecht + Co. New York, NY 10022 from November 1996 to February, 1999; Dean and (financial service Professor, College of Business and Management, provider) and University of Maryland from October, 1992 to First Health November, 1996). (healthcare). Joseph R. Palombo3 (Age 50) Trustee, 2000 Executive Vice President and Chief Operating Officer 86(6) None One Financial Center Chairman of of Columbia Management Group, Inc. (Columbia Boston, MA 02111 the Board and Management) since December, 2001 and Director, President Executive Vice President and Chief Operating Officer of the Advisor since April, 2003 (formerly Chief Operations Officer of Mutual Funds, Liberty Financial Companies, Inc. from August, 2000 to November, 2001; Executive Vice President of Stein Roe & Farnham Incorporated (Stein Roe) from April, 1999 to April, 2003; Director of Colonial Management Associates, Inc. (Colonial) from April, 1999 to April, 2003; Director of Stein Roe from September, 2000 to April, 2003) President of Liberty Funds and Galaxy Funds since February, 2003 (formerly Vice President from September 2002 to February 2003); Manager of Stein Roe Floating Rate Limited Liability Company since October, 2000; (formerly Vice President of the Liberty Funds from April, 1999 to August, 2000; Chief Operating Officer and Chief Compliance Officer, Putnam Mutual Funds from December, 1993 to March, 1999).
1 In December, 2000, the boards of each of the Liberty Funds and former Stein Roe funds were combined into one board of trustees with common membership. The date shown is the earliest date on which a trustee was elected to either the Liberty Funds board or the former Stein Roe funds board. 2 In addition to serving as a disinterested Trustee of the Liberty Funds, Mr. Nelson serves as a disinterested Director or Trustee of the Columbia Funds and CMG Funds, currently consisting of 15 funds and 20 funds, respectively, which are advised by the Advisor. 3 Mr. Mayer is an "interested person" (as defined in the Investment Company Act of 1940 (1940 Act)) by reason of his affiliation with WR Hambrecht + Co. Mr. Palombo is an interested person as an employee of the Advisor. 4 In addition to serving as trustees of Liberty Funds, Messrs. Lowry, Neuhauser and Mayer each serve as a director/trustee of the Liberty All-Star Funds, currently consisting of 2 funds, which are advised by an affiliate of the Advisor. 5 In addition to serving as disinterested trustees of the Liberty Funds, Mr. Neuhauser and Ms. Verville serve as disinterested directors of Columbia Management Multi-Strategy Hedge Fund, LLC, which is advised by the Advisor. 6 In addition to serving as an interested trustee of the Liberty Funds, Mr. Palombo serves as an interested director of Columbia Management Multi-Strategy Hedge Fund, LLC, which is advised by the Advisor. 27
OFFICERS AND TRANSFER AGENT Year First Elected or Position with Appointed Name, Address and Age Liberty Funds to Office Principal Occupation(s) During Past Five Years - ------------------------------------------------------------------------------------------------------------------------------------ OFFICERS Vicki L. Benjamin (Age 41) Chief 2001 Controller of the Liberty Funds and of the Liberty All-Star Funds since May, One Financial Center Accounting 2002; Chief Accounting Officer of the Liberty Funds and Liberty All-Star Boston, MA 02111 Officer and Funds since June, 2001; Controller and Chief Accounting Officer of the Controller Galaxy Funds since September, 2002 (formerly Vice President, Corporate Audit, State Street Bank and Trust Company from May, 1998 to April, 2001; Audit Manager from July, 1994 to June, 1997; Senior Audit Manager from July, 1997 to May, 1998, Coopers & Lybrand, LLP). J. Kevin Connaughton (Age 39) Treasurer 2000 Treasurer of the Liberty Funds and of the Liberty All-Star Funds since One Financial Center December, 2000; Vice President of the Advisor since April, 2003 (formerly Boston, MA 02111 Controller of the Liberty Funds and of the Liberty All-Star Funds from February, 1998 to October, 2000); Treasurer of the Galaxy Funds since September, 2002; Treasurer, Columbia Management Multi-Strategy Hedge Fund, LLC since December, 2002 (formerly Vice President of Colonial from February, 1998 to October, 2000 and Senior Tax Manager, Coopers & Lybrand, LLP from April, 1996 to January, 1998).
IMPORTANT INFORMATION ABOUT THIS REPORT The Transfer Agent for Liberty Managed Municipals 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 Managed Municipals 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. Annual Report: Liberty Managed Municipals Fund [THIS PAGE INTENTIONALLY LEFT BLANK] Liberty Managed Municipals Fund ANNUAL REPORT, JUNE 30, 2003 [eagle head logo] LibertyFunds A Member of Columbia Management 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. 20 798-02/617O-0603 (08/03) 03/2208 ITEM 2. CODE OF ETHICS. Not applicable at this time. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. Not applicable at this time. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES Not applicable at this time. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS Not applicable at this time. ITEM 6. [RESERVED] ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES Not applicable at this time. ITEM 8. [RESERVED] ITEM 9. CONTROLS AND PROCEDURES. (a) The Registrant's Chief Executive Officer and Chief Financial Officer, based on their evaluation of the Registrant's disclosure controls and procedures as of a date within 90 days of the filing date 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 its reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the Registrant's management, including the Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. (b) There was no change in the registrant's internal control over financial reporting that occurred over the registrant's last fiscal half-year that has affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. ITEM 10. EXHIBITS. (a) File the exhibits listed below as part of this Form. Letter or number the exhibits in the sequence indicated. (a)(1) Any code of ethics, or amendment thereto, that is the subject of the disclosure required by Item 2, to the extent that the registrant intends to satisfy the Item 2 requirements through filing of an exhibit: Not applicable at this time. (a)(2) A separate certification for each principal executive officer and principal financial officer of the registrant as required by Rule 30a-2(a) under the Investment Company Act of 1940 (17270.30a-2(a)). Attached hereto as Exhibit 99.CERT. (b) A separate certification for each principal executive officer and principal financial officer of the registrant as required by Rule 30a-2(b) under the Investment Company Act of 1940 (17270.30a-2(b)). Attached hereto as Exhibit 99.906CERT. 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 - Stein Roe Funds Municipal Trust ----------------------------------------------------------- By (Signature and Title) /s/ Joseph R. Palombo ---------------------------------------------- Joseph R. Palombo, President Date September 5, 2003 ------------------------------------------------------------------- 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/ Joseph R. Palombo ---------------------------------------------- Joseph R. Palombo, President Date September 5, 2003 ------------------------------------------------------------------- By (Signature and Title) /s/ J. Kevin Connaughton ---------------------------------------------- J. Kevin Connaughton, Treasurer Date September 5, 2003 ------------------------------------------------------------------- EX-99.CERT 3 file002.txt CERTIFICATIONS I, Joseph R. Palombo, certify that: 1. I have reviewed this report on Form N-CSR of Liberty - Stein Roe Funds Municipal Trust; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 5, 2003 /s/ Joseph R. Palombo ---------------------------------------- Joseph R. Palombo, President I, J. Kevin Connaughton, certify that: 1. I have reviewed this report on Form N-CSR of Liberty - Stein Roe Funds Municipal Trust; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 5, 2003 /s/ J. Kevin Connaughton ------------------------------- J. Kevin Connaughton, Treasurer EX-99.906CERT 4 file003.txt CERTIFICATIONS CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Certified Shareholder Report of Liberty - Stein Roe Funds Municipal Trust (the "Trust") on Form N-CSR for the period ending June 30, 2003, as filed with the Securities and Exchange Commission on the date hereof ("the Report"), the undersigned hereby certifies that, to his knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Trust. Date: September 5, 2003 /s/ Joseph R. Palombo ---------------------------------------- Joseph R. Palombo, President A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission (the "Commission") or its staff upon request. This certification is being furnished to the Commission solely pursuant to 18 U.S.C. ss.1350 and is not being filed as part of the Form N-CSR with the Commission. CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Certified Shareholder Report of Liberty - Stein Roe Funds Municipal Trust (the "Trust") on Form N-CSR for the period ending June 30, 2003, as filed with the Securities and Exchange Commission on the date hereof ("the Report"), the undersigned hereby certifies that, to his knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Trust. Date: September 5, 2003 /s/ J. Kevin Connaughton ------------------------------- J. Kevin Connaughton, Treasurer A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission (the "Commission") or its staff upon request. This certification is being furnished to the Commission solely pursuant to 18 U.S.C. ss.1350 and is not being filed as part of the Form N-CSR with the Commission. -----END PRIVACY-ENHANCED MESSAGE-----