N-30D 1 a2104298zn-30d.txt N-30D ANNUAL REPORT - CLASS B SHARES DECEMBER 31, 2002 [GRAPHIC] LIBERTY VARIABLE INVESTMENT TRUST STEINROE VARIABLE INVESTMENT TRUST WANGER ADVISORS TRUST 2002 ANNUAL REPORT LIBERTY VARIABLE INVESTMENT TRUST STEINROE VARIABLE INVESTMENT TRUST WANGER ADVISORS TRUST PRESIDENT'S MESSAGE Liberty Variable Investment Trust SteinRoe Variable Investment Trust Dear Shareholder: Early in 2002, signs of robust growth lifted investor hopes for better times for the economy and the stock markets. But the good news was short-lived. Scandals and bankruptcies, disappointing earnings reports, terrorist fears and the mounting threat of war in Iraq unsettled investors, who retreated to the highest quality bonds. All major stock market indexes declined late in the first quarter, and the decline sharpened as the economy failed to stage a convincing recovery. Stocks did not reverse course with any conviction until October. A fourth-quarter rally in the stock market was helped by the Federal Reserve's decision in November to cut a key short-term interest rate by one half of one percent. The move was aimed at averting a double-dip recession. In fact, growth for the year was expected to average 3.0%, despite expectations for a relatively weak fourth quarter. Free-spending American consumers accounted for nearly all the economy's growth during the year. Retail and auto sales continued strong into the fourth quarter, buoyed by incentives, sales and discounts. Homeowners refinanced mortgages at 30-year-low interest rates and pumped their added disposable income back into the economy. Business spending failed to move up in any meaningful way and the jobless rate climbed to 6.0%. Although US stock markets gained ground in the fourth quarter, it wasn't enough to offset declines recorded earlier in the year. The S&P 500 Index, a broad measure of common stock performance, returned negative 22.09% for the year. Mid-cap stocks performed better than both large and small-cap stocks and value performed better than growth investments, although all were down for the year. Outside the United States, most major economies faltered while emerging economies in Asia and some in Eastern Europe fared better. The MSCI EAFE Index, which measures stock market performance in major developed countries, returned negative 15.94% for the year. Perhaps the biggest disappointment was Japan's failure to make any meaningful progress in solving its decade-old banking problems. Japan held onto economic growth by a slim margin during the year. Bond markets topped the performance charts both in the United States and abroad. In general, higher quality bonds outperformed lower quality bonds. However, high-yield bonds rallied in the fourth quarter and corporate bonds, which lagged Treasuries throughout the year, took the lead in the fourth quarter. The following reports provide more detailed information about the performance and the strategies used by the individual portfolio managers. As always, I encourage you to read the information contained in these reports and to maintain an active interest in your variable annuity. Sincerely, /s/ Keith T. Banks Keith T. Banks President - 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. PERFORMANCE AT A GLANCE Liberty Variable Investment Trust SteinRoe Variable Investment Trust Wanger Advisors Trust
AVERAGE ANNUAL TOTAL RETURN AS OF 12/31/02 (%) INCEPTION 1-YEAR 3-YEAR 5-YEAR 10-YEAR LIFE ------------------------------------------------------------------------------------------------------------------------ LIBERTY VARIABLE INVESTMENT TRUST Colonial High Yield Securities Fund, Variable Series--Class B(1) 6/1/00 -3.62 -4.58 -- -- -3.20 Colonial Small Cap Value Fund, Variable Series--Class B(1) 6/1/00 -6.14 6.81 -- -- 2.56 Colonial Strategic Income Fund, Variable Series--Class B(1) 6/1/00 8.08 3.85 3.86 -- 6.68 Colonial U.S. Growth & Income Fund, Variable Series--Class B(1) 6/1/00 -22.06 -7.13 1.51 -- 10.59 Crabbe Huson Real Estate Investment Fund, Variable Series--Class B 6/1/99 0.42 10.12 -- -- 4.00 Liberty All-Star Equity Fund, Variable Series--Class B(1) 6/1/00 -25.96 -11.81 -2.46 -- -2.25 Liberty Newport Japan Opportunities Fund, Variable Series--Class B 5/30/00 -13.61 -- -- -- -28.94 Liberty S&P 500 Index Fund, Variable Series--Class B 5/30/00 -22.75 -- -- -- -15.65 Liberty Select Value Fund, Variable Series--Class B 5/30/00 -11.21 -- -- -- 0.89 Liberty Value Fund, Variable Series--Class B(1) 6/1/00 -20.76 -2.83 1.48 -- 8.74 Newport Tiger Fund, Variable Series--Class B(1) 6/1/00 -17.70 -16.55 -1.79 -- -2.74 Rydex Financial Services Fund, Variable Series--Class B 5/30/00 -14.20 -- -- -- -3.12 Rydex Health Care Fund, Variable Series--Class B 5/30/00 -19.73 -- -- -- -6.61 STEINROE VARIABLE INVESTMENT TRUST Liberty Federal Securities Fund, Variable Series--Class B(1) 6/1/00 9.59 8.91 6.88 6.78 -- Stein Roe Balanced Fund, Variable Series--Class B(1) 6/1/00 -11.94 -7.61 -0.02 6.00 -- Stein Roe Growth Stock Fund, Variable Series--Class B(1) 6/1/00 -30.27 -22.77 -4.20 5.77 -- Stein Roe Money Market Fund, Variable Series 1/1/89 1.23 3.62 4.16 4.30 -- WANGER ADVISORS TRUST Wanger Foreign Forty, Variable Series 2/2/99 -15.29 -15.10 -- -- 3.06 Wanger International Small Cap, Variable Series 5/3/95 -13.83 -21.19 5.21 -- 11.19 Wanger Twenty, Variable Series 2/2/99 -7.62 3.32 -- -- 10.56 Wanger U.S. Smaller Companies, Variable Series 5/3/95 -16.81 -5.23 2.95 -- 12.96
(1) Class B shares (newer class shares) performance information includes returns of the fund's class A shares (the oldest existing fund class) for periods prior to the inception of the newer class shares. These class A share returns were not restated to reflect any expense differential (e.g., Rule 12b-1 fees) between class A shares and the newer class shares. TABLE OF CONTENTS Liberty Variable Investment Trust PORTFOLIO MANAGERS' DISCUSSIONS Colonial High Yield Securities Fund, Variable Series 2 Colonial Small Cap Value Fund, Variable Series 20 Colonial Strategic Income Fund, Variable Series 36 Colonial U.S. Growth & Income Fund, Variable Series 55 Crabbe Huson Real Estate Investment Fund, Variable Series 68 Liberty All-Star Equity Fund, Variable Series 80 Liberty Newport Japan Opportunities Fund, Variable Series 95 Liberty S&P 500 Index Fund, Variable Series 107 Liberty Select Value Fund, Variable Series 125 Liberty Value Fund, Variable Series 139 Newport Tiger Fund, Variable Series 152 Rydex Financial Services Fund, Variable Series 164 Rydex Health Care Fund, Variable Series 176 FINANCIAL STATEMENTS Colonial High Yield Securities Fund, Variable Series 4 Colonial Small Cap Value Fund, Variable Series 22 Colonial Strategic Income Fund, Variable Series 38 Colonial U.S. Growth & Income Fund, Variable Series 57 Crabbe Huson Real Estate Investment Fund, Variable Series 70 Liberty All-Star Equity Fund, Variable Series 82 Liberty Newport Japan Opportunities Fund, Variable Series 97 Liberty S&P 500 Index Fund, Variable Series 109 Liberty Select Value Fund, Variable Series 127 Liberty Value Fund, Variable Series 141 Newport Tiger Fund, Variable Series 154 Rydex Financial Services Fund, Variable Series 166 Rydex Health Care Fund, Variable Series 178
TABLE OF CONTENTS SteinRoe Variable Investment Trust Wanger Advisors Trust STEINROE VARIABLE INVESTMENT TRUST PORTFOLIO MANAGERS` DISCUSSIONS Liberty Federal Securities Fund, Variable Series 194 Stein Roe Balanced Fund, Variable Series 207 Stein Roe Growth Stock Fund, Variable Series 230 Stein Roe Money Market Fund, Variable Series 243 FINANCIAL STATEMENTS Liberty Federal Securities Fund, Variable Series 196 Stein Roe Balanced Fund, Variable Series 209 Stein Roe Growth Stock Fund, Variable Series 232 Stein Roe Money Market Fund, Variable Series 245 WANGER ADVISORS TRUST PERFORMANCE REVIEWS Wanger U.S. Smaller Companies, Variable Series 260 Wanger International Small Cap, Variable Series 262 Wanger Twenty, Variable Series 264 Wanger Foreign Forty, Variable Series 266 FINANCIAL STATEMENTS 268
Must be preceded or accompanied by a prospectus. Liberty Funds Distributor, Inc. 2/2003 LIBERTY VARIABLE INVESTMENT TRUST PORTFOLIO MANAGER'S DISCUSSION Colonial High Yield Securities Fund, Variable Series / December 31, 2002 Colonial High Yield Securities Fund, Variable Series seeks high current income and total return. Scott B. Richards is the portfolio manager of the fund. Mr. Richards is a senior vice president of Colonial Management Associates, Inc. ANOTHER CHALLENGING YEAR FOR HIGH-YIELD BONDS Although high-yield bonds rallied in the fourth quarter of the year, most high-yield benchmarks posted negative returns for the 12 months ended December 31, 2002. It was the fifth consecutive year that total returns were below long-term averages. While these returns are disappointing, the sector has held up better than the equity markets, which logged significant losses for three consecutive years. The higher-quality sector of the high-yield market performed better than lower-quality bonds throughout most of the period, as rallying US Treasury securities lifted these interest-rate sensitive issues. The credit-sensitive sector of the high-yield market, by contrast, was hurt by the concerns that afflicted stocks--geopolitical and economic uncertainties, accounting scandals and the lack of investor confidence. The strength in the high-yield market that began at the end of 2001 faded early in 2002 as the economic recovery stalled and default rates remained stubbornly high. Based on our more subdued outlook, we increased our holdings in higher-quality, BB-rated bonds and reduced our stake in relatively lower-quality, B-rated bonds. Consistent with our long-term strategy however, credit-sensitive sectors remained high throughout the year, which had a negative impact on relative returns. In response to continuing declines in trading activity, we increased the number of holdings in the fund during the year. Holding smaller positions of more securities across a broad selection of industries improved the portfolio's liquidity and provided some cushion against market volatility. SEVERAL BRIGHT SPOTS Among the bright spots for the year were our holdings in the broadcast and housing industries. LIN Holding Corp, a television broadcaster, and Emmis Communications, a radio broadcaster, (0.7% and 0.2% of net assets, respectively) both showed improved earnings and increased asset valuations, increasing the prices of those high-yield issues. Homebuilders D.R. Horton and K. Hovnanian Enterprises, (1.0% and 1.2% of net assets, respectively) also reported favorable results throughout the year as the strong housing market continued throughout most of 2002. Our overweight positions in the energy, manufacturing and services sectors also were net positives for the fund. CABLE, CELLULAR STUMBLED Our holdings in the cellular industry and the cable television industry hurt fund performance. Bonds of US cable company Charter Communications (0.7% of net assets) suffered substantial declines as Adelphia's accounting scandal spread concerns throughout the industry, lowering asset valuations and reducing financing available to all cable companies. Our holdings in Adelphia, once one of the largest issuers in the high-yield market, were sold as our concerns about management increased, enabling us to avoid significant price declines in subsequent months. Calpine, a power company, faced a short-term debt rollover problem as bank liquidity for utilities became tighter. LOOKING AHEAD After five years of below-average returns to the high-yield market, we expect improvement in 2003. Industry default rates, which have been at near- historical highs for the past two years, are forecast to come down by year-end. High-yield spreads continue to be well above long-term averages and have historically attracted investor inflows as they widen. A prolonged recovery to the high-yield market will of course depend on improving economies, increased capital availability for issuers and more stability in equity and other capital markets. Regardless of the market environment, our strategy is to employ rigorous fundamental research to locate high-yield companies with strong market positions, good asset coverage and improving operating results. We believe these companies will outperform the market over the next twelve months. ---------- Economic and market conditions can frequently change. There is no assurance that the trends described here will continue or commence. Investing in Colonial High Yield Securities Fund, Variable Series offers the potential for high current income and attractive total return, but involves certain risks. Lower-rated bond risks include default of the issuer, rising interest rates and risk associated with investing in securities of foreign and emerging markets, including currency exchange rate fluctuations and economic and political change. Holdings are disclosed as of December 31, 2002, and are subject to change. 2 PERFORMANCE INFORMATION Colonial High Yield Securities Fund, Variable Series / December 31, 2002 AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 2002 (%)
1-YEAR LIFE ----------------------------------------------------- Class B(1) (6/1/00) -3.62 -3.20 CS First Boston High Yield Index(2) 3.10 2.51
Inception date of share class is in parentheses. [CHART] VALUE OF A $10,000 INVESTMENT, 5/19/98(3) - 12/31/02 Class B: $8,604
CLASS B SHARES CS FIRST BOSTON HIGH YIELD INDEX $ 10,000 $ 10,000 5/19/00 - 5/31/1998 $ 10,020 $ 10,030 06/01/1998 - 06/30/1998 $ 10,050 $ 10,051 07/01/1998 - 07/31/1998 $ 10,170 $ 10,121 08/01/1998 - 08/31/1998 $ 9,510 $ 9,434 09/01/1998 - 09/30/1998 $ 9,470 $ 9,433 10/01/1998 - 10/31/1998 $ 9,320 $ 9,246 11/01/1998 - 11/30/1998 $ 9,940 $ 9,714 12/01/1998 - 12/31/1998 $ 9,743 $ 9,692 01/01/1999 - 01/31/1999 $ 9,889 $ 9,783 02/01/1999 - 02/28/1999 $ 9,878 $ 9,762 03/01/1999 - 03/31/1999 $ 10,045 $ 9,851 04/01/1999 - 04/30/1999 $ 10,109 $ 10,069 05/01/1999 - 05/31/1999 $ 9,931 $ 9,960 06/01/1999 - 06/30/1999 $ 9,931 $ 9,965 07/01/1999 - 07/31/1999 $ 9,972 $ 9,970 08/01/1999 - 08/31/1999 $ 9,837 $ 9,882 09/01/1999 - 09/30/1999 $ 9,742 $ 9,805 10/01/1999 - 10/31/1999 $ 9,659 $ 9,757 11/01/1999 - 11/30/1999 $ 9,826 $ 9,890 12/01/1999 - 12/31/1999 $ 9,902 $ 10,010 01/01/2000 - 01/31/2000 $ 9,824 $ 9,970 02/01/2000 - 02/29/2000 $ 9,992 $ 10,032 03/01/2000 - 03/31/2000 $ 9,768 $ 9,881 04/01/2000 - 04/30/2000 $ 9,768 $ 9,866 05/01/2000 - 05/31/2000 $ 9,678 $ 9,708 06/01/2000 - 06/30/2000 $ 9,768 $ 9,926 07/01/2000 - 07/31/2000 $ 9,802 $ 10,019 08/01/2000 - 08/31/2000 $ 9,891 $ 10,086 09/01/2000 - 09/30/2000 $ 9,743 $ 9,993 10/01/2000 - 10/31/2000 $ 9,396 $ 9,683 11/01/2000 - 11/30/2000 $ 8,936 $ 9,301 12/01/2000 - 12/31/2000 $ 9,198 $ 9,488 01/01/2001 - 01/31/2001 $ 9,868 $ 10,057 02/01/2001 - 02/28/2001 $ 9,942 $ 10,158 03/01/2001 - 03/31/2001 $ 9,533 $ 9,956 04/01/2001 - 04/30/2001 $ 9,335 $ 9,853 05/01/2001 - 05/31/2001 $ 9,409 $ 10,051 06/01/2001 - 06/30/2001 $ 9,050 $ 9,895 07/01/2001 - 07/31/2001 $ 9,013 $ 10,001 08/01/2001 - 08/31/2001 $ 9,075 $ 10,141 09/01/2001 - 09/30/2001 $ 8,368 $ 9,501 10/01/2001 - 10/31/2001 $ 8,666 $ 9,718 11/01/2001 - 11/30/2001 $ 8,951 $ 10,032 12/01/2001 - 12/31/2001 $ 8,926 $ 10,039 01/01/2002 - 01/31/2002 $ 8,981 $ 10,133 02/01/2002 - 02/28/2002 $ 8,844 $ 10,061 03/01/2002 - 03/31/2002 $ 8,981 $ 10,291 04/01/2002 - 04/30/2002 $ 9,064 $ 10,455 05/01/2002 - 05/31/2002 $ 8,968 $ 10,418 06/01/2002 - 06/30/2002 $ 8,569 $ 10,055 07/01/2002 - 07/31/2002 $ 8,336 $ 9,767 08/01/2002 - 08/31/2002 $ 8,391 $ 9,894 09/01/2002 - 09/30/2002 $ 8,309 $ 9,772 10/01/2002 - 10/31/2002 $ 8,227 $ 9,712 11/01/2002 - 11/30/2002 $ 8,543 $ 10,226 12/01/2002 - 12/31/2002 $ 8,604 $ 10,351
NET ASSET VALUE PER SHARE ($) 12/31/01 12/31/02 ------------------------------------------------------------ Class B 6.50 5.76
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 SHARES. Total return performance includes changes in share price and reinvestment of all distributions. The CS First Boston High Yield Index is a broad-based, unmanaged index that tracks the performance of high-yield bonds. Indexes are not investments, do not incur fees or expenses and are not professionally managed. It is not possible to invest directly in an index. Securities in the fund may not match those in the index. MUTUAL FUND PERFORMANCE CHANGES OVER TIME. CURRENT RETURNS FOR THE FUND MAY BE DIFFERENT THAN THAT SHOWN. Performance numbers reflect all fund expenses, but do not include any insurance charges imposed by your insurance company's separate accounts. If performance included the effect of these additional charges, it would be lower. (1) Class B share (newer class shares) performance information includes returns of the fund's class A shares (the older existing fund class) for periods prior to the inception of the newer class shares. These class A share returns were not restated to reflect any expense differential (e.g., Rule 12b-1 fees) between class A shares and the new class shares. If differences in expenses were reflected, the returns for the periods prior to the inception of the newer class shares would be lower. (2) Index performance is from May 31, 1998. (3) Inception date of class A shares (oldest existing share class). 3 INVESTMENT PORTFOLIO Colonial High Yield Securities Fund, Variable Series / December 31, 2002
PAR VALUE ------------ ------------ CORPORATE FIXED-INCOME BONDS & NOTES--88.9% CONSTRUCTION--4.6% BUILDING CONSTRUCTION--4.6% Associated Materials, Inc. 9.750% 04/15/12 (a) $ 85,000 $ 89,250 Atrium Companies, Inc., 10.500% 05/01/09 50,000 48,750 D.R. Horton, Inc., 9.750% 09/15/10 260,000 266,500 KB Home, 8.625% 12/15/08 115,000 118,737 K. Hovnanian Enterprises, Inc.: 8.875% 04/01/12 155,000 147,250 10.500% 10/01/07 160,000 172,000 Lennar Corp., 7.625% 03/01/09 135,000 139,725 Ryland Group, Inc., 9.125% 06/15/11 85,000 90,100 Standard Pacific Corp., 9.250% 04/15/12 175,000 168,000 ------------ 1,240,312 ------------ CONSUMER STAPLES--1.3% HOUSEHOLD PRODUCTS--1.3% Armkell LLC, 9.500% 08/15/09 45,000 48,712 Playtex Products, Inc., 9.375% 06/01/11 270,000 294,300 ------------ 343,012 ------------ FINANCE, INSURANCE & REAL ESTATE--2.5% DEPOSITORY INSTITUTIONS--1.4% Sovereign Bancorp, Inc., 10.500% 11/15/06 350,000 394,363 ------------ FINANCIAL SERVICES--0.6% MDP Acquisitions PLC, 9.625% 10/01/12 (a) 150,000 156,750 ------------ INSURANCE AGENTS & Brokers--0.3% Willis Corroon Corp., 9.000% 02/01/09 70,000 73,850 ------------ REAL ESTATE--0.2% Istar Financial, Inc., 8.750% 08/15/08 45,000 47,250 ------------ INDUSTRIALS--0.6% CONSTRUCTION & FARM MACHINERY--0.3% Cummins, Inc., 9.500% 12/01/10 (a) 80,000 84,800 ------------ INDUSTRIAL CONGLOMERATE--0.3% SPX Corp., 7.500% 01/01/13 75,000 75,938 ------------ MANUFACTURING--25.7% APPAREL--0.2% William Carter Co., 10.875% 08/15/11 $ 60,000 $ 65,400 ------------ AUTO PARTS & EQUIPMENT--0.7% American Axle & Manufacturing, Inc., 9.750% 03/01/09 145,000 155,875 Rexnord Corp., 10.125% 12/15/12 (a) 40,000 41,400 ------------ 197,275 ------------ CHEMICALS & ALLIED PRODUCTS--6.0% Avecia Group PLC, 11.000% 07/01/09 80,000 62,400 FMC Corp., 10.250% 11/01/09 (a) 105,000 113,400 Huntsman ICI Holdings LLC, (b) 12/31/09 1,070,000 246,100 Koppers Industries, Inc., 9.875% 12/01/07 155,000 139,500 Lyondell Chemical Co., Series 1999 A, 9.625% 05/01/07 450,000 430,875 MacDermid, Inc., 9.125% 07/15/11 275,000 294,250 Terra Capital, Inc., 12.875% 10/15/08 190,000 203,300 Texas Petrochemicals Corp., 11.125% 07/01/06 175,000 106,750 ------------ 1,596,575 ------------ ELECTRONIC & ELECTRICAL EQUIPMENT--0.5% Flextronics International Ltd., 9.875% 07/01/10 130,000 140,400 ------------ FABRICATED METAL--0.4% Earle M. Jorgensen Co., 9.750% 06/01/12 100,000 102,000 ------------ FOOD & KINDRED PRODUCTS--2.6% Constellation Brands, Inc., 8.125% 01/15/12 75,000 77,625 Del Monte Corp., 9.250% 05/15/11 60,000 62,400 Dole Food Co., Inc., 7.250% 05/01/09 85,000 80,750 New World Pasta Co., 9.250% 02/15/09 70,000 35,000 Premier International Foods PLC, 12.000% 09/01/09 200,000 214,000 Roundy's, Inc., 8.000% 10/15/09 (a) 110,000 108,625 Smithfield Foods, Inc., 8.000% 10/15/09 115,000 117,300 ------------ 695,700 ------------
See Notes to Investment Portfolio. 4
PAR VALUE ------------ ------------ FURNITURE & FIXTURES--0.5% Congloleum Corp., 8.625% 08/01/08 $ 65,000 $ 27,950 Juno Lighting, Inc., 11.875% 07/01/09 75,000 75,000 Simmons Co., Series 1999 B, 10.250% 03/15/09 35,000 37,975 ------------ 140,925 ------------ MACHINERY & COMPUTER EQUIPMENT--0.2% JLG Industries, Inc., 8.375% 06/15/12 70,000 57,750 ------------ MEASURING & ANALYZING INSTRUMENTS--0.4% Fisher Scientific International, Inc., 8.125% 05/01/12 100,000 103,250 ------------ MISCELLANEOUS MANUFACTURING--4.0% Actuant Corp., 13.000% 05/01/09 101,000 118,170 Agco Corp., 9.500% 05/01/08 100,000 108,000 Applied Extrusion Technologies, Inc., 10.750% 07/01/11 90,000 57,600 Ball Corp.: 6.875% 12/15/12 (a) 35,000 35,175 8.250% 08/01/08 70,000 73,500 Flowserve Corp., 12.250% 08/15/10 81,000 88,290 Johnsondiversey, Inc., 9.625% 05/15/12 (a) 150,000 157,500 Owens-Illinois, Inc.: 7.150% 05/15/05 40,000 38,800 7.350% 05/15/08 50,000 46,500 7.500% 05/15/10 90,000 83,250 8.100% 05/15/07 50,000 48,250 Tekni Plex, Inc., 12.750% 06/15/10 205,000 186,550 Terex Corp., Series 2001 B, 10.375% 04/01/11 40,000 37,600 ------------ 1,079,185 ------------ PAPER PRODUCTS--1.9% Corp. Durango SA, 13.125% 08/01/06 125,000 45,000 Jefferson Smurfit Corp., 8.250% 10/01/12 (a) 65,000 66,625 Riverwood International Corp., 10.875% 04/01/08 295,000 297,950 Tembec Industries, Inc., 8.500% 02/01/11 90,000 90,450 ------------ 500,025 ------------ PRIMARY METAL--1.2% AK Steel Corp., 7.750% 06/15/12 (a) 100,000 100,750 Kaiser Aluminum & Chemical Corp., 10.875% 10/15/06 (c) (e) $ 195,000 $ 130,650 Oregon Steel Mills, Inc., 10.000% 07/15/09 (a) 50,000 50,500 WCI Steel, Inc., 10.000% 12/01/04 (c) 160,000 36,800 Wheeling-Pittsburg Corp., 9.250% 11/15/07 (c) (e) 250,000 7,500 ------------ 326,200 ------------ PRINTING & PUBLISHING--3.1% American Greetings Corp., 11.750% 07/15/08 70,000 76,300 Dex Media East LLC, 12.125% 11/15/12 (a) 145,000 160,587 PriMedia Inc., 8.875% 05/15/11 150,000 136,125 Quebecor Media, Inc., 11.125% 07/15/11 150,000 138,000 Von Hoffman Corp., 10.250% 03/15/09 110,000 104,500 Yell Finance BV, 10.750% 08/01/11 185,000 201,650 ------------ 817,162 ------------ STONE, CLAY, GLASS & CONCRETE--0.5% Anchor Glass Container Corp., 11.250% 04/01/05 125,000 122,500 ------------ TRANSPORTATION EQUIPMENT--3.5% Allied Holdings Inc., Series 1997 B, 8.625% 10/01/07 50,000 38,500 Collins & Aikman Products Co., 10.750% 12/31/11 165,000 156,750 Dana Corp.: 9.000% 08/15/11 55,000 53,212 10.125% 03/15/10 (a) 60,000 60,900 Dura Operating Corp., 8.625% 04/15/12 90,000 90,900 Lear Corp., 8.110% 05/15/09 520,000 549,900 ------------ 950,162 ------------ MINING & ENERGY--8.3% METALS & MINING--0.5% TriMas Corp., 9.875% 06/15/12 (a) 140,000 138,600 ------------ OIL & GAS EXTRACTION--7.1% Benton Oil & Gas Co., 9.375% 11/01/07 55,000 49,500 Chesapeake Energy Corp., 8.125% 04/01/11 200,000 207,000 Compton Petroleum Corp., 9.900% 05/15/09 (a) 575,000 603,750 Denbury Management, Inc., 9.000% 03/01/08 30,000 30,750
See Notes to Investment Portfolio. 5
PAR VALUE ------------ ------------ El Paso Energy Partners, LP, 8.500% 06/01/11 (a) $ 45,000 $ 41,400 Encore Acquisition Co., 8.375% 06/15/12 (a) 95,000 98,800 Forest Oil Corp., 8.000% 06/15/08 95,000 100,225 Magnum Hunter Resources, Inc., 10.000% 06/01/07 150,000 156,750 Mariner Energy, Inc., 10.500% 08/01/06 120,000 112,800 Petsec Energy, Inc., 9.500% 06/15/07 (c) (e) 200,000 2,000 Pioneer Natural Resources Co., 7.500% 04/15/12 25,000 26,375 Pogo Producing Co., 8.250% 04/15/11 205,000 215,250 Stone Energy Corp., 8.250% 12/15/11 50,000 51,625 Trico Marine Services, Inc., 8.875% 05/15/12 80,000 73,600 XTO Energy, Inc., 7.500% 04/15/12 130,000 137,800 ------------ 1,907,625 ------------ OIL & GAS FIELD SERVICES--0.7% Newpark Resources, Inc., Series 1997 B, 8.625% 12/15/07 200,000 187,000 ------------ RETAIL TRADE--3.4% FOOD RETAIL--1.1% Winn Dixie Stores, Inc., 8.875% 04/01/08 285,000 290,700 ------------ MISCELLANEOUS RETAIL--1.0% JC Penney Co., Inc., 9.000% 08/01/12 (a) 110,000 112,200 Steinway Musical Instruments, Inc., 8.750% 04/15/11 150,000 147,000 ------------ 259,200 ------------ RESTAURANTS--1.3% Yum! Brands, Inc.: 7.700% 07/01/12 225,000 235,125 8.875% 04/15/11 100,000 109,000 ------------ 344,125 ------------ SERVICES--20.5% AMUSEMENT & Recreation--9.1% Ameristar Casinos, Inc., 10.750% 02/15/09 95,000 103,550 Argosy Gaming Co., 10.750% 06/01/09 115,000 126,500 Boyd Gaming Corp.: 7.750% 12/15/12 (a) 70,000 69,300 9.500% 07/15/07 60,000 62,700 Circus & Eldorado/Silver Legacy Capital Corp., 10.125% 03/01/12 $ 105,000 $ 103,425 Coast Hotels & Casinos, Inc., 9.500% 04/01/09 100,000 106,250 Hollywood Casino Corp., 11.250% 05/01/07 230,000 249,550 Hollywood Casino Shreveport, 13.000% 08/01/06 220,000 224,400 Hollywood Park, Inc., 9.250% 02/15/07 250,000 222,500 International Game Technology, 8.375% 05/15/09 80,000 88,400 Majestic Investor Holdings, 11.653% 11/30/07 50,000 47,000 Mohegan Tribal Gaming Authority: 8.000% 04/01/12 40,000 41,900 8.375% 07/01/11 50,000 52,625 Park Place Entertainment, 9.375% 02/15/07 200,000 213,000 Penn National Gaming, Inc., 11.125% 03/01/08 200,000 218,000 Regal Cinemas, Inc., 9.375% 02/01/12 150,000 159,375 Riviera Holdings Corp., 11.000% 06/15/10 (a) 10,000 9,000 Six Flags, Inc., 9.500% 02/01/09 260,000 250,250 Venetian Casino Resort LLC, 11.000% 06/15/10 (a) 100,000 104,500 ------------ 2,452,225 ------------ AUTO EQUIPMENT & RENTAL SERVICES--0.7% United Rentals, Inc.: 8.000% 08/15/08 85,000 68,000 9.500% 06/01/08 130,000 106,600 ------------ 174,600 ------------ FUNERAL SERVICES--1.0% Service Corp. International, 7.700% 04/15/09 160,000 152,000 Stewart Enterprises, Inc., 10.750% 07/01/08 100,000 110,500 ------------ 262,500 ------------ HEALTH SERVICES--7.3% AmerisourceBergen Corp.: 7.250% 11/15/12 (a) 205,000 210,637 8.125% 09/01/08 100,000 107,000 Coventry Health Care, Inc., 8.125% 02/15/12 175,000 184,625 HCA Inc., 8.750% 09/01/10 395,000 452,607 Healthsouth Corp., 7.625% 06/01/12 140,000 115,500 InSight Health Services Corp., 9.875% 11/01/11 (a) 110,000 105,050
See Notes to Investment Portfolio. 6
PAR VALUE ------------ ------------ Magellan Health Services, Inc.: 9.000% 02/15/08 $ 170,000 $ 42,500 9.375% 11/15/07 (a) 80,000 62,400 MedQuest, Inc., 11.750% 08/15/12 (a) 125,000 123,750 PacifiCare Health Systems Inc., 10.750% 06/01/09 165,000 176,550 Radiologix, Inc., 10.500% 12/15/08 70,000 54,600 Res-Care, Inc., 10.625% 11/15/08 120,000 92,400 Tenet Healthcare Corp., 6.375% 12/01/11 130,000 116,675 United Surgical Partners International, Inc., 10.000% 12/15/11 100,000 102,500 ------------ 1,946,794 ------------ HOTELS, CAMPS & LODGING--1.7% Host Marriott LP, 9.500% 01/15/07 170,000 172,550 Starwood Hotels & Resorts Worldwide, Inc., 7.875% 05/01/12 (a) 290,000 287,100 ------------ 459,650 ------------ OTHER SERVICES--0.7% Advanstar Communications, Inc., 12.000% 02/15/11 120,000 93,600 Corrections Corp., 9.875% 05/01/09 (a) 100,000 107,000 ------------ 200,600 ------------ TRANSPORTATION, COMMUNICATIONS, ELECTRIC, GAS & SANITARY SERVICES--22.0% AEROSPACE--1.7% BE Aerospace, Inc., 8.875% 05/01/11 100,000 74,000 L-3 Communications Corp., 7.625% 06/15/12 60,000 62,100 Sequa Corp., 8.875% 04/01/08 125,000 119,379 TransDigm, Inc., 10.375% 12/01/08 200,000 206,000 ------------ 461,479 ------------ AIR TRANSPORTATION--0.7% Northwest Airlines Corp., 9.875% 03/15/07 85,000 54,400 U.S. Airways, Inc., 10.375% 03/01/13 (e) 275,000 137,500 ------------ 191,900 ------------ BROADCASTING--3.4% Allbritton Communications Co., 9.750% 11/30/07 110,000 114,290 British Sky Broadcasting PLC, 8.200% 07/15/09 200,000 218,486 CanWest Media, Inc., 10.625% 05/15/11 $ 125,000 $ 133,125 Clear Channel Communications, Inc., 8.000% 11/01/08 45,000 48,825 Corus Entertainment, Inc., 8.750% 03/01/12 45,000 47,700 Emmis Communications Corp., (d) 03/15/11 (12.500% 03/15/06) 74,000 59,385 LIN Holding Corp., (d) 03/01/08 (10.000% 03/01/03) 185,000 188,700 TV Azteca SA de CV, 10.500% 02/15/07 120,000 108,000 ------------ 918,511 ------------ CABLE--4.4% Cable Satisfaction International, Inc., 12.750% 03/01/10 155,000 31,000 Charter Communications Holdings LLC: (d) 04/01/11 (9.920% 04/01/04) 275,000 96,250 10.000% 04/01/09 115,000 50,600 10.750% 10/01/09 75,000 33,750 Diamond Cable Co., 10.750% 02/15/07 (c) (e) 230,000 23,000 EchoStar DBS Corp.: 9.250% 02/01/06 275,000 288,063 9.375% 02/01/09 200,000 212,000 Insight Communications Co., (d) 02/15/11 (12.250% 02/15/06) 425,000 233,750 Insight Midwest, 9.750% 10/01/09 (a) 130,000 122,850 Northland Cable Television, Inc., 10.250% 11/15/07 135,000 90,450 ------------ 1,181,713 ------------ COMMUNICATIONS--0.5% XM Satellite Radio Holdings, Inc., 14.000% 03/15/10 190,000 129,200 ------------ COMMUNICATION SERVICES--0.4% Crown Castle International Corp.: (d) 05/15/11 (10.375% 05/15/04) 70,000 45,500 SBA Communications, Inc., 10.250% 02/01/09 115,000 62,387 ------------ 107,887 ------------ ELECTRIC, GAS & SANITARY SERVICES--2.6% Allied Waste North America, Inc.: 8.500% 12/01/08 300,000 301,500 10.000% 08/01/09 295,000 293,525 HydroChem Industrial Services, 10.375% 08/01/07 125,000 93,750 ------------ 688,775 ------------
See Notes to Investment Portfolio. 7
PAR VALUE ------------ ------------ ELECTRIC SERVICES--3.3% AES Corp., 9.500% 06/01/09 $ 80,000 $ 48,800 Beaver Valley Funding Corp., 9.000% 06/01/17 220,000 243,835 Caithness Coso Funding Corp., Series 1999 B, 9.050% 12/15/09 125,300 122,794 Calpine Corp., 8.500% 02/15/11 175,000 77,875 CMS Energy Corp., 8.900% 07/15/08 110,000 97,900 Nevada Power Co., 10.875% 10/15/09 (a) 70,000 72,100 PSE&G Energy Holdings, Inc., 8.625% 02/15/08 110,000 89,100 Teco Energy, Inc., 10.500% 12/01/07 (a) 55,000 55,226 Western Resources, Inc., 7.875% 05/15/07 85,000 85,000 ------------ 892,630 ------------ MARINE TRANSPORTATION--0.2% Teekay Shipping Corp., 8.875% 07/15/11 50,000 51,250 ------------ MOTOR FREIGHT & WAREHOUSING--0.1% QDI LLC: 12.000% 06/15/09 (a) 11,922 1,773 12.500% 06/15/08 49,750 24,813 ------------ 26,586 ------------ POLLUTION CONTROL--0.2% Envirosource, Inc., 14.000% 12/15/08 47,729 42,956 ------------ RADIOTELEPHONE COMMUNICATIONS--2.1% Airgate PCS, Inc., (d) 10/01/09 (13.500% 10/01/04) 110,000 12,100 Horizon PCS, Inc., 13.750% 06/15/11 (a) 95,000 18,050 Nextel Communications, Inc.: 9.375% 11/15/09 370,000 335,775 9.750% 10/31/07 100,000 93,000 Rogers Cantel, Inc., 9.750% 06/01/16 115,000 102,350 US Unwired, Inc., (d) 11/01/09 (13.375% 11/01/04) 180,000 10,800 ------------ 572,075 ------------ RAILROAD--0.6% Kansas City Southern, 7.500% 06/15/09 55,000 57,750 TFM SA, 12.500% 06/15/12 (a) 110,000 109,588 ------------ 167,338 ------------ TELECOMMUNICATIONS--0.8% AT&T Wireless Services, Inc., 7.875% 03/01/11 $ 90,000 $ 90,000 Carrier1 International SA, 13.250% 02/15/09 (c) (e) 250,000 7,500 RCN Corp., 11.125% 10/15/07 50,000 11,000 Time Warner Telecom, Inc.: 9.750% 07/15/08 135,000 74,250 10.125% 02/01/11 55,000 30,250 ------------ 213,000 ------------ TRANSPORTATION SERVICES--0.8% Petroleum Helicopters, Inc., 9.375% 05/01/09 125,000 131,250 Stena AB, 9.625% 12/01/12 (a) 70,000 72,100 ------------ 203,350 ------------ WATER TRANSPORTATION--0.2% National Waterworks, Inc., 10.500% 12/01/12 (a) 50,000 52,500 ------------ TOTAL CORPORATE FIXED-INCOME BONDS & Notes (cost of $26,637,514) 23,835,553 ------------ SHARES ------------ PREFERRED STOCKS--1.7% TRANSPORTATION, COMMUNICATIONS, ELECTRIC, GAS & SANITARY SERVICES--1.7% BROADCASTING--0.4% Sinclair Capital, 11.625% PIK 1,000 107,500 ------------ CABLE--1.1% CSC Holdings Ltd.: 11.125% PIK 282 26,367 11.750% PIK 2,896 276,568 ------------ 302,935 ------------ COMMUNICATIONS--0.1% Dobson Communication Corp., 12.250% PIK 50 23,986 ------------ POLLUTION CONTROL--0.1% EnviroSource, Inc. 7.250% 300 13,890 ------------ Total Preferred Stocks (cost of $374,820) 448,311 ------------ COMMON STOCKS--0.0% TRANSPORTATION, COMMUNICATIONS, ELECTRIC, GAS & SANITARY SERVICES--0.0% POLLUTION CONTROL--0.0% EnviroSource, Inc. (e) 1,200 276 Fairlane Management Corp. (e) 1,200 -- ------------ TOTAL COMMON STOCKS (cost of $49) 276 ------------
See Notes to Investment Portfolio. 8
UNITS VALUE ------------ ------------ WARRANTS--0.0% (f) TRANSPORTATION, COMMUNICATIONS, ELECTRIC, GAS & SANITARY SERVICES--0.0% CABLE--0.0% Cable Satisfaction International, Inc., expires 03/01/05 220 $ 22 Ono Finance PLC, expires 02/15/11 (a) 85 1 ------------ 23 ------------ COMMUNICATIONS--0.0% UbiquiTel Inc., expires 04/15/10 (a) 50 12 XM Satellite Radio Holdings, Inc., expires 03/15/10 (a) 150 112 ------------ 124 ------------ MOTOR FREIGHT & WAREHOUSING--0.0% QDI LLC, expires 01/15/07 (a) 153 -- ------------ TELECOMMUNICATIONS--0.0% Carrier1 International SA, expires 02/19/09 113 1 Horizon PCS, Inc., expires 10/01/10 (a) 145 -- Jazztel PLC, expires 07/15/10 60 -- ------------ 1 ------------ TOTAL WARRANTS (cost of $22,709) 148 ------------ PAR VALUE ------------ ------------ SHORT-TERM OBLIGATION--8.5% Repurchase agreement with State Street Bank & Trust Co., dated 12/31/02, due 01/02/03 at 1.180%, collateralized by U.S. Treasury Bond maturing 02/15/20, market value $2,319,623 (repurchase proceeds $2,270,149) (cost of $2,270,000) $ 2,270,000 $ 2,270,000 ------------ TOTAL INVESTMENTS--99.1% (cost of $29,305,092)(g) 26,554,288 ------------ OTHER ASSETS & LIABILITIES, NET--0.9% 243,212 ------------ (NET ASSETS--100.0% $ 26,797,500 ============
NOTES TO INVESTMENT PORTFOLIO: (a) 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 December 31, 2002, the value of these securities amounted to $3,804,061 which represents 14.2% of net assets. (b) Zero coupon bond. (c) This issuer is in default of certain debt covenants. Income is not being fully accrued. (d) Stepped coupon bond. Currently accruing at zero. Shown parenthetically is the next interest rate to be paid and the date the Fund will begin accruing this rate. (e) As of December 31, 2002 the fund held certain securities that have filed for bankruptcy protection under Chapter 11, representing 1.2% of net assets. (f) Non-incoming producing. (g) Cost for federal income tax purposes is $29,197,944. The difference between cost for generally accepted accounting principles and cost on a tax basis is related to deferral of losses on wash sales and amortization/accretion tax elections on fixed income securities.
ACRONYM NAME ------- ---- PIK Payment-In-Kind
See Notes to Investment Portfolio. 9 STATEMENT OF ASSETS AND LIABILITIES Colonial High Yield Securities Fund, Variable Series / December 31, 2002 ASSETS: Investments, at cost $ 29,305,092 ------------ Investments, at value $ 26,554,288 Cash 181 Receivable for: Fund shares sold 30,651 Interest 540,385 Dividends 9,291 Deferred Trustees' compensation plan 2,273 ------------ TOTAL ASSETS 27,137,069 ------------ LIABILITIES: Expense reimbursement due to Distributor 5,648 Payable for: Investments purchased 229,687 Fund shares repurchased 60,666 Management fee 13,418 Distribution fee--Class B 267 Transfer agent fee 625 Pricing and bookkeeping fees 1,133 Audit fee 18,065 Deferred Trustees' fee 2,273 Other liabilities 7,787 ------------ TOTAL LIABILITIES 339,569 ------------ NET ASSETS $ 26,797,500 ============ COMPOSITION OF NET ASSETS: Paid-in capital $ 37,497,637 Undistributed net investment income 102,129 Accumulated net realized loss (8,051,462) Net unrealized depreciation on investments (2,750,804) ------------ NET ASSETS $ 26,797,500 ============ CLASS A: Net assets $ 11,561,594 Shares outstanding 1,996,066 ============ Net asset value per share $ 5.79 ============ CLASS B: Net assets $ 15,235,906 Shares outstanding 2,645,518 ============ Net asset value per share $ 5.76 ============
See Notes to Financial Statements. 10 STATEMENT OF OPERATIONS Colonial High Yield Securities Fund, Variable Series For the Year Ended December 31, 2002 INVESTMENT INCOME: Dividends $ 71,677 Interest 2,144,844 ------------ Total Investment Income (net of foreign taxes withheld of $1,213) 2,216,521 ------------ EXPENSES: Management fee 148,684 Distribution fee--Class B 28,436 Pricing and bookkeeping fees 12,508 Transfer agent fee 7,500 Trustees' fee 6,278 Custody fee 7,500 Audit fee 17,398 Other expenses 10,382 ------------ Total Expenses 238,686 Fees and expenses reimbursed by Distributor--Class B (16,857) Custody earnings credit (288) ------------ Net Expenses 221,541 ------------ Net Investment Income 1,994,980 ------------ NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY: Net realized gain (loss) on: Investments (3,559,323) Foreign currency transactions 265 ------------ Net realized loss (3,559,058) ------------ Net change in unrealized appreciation/depreciation on: Investments 694,076 Foreign currency translations (7,959) ------------ Net change in unrealized appreciation/depreciation 686,117 ------------ Net Loss (2,872,941) ------------ Net Decrease in Net Assets from Operations $ (877,961) ============
See Notes to Financial Statements. 11 STATEMENT OF CHANGES IN NET ASSETS Colonial High Yield Securities Fund, Variable Series
YEAR ENDED DECEMBER 31, ---------------------------- INCREASE (DECREASE) IN NET ASSETS: 2002 2001 --------------------------------- ------------ ------------ OPERATIONS: Net investment income $ 1,994,980 $ 2,470,797 Net realized loss on investments and foreign currency transactions (3,559,058) (3,133,938) Net change in unrealized appreciation/depreciation on investments and foreign currency translations 686,117 (163,686) ------------ ------------ Net Decrease from Operations (877,961) (826,827) ------------ ------------ DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income: Class A (945,103) (1,594,290) Class B (1,220,283) (710,340) Return of capital: Class A -- (86,410) Class B -- (38,500) ------------ ------------ Total Distributions Declared to Shareholders (2,165,386) (2,429,540) ------------ ------------ SHARE TRANSACTIONS: Class A: Subscriptions 4,191,874 3,285,968 Distributions reinvested 945,103 1,680,700 Redemptions (9,325,390) (4,505,992) ------------ ------------ Net Increase (Decrease) (4,188,413) 460,676 ------------ ------------ Class B: Subscriptions 14,150,523 13,302,022 Distributions reinvested 1,220,283 748,840 Redemptions (7,314,175) (5,494,522) ------------ ------------ Net Increase 8,056,631 8,556,340 ------------ ------------ Net Increase from Share Transactions 3,868,218 9,017,016 ------------ ------------ Total Increase in Net Assets 824,871 5,760,649 NET ASSETS: Beginning of period 25,972,629 20,211,980 ------------ ------------ End of period (including undistributed net investment income of $102,129 and $268,487, respectively) $ 26,797,500 $ 25,972,629 ============ ============ CHANGES IN SHARES: Class A: Subscriptions 666,673 438,159 Issued for distributions reinvested 163,230 256,988 Redemptions (1,471,172) (608,539) ------------ ------------ Net Increase (Decrease) (641,269) 86,608 ------------ ------------ Class B: Subscriptions 2,239,339 1,812,231 Issued for distributions reinvested 211,855 115,206 Redemptions (1,145,972) (748,618) ------------ ------------ Net Increase 1,305,222 1,178,819 ------------ ------------
See Notes to Financial Statements. 12 NOTES TO FINANCIAL STATEMENTS Colonial High Yield Securities Fund, Variable Series / December 31, 2002 NOTE 1. ORGANIZATION AND ACCOUNTING POLICIES ORGANIZATION--Colonial High Yield Securities Fund, Variable Series (the "Fund"), a series of Liberty Variable Investment Trust (the "Trust"), is a diversified portfolio of a Massachusetts business trust, registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The Fund's investment goal is to seek high current income and total return. The Fund's capitalization consists of an unlimited number of shares of beneficial interest without par value that represent a separate series of the Trust. The Fund offers two classes of shares: Class A and Class B. Each share of a class represents an equal proportionate beneficial interest in that share class and, when issued and outstanding, is fully paid and nonassessable. Shareholders would be entitled to share proportionally in the net assets of their share class available for distribution to shareholders upon liquidation of the Fund. Shares of the Fund are available and are being marketed exclusively as a pooled funding vehicle for variable annuity contracts ("VA contracts") and Variable Life Insurance Policies ("VLI Policies") offered by the separate accounts of certain life insurance companies ("Participating Insurance Companies"). The Participating Insurance Companies and their separate accounts own all the shares of the Fund. Liberty Advisory Services Corp. (the "Manager") ("LASC") provides investment management and advisory services to the Fund pursuant to its Management Agreement with the Fund. Colonial Management Associates, Inc. ("Colonial") provides sub-advisory services. LASC has delegated various administrative matters to Colonial. Colonial also provides pricing and bookkeeping services to the Fund. Liberty Funds Distributor, Inc. ("LFD"), an affiliate of the Manager, serves as the principal underwriter of the Fund. The Manager, Colonial and LFD are wholly-owned indirect subsidiaries of FleetBoston Financial Corporation ("FleetBoston"). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. SECURITY VALUATION AND TRANSACTIONS--Debt securities generally are valued by a pricing service based upon market transactions for normal, institutional-size trading units of similar securities. When management deems it appropriate, an over-the-counter or exchange bid quotation is used. Equity securities generally are valued at the last sale price or, in the case of unlisted or listed securities for which there were no sales during the day, at the current quoted bid price. Forward currency contracts are valued based on the weighted value of exchange-traded contracts with similar durations. Short-term obligations with a maturity of 60 days or less are valued at amortized cost. The values of all assets and liabilities quoted in foreign currencies are translated into U.S. dollars at that day's exchange rates. 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. Generally, trading in foreign securities is substantially completed each day at various times prior to the close of the New York Stock Exchange ("NYSE"). The values of such securities used in computing the net asset value of the Fund's shares are determined as of such times. Foreign currency exchange rates are also generally determined prior to the close of the NYSE. Occasionally, events affecting the values of such securities and such exchange rates may occur between the times at which they are determined and the close of the customary trading session of the NYSE which would not be reflected in the computation of the Fund's net asset value. If events materially affecting the value of such securities and such exchange rates occur during such period, then these securities will be valued at their fair value as determined in good faith by or under the supervision of the Board of Trustees. 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 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 AND FINANCIAL HIGHLIGHTS--All income, expenses (other than the Class B distribution fee), 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. The per share data was calculated using average shares outstanding during the period. In addition, Class B net 13 investment income per share data and ratios reflect the distribution fee applicable to Class B shares only. 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. INTEREST INCOME, DEBT DISCOUNT AND PREMIUM-- Interest income is recorded on the accrual basis. Discount is accreted to interest income over the life of a security with a corresponding increase in the cost basis. Premium is amortized against interest income with a corresponding decrease in the cost basis. DISTRIBUTIONS TO SHAREHOLDERS--The Fund intends to distribute as income dividends or capital gains distributions, at least annually, substantially all of its net investment income and net profits realized from the sale of investments. All dividends and distributions are reinvested in additional shares of the Fund at net asset value as of the record date of the distribution. Income and capital gain distributions are determined in accordance with federal income tax regulations. FOREIGN CURRENCY TRANSACTIONS--Net realized and unrealized gains (losses) on foreign currency transactions includes gains (losses) arising from the fluctuations in exchange rates between trade and settlement dates on securities transactions, gains (losses) arising from the disposition of foreign currency, and currency gains (losses) between the accrual and payment dates on dividends, interest income and foreign withholding taxes. The Fund does not distinguish that portion of gains (losses) on investments which is due to changes in foreign exchange rates from that which is due to changes in market prices of the investments. Such fluctuations are included with the net realized and unrealized gains (losses) on investments. FORWARD CURRENCY CONTRACTS--The Fund may enter into forward currency contracts to purchase or sell foreign currencies at predetermined exchange rates in connection with the settlement of purchases and sales of securities. The Fund may also enter into forward currency contracts to hedge certain other foreign currency denominated assets. The contracts are used to minimize the exposure to foreign exchange rate fluctuations during the period between trade and settlement date of the contracts. All contracts are marked-to-market daily, resulting in unrealized gains (losses) which become realized at the time the forward currency contracts are closed or mature. Realized and unrealized gains (losses) arising from such transactions are included in net realized and unrealized gains (losses) on foreign currency transactions. Forward currency contracts do not eliminate fluctuations in the prices of the Fund's portfolio securities. While the maximum potential loss from such contracts is the aggregate face value in U.S. dollars at the time the contract was opened, exposure is typically limited to the change in value of the contract (in U.S. dollars) over the period it remains open. Risks may also arise if counterparties fail to perform their obligations under the contracts. OTHER--Corporate actions and dividend income are recorded on the ex-date (except for certain foreign securities which are recorded as soon after ex-date as the Fund becomes aware of such), net of non-reclaimable tax withholdings. Where a high level of uncertainty as to collection exists, income on securities is recorded net of all tax withholdings with any rebates recorded when received. The Fund's custodian takes possession through the federal book-entry system of securities collateralizing repurchase agreements. Collateral is marked-to-market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund. The Fund may experience costs and delays in liquidating the collateral if the issuer defaults or enters bankruptcy. NOTE 2. FEDERAL TAX INFORMATION Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from generally accepted accounting principles. These differences are primarily due to differing treatments for foreign currency transactions, deferral of losses from wash sales, discount accretion/premium amortization on debt securities, capital loss carryforwards 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 December 31, 2002, 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 ------------- ------------ ------- $ 4,048 $ (4,714) $ 666
Net investment income, netrealized gains (losses) and net assets were not affected by this reclassi fication. 14 The tax character of distributions paid during 2002 and 2001 was as follows:
2002 2001 ----------- ----------- Distributions paid from: Ordinary income $ 2,165,386 $ 2,304,630 Return of capital -- 124,910 ----------- ----------- $ 2,165,386 $ 2,429,540 =========== ===========
As of December 31, 2002, the components of distributable earnings on a tax basis were as follows:
UNDISTRIBUTED ORDINARY UNREALIZED INCOME DEPRECIATION* ------------- ------------- $ 6,273 $ (2,643,656)
*The difference between book-basis and tax-basis unrealized depreciation is attributable primarily to the tax deferral of losses on wash sales and discount accretion/premium amortization on debt securities. The following capital loss carryforwards are available to reduce taxable income arising from future net realized gains on investments, if any, to the extent permitted by the Internal Revenue Code:
YEAR OF CAPITAL LOSS EXPIRATION CARRYFORWARD ---------- ------------ 2006 $ 48,985 2007 52,900 2008 1,136,229 2009 2,734,633 2010 4,075,815 ----------- $ 8,048,562 ===========
NOTE 3. FEES AND COMPENSATION PAID TO AFFILIATES MANAGEMENT AND SUB-ADVISORY FEES--The Manager receives a monthly fee equal to 0.60% annually of the Fund's average daily net assets. The Manager, out of the management fee it receives, pays Colonial a monthly sub-advisory fee equal to 0.40% annually of the Fund's average daily net assets. PRICING AND BOOKKEEPING FEES--Colonial is responsible for providing pricing and bookkeeping services to the Fund under a Pricing and Bookkeeping Agreement. Under a separate agreement (the "Outsourcing Agreement"), Colonial has delegated those functions to State Street Bank & Trust Company ("State Street"). Colonial pays fees to State Street under the Outsourcing Agreement. Under its pricing and bookkeeping agreement with the Fund, Colonial 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. The Fund also pays out-of-pocket costs for pricing services. TRANSFER AGENT FEE--Liberty Funds Services, Inc. (the "Transfer Agent"), an affiliate of the Manager, provides shareholder services for an annual rate of $7,500. DISTRIBUTION FEE--The Fund has adopted a 12b-1 plan, which requires it to pay LFD a monthly distribution fee equal to 0.25% annuallyofClassB average daily net assets as of the 20th of each month. EXPENSE LIMITS--The Manager and LFD have voluntarily agreed to reimburse all expenses, including management fees and distribution fees, but excluding interest, taxes, brokerage and extraordinary expenses incurred by the Fund in excess of 0.95% annually of the Fund's average daily net assets. LFD will first reimburse the Class B distribution fee up to 0.25% annually to reach the 0.95% limit on Class B expenses. If additional reimbursement is needed to meet the limit for each class, the Manager will then reimburse other expenses to the extent necessary. If additional reimbursement is still needed to reach the expense limit, the Manager will then waive a portion of its management fee to reach the expense limit. This arrangement may be terminated or modified by the Manager or LFD at any time. OTHER--The Fund pays no compensation to its officers, all of whom are employees of Colonial 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 $288 of custody fees were reduced by balance credits for the year ended December 31, 2002. The Fund could have invested a portion of the assets utilized in connection with the expense offset arrangement in an income-producing asset if it had not entered into such an agreement. NOTE 4. PORTFOLIO INFORMATION INVESTMENT ACTIVITY--For the year ended December31, 2002, purchases and sales of investments, other than short-term obligations, were $17,805,351 and $14,632,843, respectively. 15 Unrealized appreciation (depreciation) at December 31, 2002, based on cost of investments for federal income tax purposes, was: Gross unrealized appreciation $ 574,290 Gross unrealized depreciation (3,217,946) -------------- Net unrealized depreciation $ (2,643,656) ==============
OTHER--High yield investing offers the potential for high income and attractive total return, but also certain additional risks. These include credit risks associated with lower-rated bonds, changes in interest rates and certain risks associated with foreign investments. The Fund may focus its investments in certain industries, subjecting it to greater risk than a fund that is more diversified. NOTE 5. PROPOSED REORGANIZATION The Board of Trustees has approved a proposal to reorganize the Fund, subject to shareholder approval and the satisfaction of certain other conditions. Shareholders of the Fund are scheduled to vote on the proposal at a special meeting of shareholders to be held on February 19, 2003. If approved at the special meeting, the reorganization is proposed to take place on or around April 11, 2003. 16 FINANCIAL HIGHLIGHTS Colonial High Yield Securities Fund, Variable Series--Class B Shares Selected data for a share outstanding throughout each period is as follows:
YEAR ENDED PERIOD DECEMBER 31, ENDED -------------------- DECEMBER 31, 2002 2001 2000 (a) --------- -------- ------- NET ASSET VALUE, BEGINNING OF PERIOD $ 6.50 $ 7.42 $ 8.64 --------- -------- ------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (b) 0.51 0.74(c) 0.48 Net realized and unrealized loss on investments and foreign currency (0.74) (0.96)(c) (0.91) --------- -------- ------- Total from Investment Operations (0.23) (0.22) (0.43) --------- -------- ------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.51) (0.66) (0.75) In excess of net investment income -- -- (0.02) Return of capital -- (0.04) (0.02) --------- -------- ------- Total Distributions Declared to Shareholders (0.51) (0.70) (0.79) --------- -------- ------- NET ASSET VALUE, END OF PERIOD $ 5.76 $ 6.50 $ 7.42 ========= ======== ======= Total return (d)(e)(f) (3.62)% (2.96)% (4.96)%(g) RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA: Expenses (h) 0.95% 0.95% 0.95%(i) Net investment income (h) 8.00% 10.19%(c) 9.88%(i) Waiver/reimbursement 0.15% 0.23% 0.24%(i) Portfolio turnover rate 66% 54% 35% Net assets, end of period (000's) $ 15,236 $ 8,716 $ 1,199
(a) For the period from commencement of operations on June 1, 2000 to December 31, 2000. (b) Per share data was calculated using average shares outstanding during the period. (c) Effective January 1, 2001, the Fund 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 December 31, 2001, was to increase net investment income per share by $0.05, decrease net realized and unrealized gain (loss) per share by $0.05 and increase the ratio of net investment income to average net assets from 9.47% to 10.19%. Per share data and ratios for periods prior to December 31, 2001 have not been restated to reflect this change in presentation. (d) Total return at net asset value assuming all distributions reinvested. (e) Had the Distributor not waived a portion of expenses, total return would have been reduced. (f) Total return figure does not include any insurance company charges associated with a variable annuity. If included, total return would be reduced. (g) Not annualized. (h) The benefits derived from custody credits and directed brokerage arrangements, if applicable, had an impact of less than 0.01%. (i) Annualized. 17 REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of Liberty Variable Investment Trust and the Class B Shareholders of Colonial High Yield Securities Fund, Variable Series In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio, and the related statements of operations and of changes in net assets and the Class B financial highlights present fairly, in all material respects, the financial position of Colonial High Yield Securities Fund, Variable Series (the "Fund") (a series of Liberty Variable Investment Trust) at December 31, 2002, and the results of its operations, the changes in its net assets and the Class B financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and the Class B financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2002 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts February 12, 2003 18 UNAUDITED INFORMATION FEDERAL INCOME TAX INFORMATION 3.30% of the ordinary income distributed by the Fund, for the year ended December 31, 2002, qualifies for the corporate dividends received deduction. 19 PORTFOLIO MANAGER'S DISCUSSION Colonial Small Cap Value Fund, Variable Series / December 31, 2002 Colonial Small Cap Value Fund, Variable Series seeks long-term growth. Stephen Barbaro is portfolio manager of the fund. Mr. Barbaro is a senior vice president of Colonial Management Associates, Inc., the sub-advisor to the fund. Stock prices tumbled in 2002, posting steep losses for the first nine months of the year before rising in the fourth quarter. Value stocks performed better than more expensive growth stocks. The fund benefited from strong stock selection, as well as timely changes in sector weightings, although overall performance for the fund--as for the market--was down for the year. INVESTMENTS FOCUSED ON STOCKS WITH CHEAP VALUATIONS, STRONG BALANCE SHEETS Our strategy during the period focused on stocks that had both cheap valuations and strong balance sheets with relatively low levels of debt or relatively high cash positions. In general, stocks that met these criteria outperformed the market during the third quarter downturn and participated fully in the fourth quarter improvement. Using a bottom-up approach to stock selection, we kept the fund's assets diversified across a range of sectors with our largest stakes in consumer discretionary, industrial and financial stocks. In the consumer discretionary sector, we favored stocks that we believed could benefit from an economic recovery, including autos, restaurants, retailers and apparel companies. As consumer confidence wavered in the second half of the year, many of these stocks declined. Our holdings in the more defensive financial stocks sector held up relatively well during the volatile summer months. After increasing our stake in financial stocks early in the summer, we pared them back in the fall, selling more expensive company names as well as those with less-than-stellar balance sheets. SHIFT TOWARD MORE ECONOMICALLY SENSITIVE SECTORS Late in the third quarter, we increased our investment in economically-sensitive technology and industrials stocks whose valuations had reached attractive levels. In technology, we found the best opportunities in software and services, which tend to be less capital intensive, because these businesses don't involve heavy investments in plant and equipment. As a result, they tend to generate more cash flow than other areas, such as semiconductors or computer hardware manufacturers, for example. Our timing proved fortuitous as technology stocks rallied in the fourth quarter, although they remained down for the six-month period. Top gainers included Genesis Microchip and Storage Technology, both of which we sold. Industrials also did well, buoyed by the release of encouraging economic news toward year-end. OPPORTUNITY AHEAD We believe the possibility of war and uncertainties surrounding the sustainability of the economic recovery may contribute to a choppy market going forward. A prolonged war with Iraq could extend the aversion toward risk that investors demonstrated in 2002. That would likely be favorable for value stocks. However, if we avoid war and the economy keeps improving, investors may grow less risk averse, narrowing the gap between value and growth returns. In either scenario, we believe small-cap stocks will continue to be a source of opportunity, especially those with relatively cheap valuations and strong balance sheets. ---------- Economic and market conditions can frequently change. There is no assurance that the trends described here will continue or commence. Investing in Colonial Small Cap Value Fund, Variable Series may present special risks, including possible illiquidity and greater price volatility than stocks of larger, more established companies. 20 PERFORMANCE INFORMATION Colonial Small Cap Value Fund, Variable Series / December 31, 2002 AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 2002 (%)
1-YEAR LIFE ------------------------------------------------------------- Class B(1) (6/1/00) -6.14 2.56 S&P SmallCap 600/Barra Value Index(2) -14.47 5.48
Inception date of share class is in parentheses. [CHART] VALUE OF A $10,000 INVESTMENT, 5/19/983 - 12/31/02 CLASS B: $11,240
CLASS B SHARES S&P SMALLCAP 600/BARRA VALUE INDEX $ 10,000 $ 10,000 05/19/1998 - 05/31/1998 $ 10,020 $ 10,000 06/01/1998 - 06/30/1998 $ 10,050 $ 9,995 07/01/1998 - 07/31/1998 $ 9,120 $ 9,070 08/01/1998 - 08/31/1998 $ 7,201 $ 7,434 09/01/1998 - 09/30/1998 $ 7,461 $ 7,829 10/01/1998 - 10/31/1998 $ 7,881 $ 8,171 11/01/1998 - 11/30/1998 $ 8,401 $ 8,520 12/01/1998 - 12/31/1998 $ 8,675 $ 8,855 01/01/1999 - 01/31/1999 $ 8,464 $ 8,753 02/01/1999 - 02/28/1999 $ 7,626 $ 8,040 03/01/1999 - 03/31/1999 $ 7,525 $ 8,009 04/01/1999 - 04/30/1999 $ 8,030 $ 8,707 05/01/1999 - 05/31/1999 $ 8,354 $ 9,054 06/01/1999 - 06/30/1999 $ 8,788 $ 9,604 07/01/1999 - 07/31/1999 $ 8,778 $ 9,454 08/01/1999 - 08/31/1999 $ 8,324 $ 9,058 09/01/1999 - 09/30/1999 $ 8,273 $ 8,891 10/01/1999 - 10/31/1999 $ 8,313 $ 8,686 11/01/1999 - 11/30/1999 $ 8,545 $ 8,881 12/01/1999 - 12/31/1999 $ 9,226 $ 9,124 01/01/2000 - 01/31/2000 $ 8,640 $ 8,656 02/01/2000 - 02/29/2000 $ 9,216 $ 9,048 03/01/2000 - 03/31/2000 $ 9,358 $ 9,382 04/01/2000 - 04/30/2000 $ 9,459 $ 9,447 05/01/2000 - 05/31/2000 $ 9,317 $ 9,293 06/01/2000 - 06/30/2000 $ 9,692 $ 9,560 07/01/2000 - 07/31/2000 $ 9,783 $ 9,748 08/01/2000 - 08/31/2000 $ 10,582 $ 10,318 09/01/2000 - 09/30/2000 $ 10,582 $ 10,297 10/01/2000 - 10/31/2000 $ 10,633 $ 10,347 11/01/2000 - 11/30/2000 $ 9,864 $ 9,663 12/01/2000 - 12/31/2000 $ 10,969 $ 11,028 01/01/2001 - 01/31/2001 $ 11,061 $ 11,901 02/01/2001 - 02/28/2001 $ 10,743 $ 11,399 03/01/2001 - 03/31/2001 $ 10,569 $ 10,926 04/01/2001 - 04/30/2001 $ 11,346 $ 11,584 05/01/2001 - 05/31/2001 $ 11,683 $ 11,879 06/01/2001 - 06/30/2001 $ 11,765 $ 12,333 07/01/2001 - 07/31/2001 $ 11,847 $ 12,217 08/01/2001 - 08/31/2001 $ 11,613 $ 12,020 09/01/2001 - 09/30/2001 $ 10,215 $ 10,300 10/01/2001 - 10/31/2001 $ 10,460 $ 10,771 11/01/2001 - 11/30/2001 $ 11,165 $ 11,633 12/01/2001 - 12/31/2001 $ 11,978 $ 12,472 01/01/2002 - 01/31/2002 $ 12,071 $ 12,706 02/01/2002 - 02/28/2002 $ 12,310 $ 12,651 03/01/2002 - 03/31/2002 $ 13,181 $ 13,750 04/01/2002 - 04/30/2002 $ 13,410 $ 14,313 05/01/2002 - 05/31/2002 $ 12,995 $ 13,770 06/01/2002 - 06/30/2002 $ 12,591 $ 13,155 07/01/2002 - 07/31/2002 $ 11,046 $ 11,016 08/01/2002 - 08/31/2002 $ 11,295 $ 11,002 09/01/2002 - 09/30/2002 $ 10,531 $ 10,192 10/01/2002 - 10/31/2002 $ 10,749 $ 10,397 11/01/2002 - 11/30/2002 $ 11,581 $ 10,958 12/01/2002 - 12/31/2002 $ 11,240 $ 10,199
NET ASSET VALUE PER SHARE ($) 12/31/01 12/31/02 ------------------------------------------------------------- Class B 11.55 10.47
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 SHARES. Total return performance includes changes in share price and reinvestment of all distributions. The S&P SmallCap 600/Barra Value Index is an unmanaged index that tracks the performance of value stocks, as determined by low price-to-book ratios included in the S&P SmallCap 600 Index. Indexes are not investments, do not incur fees or expenses and are not professionally managed. It is not possible to invest directly in an index. Securities in the fund may not match those in the index. MUTUAL FUND PERFORMANCE CHANGES OVERTIME. CURRENT RETURNS FOR THE FUND MAY BE DIFFERENT THAN THAT SHOWN. Performance numbers reflect all fund expenses, but do not include any insurance charges imposed by your insurance company's separate accounts. If performance included the effect of these additional charges, it would be lower. (1) Class B share (newer class shares) performance information includes returns of the fund's class A shares (the older existing fund class) for periods prior to the inception of the newer class shares. These class A share returns were not restated to reflect any expense differential (e.g., Rule 12b-1 fees) between class A shares and the newer class shares. If differences in expenses were reflected, the returns for the periods prior to the inception of the newer class shares would be lower. (2) Index performance is from May 31, 1998. (3) Inception date of class A shares (oldest existing share class). 21 INVESTMENT PORTFOLIO Colonial Small Cap Value Fund, Variable Series / December 31, 2002
SHARES VALUE ------------ ------------ COMMON STOCKS--97.8% CONSUMER DISCRETIONARY--20.0% AUTOMOBILES & COMPONENTS--0.9% AUTO PARTS & EQUIPMENT--0.9% American Axle & Manufacturing Holdings, Inc. (a) 3,750 $ 87,825 Modine Manufacturing Co. 2,950 52,156 Standard Motor Products, Inc. 2,300 29,900 ------------ 169,881 ------------ CONSUMER DURABLES & APPAREL--6.6% APPAREL & ACCESSORIES--1.9% Delta Apparel, Inc. 3,150 48,510 Kellwood Co. 6,050 157,300 Nautica Enterprises, Inc. (a) 5,500 61,105 Tommy Hilfiger Corp. (a) 15,050 104,597 ------------ 371,512 ------------ FOOTWEAR--1.0% Maxwell Shoe Co. (a) 8,750 101,675 Stride Rite Corp. 5,200 37,284 Vans, Inc. (a) 10,150 57,652 ------------ 196,611 ------------ HOME FURNISHINGS--1.3% Bassett Furniture Industries, Inc. 7,050 100,956 Quaker Fabric Corp. (a) 8,350 58,032 Stanley Furniture Co., Inc. (a) 3,950 91,838 ------------ 250,826 ------------ HOUSEHOLD APPLIANCES--0.6% Toro Co. 1,900 121,410 ------------ HOUSEWARES & SPECIALTIES--1.1% American Greetings Corp. (a) 6,500 102,700 Helen of Troy Ltd. (a) 6,900 80,316 Russ Berrie & Co., Inc. 1,300 43,914 ------------ 226,930 ------------ LEISURE PRODUCTS--0.7% Jakks Pacific, Inc. (a) 8,150 109,780 Johnson Outdoors, Inc. (a) 3,000 29,610 Travis Boats & Motors, Inc. (a) 10,336 10,336 ------------ 149,726 ------------ HOTELS, RESTAURANTS & LEISURE--3.2% CASINOS & GAMING--0.3% Magna Entertainment Corp. (a) 8,250 51,150 ------------ HOTELS--0.8% Prime Hospitality Corp. (a) 19,820 161,533 ------------ LEISURE FACILITIES--0.4% Bally Total Fitness Holding Corp. (a) 12,000 85,080 ------------ RESTAURANTS--1.7% Buca, Inc. (a) 5,700 47,424 Jack in the Box, Inc. (a) 2,200 38,038 Landry's Restaurants, Inc. 5,150 109,386 Lone Star Steakhouse & Saloon 7,250 140,215 ------------ 335,063 ------------ MEDIA--1.0% BROADCASTING & CABLE--1.0% Alliance Atlantis Communications, Inc., Class B (a) 13,200 $ 141,240 Regent Communications, Inc. (a) 10,950 64,714 ------------ 205,954 ------------ RETAILING--8.3% APPAREL RETAIL--1.2% Casual Male Retail Group, Inc. (a) 15,600 60,372 Charming Shoppes (a) 12,900 53,922 Dress Barn, Inc. (a) 6,300 83,790 Goody's Family Clothing, Inc. (a) 10,300 45,732 ------------ 243,816 ------------ CATALOG RETAIL--0.0% Blair Corp. 250 5,830 ------------ COMPUTER & ELECTRONICS RETAIL--0.9% GTSI Corp. (a) 6,450 86,752 Pomeroy Computer Resources (a) 6,500 76,050 Tweeter Home Entertainment Group, Inc. (a) 2,550 14,943 ------------ 177,745 ------------ GENERAL MERCHANDISE STORES--0.3% ShopKo Stores, Inc. (a) 5,450 67,852 ------------ HOME IMPROVEMENT RETAIL--0.2% Building Material Holding Corp. 2,100 30,030 ------------ SPECIALTY STORES--5.7% Aaron Rents, Inc. 8,556 187,205 Borders Group, Inc. (a) 10,850 174,685 Friedman's, Inc. 6,600 57,288 Monro Muffler, Inc. (a) 6,050 102,245 Party City Corp. (a) 8,150 97,800 Rent-A-Center, Inc. (a) 800 39,960 Select Comfort Corp. (a) 6,900 64,860 Sports Authority, Inc. (a) 11,350 79,450 TBC Corp. (a) 2,650 31,826 United Rentals, Inc. (a) 4,500 48,420 Zale Corp. (a) 7,850 250,415 ------------ 1,134,154 ------------ CONSUMER STAPLES--1.2% FOOD & DRUG RETAILING--0.5% DRUG RETAIL--0.5% Longs Drug Stores Corp. 5,200 107,848 ------------ FOOD, BEVERAGES & TOBACCO--0.5% PACKAGED FOODS--0.5% Ralcorp Holdings, Inc. (a) 4,150 104,331 ------------ HOUSEHOLD & PERSONAL PRODUCTS--0.2% PERSONAL PRODUCTS--0.2% Inter Parfums, Inc. 4,800 37,152 ------------
See Notes to Investment Portfolio. 22
SHARES VALUE ------------ ------------ ENERGY--6.4% OIL & GAS EQUIPMENT & SERVICES--1.9% Lufkin Industries, Inc. 5,050 $ 118,422 Universal Compression Holdings, Inc. (a) 8,250 157,822 Willbros Group, Inc. (a) 11,540 94,859 ------------ 371,103 ------------ OIL & GAS EXPLORATION & PRODUCTION--4.5% 3TEC Energy Corp. (a) 5,960 84,572 Denbury Resources, Inc. (a) 6,450 72,885 EXCO Resources, Inc. (a) 9,345 163,351 Harvest Natural Resources, Inc. (a) 13,750 88,687 Peabody Energy Corp. 8,250 241,148 Spinnaker Exploration Co. (a) 3,850 84,892 Vintage Petroleum, Inc. 5,200 54,860 Westport Resources Corp. (a) 5,150 107,120 ------------ 897,515 ------------ FINANCIALS--21.8% BANKS--11.5% BancFirst Corp. 900 42,300 Bank of Granite Corp. 6,100 106,750 Bryn Mawr Bank Corp. 3,800 139,194 Capital City Bank Group, Inc. 2,100 82,299 Capitol Bancorp Ltd. 2,800 64,960 Chemical Financial Corp. 4,350 139,852 Chittenden Corp. 7,200 183,456 Commercial Bankshares, Inc. 400 13,840 Community First Bankshares, Inc. 4,850 128,331 Community Trust Bancorp, Inc. 2,740 68,884 Corus Bankshares, Inc. 2,500 109,150 First Citizens BancShares, Inc. 800 77,280 First Financial Bankshares, Inc. 2,500 95,000 Hancock Holding Co. 1,200 53,580 MASSBANK Corp. 1,800 50,940 MainSource Financial Group, Inc. 2,100 50,423 Merchants Bancshares, Inc. 4,700 105,938 MetroCorp Bancshares, Inc. 1,150 13,340 Mid-State Bancshares 8,750 143,692 Northrim BanCorp, Inc. 4,400 59,400 Omega Financial Corp. 800 28,680 Riggs National Corp. 9,680 149,943 Simmons First National Corp. 2,200 80,630 Texas Regional Bancshares, Inc., Class A 2,150 76,413 TriCo Bancshares 4,950 121,770 TrustCo Bank Corp., NY 3,300 35,574 Whitney Holding Corp. 2,300 76,659 ------------ 2,298,278 ------------ DIVERSIFIED FINANCIALS--1.8% CONSUMER FINANCE--1.2% Cash America International, Inc. 18,540 $ 176,501 CompuCredit Corp. (a) 3,200 22,624 Metris Companies, Inc. 15,900 39,273 ------------ 238,398 ------------ DIVERSIFIED FINANCIAL SERVICES--0.6% MFC Bancorp Ltd. 15,100 109,475 ------------ INSURANCE--3.3% LIFE & HEALTH INSURANCE--1.7% AmerUs Group Co. 2,600 73,502 Delphi Financial Group, Inc., Class A 3,524 133,771 Kansas City Life Insurance Co. 900 34,110 Phoenix Companies, Inc. 10,250 77,900 Universal American Financial Corp. (a) 5,700 33,168 ------------ 352,451 ------------ PROPERTY & CASUALTY INSURANCE--1.6% Commerce Group, Inc. 2,700 101,223 Navigators Group, Inc. (a) 1,600 36,720 RLI Corp. 3,900 108,810 State Auto Financial Corp. 4,250 65,875 ------------ 312,628 ------------ REAL ESTATE--5.2% REAL ESTATE INVESTMENT TRUSTS--4.8% EastGroup Properties, Inc. 4,150 105,825 Equity One, Inc. 6,000 80,100 Keystone Property Trust 4,850 82,304 MeriStar Hospitality Corp. 10,550 69,630 Mid-America Apartment Communities, Inc. 4,950 121,027 Nationwide Health Properties, Inc. 8,150 121,680 PS Business Parks, Inc. 2,700 85,860 RFS Hotel Investors, Inc. 6,750 73,305 Sovran Self Storage, Inc. 2,700 76,572 Universal Health Realty Income 2,700 70,875 Urstadt Biddle Properties, Inc. 5,600 62,048 Windrose Medical Properties Trust 1,800 18,540 ------------ 967,766 ------------ REAL ESTATE MANAGEMENT & DEVELOPMENT--0.4% Getty Realty Corp. 4,150 78,642 ------------
See Notes to Investment Portfolio. 23
SHARES VALUE ------------ ------------ HEALTH CARE--5.5% HEALTH CARE EQUIPMENT & SERVICES--3.8% HEALTH CARE DISTRIBUTORS & SERVICES--2.2% Option Care, Inc. (a) 6,200 $ 49,352 Orthodontic Centers of America (a) 7,950 86,735 Owens & Minor, Inc. 1,550 25,451 Quintiles Transnational Corp. (a) 5,500 66,550 US Oncology, Inc. (a) 23,770 206,086 ------------ 434,174 ------------ HEALTH CARE FACILITIES--0.9% Kindred Healthcare, Inc. (a) 3,500 63,529 Medcath Corp. (a) 7,750 77,500 Stewart Enterprises, Inc. (a) 8,100 45,125 ------------ 186,154 ------------ HEALTH CARE SUPPLIES--0.7% Sola International, Inc. (a) 7,000 91,000 Theragenics Corp. (a) 10,950 44,129 ------------ 135,129 ------------ PHARMACEUTICALS & BIOTECHNOLOGY--1.7% BIOTECHNOLOGY--0.9% Kendle International, Inc. (a) 10,950 96,371 Serologicals Corp. (a) 6,900 75,900 ------------ 172,271 ------------ PHARMACEUTICALS--0.8% D&K Healthcare Resources, Inc. 4,900 50,181 First Horizon Pharmaceutical Corp. (a) 8,200 61,320 Nabi Biopharmaceuticals (a) 9,500 58,900 ------------ 170,401 ------------ INDUSTRIALS--20.0% CAPITAL GOODS--10.2% AEROSPACE & DEFENSE--1.5% Herley Industries, Inc. (a) 6,300 109,670 Ladish Co., Inc. (a) 10,950 88,257 Precision Castparts Corp. 3,900 94,575 ------------ 292,502 ------------ BUILDING PRODUCTS--0.4% NCI Building Systems, Inc. (a) 3,800 82,916 ------------ CONSTRUCTION & ENGINEERING--2.7% Chicago Bridge & Iron Co., NV 3,760 113,552 Comfort Systems USA, Inc. (a) 10,650 35,678 EMCOR Group, Inc. (a) 4,500 238,545 Granite Construction, Inc. 4,150 64,325 Shaw Group, Inc. (a) 5,450 89,653 ------------ 541,753 ------------ CONSTRUCTION & FARM MACHINERY--1.2% Oshkosh Truck Corp. 3,800 233,700 Terex Corp. (a) 1,350 15,039 ------------ 248,739 ------------ ELECTRICAL COMPONENTS & EQUIPMENT--0.3% Genlyte Group, Inc. (a) 2,000 62,320 ------------ INDUSTRIAL MACHINERY--3.6% Alamo Group, Inc. 1,100 $ 13,475 Esterline Technologies Corp. (a) 6,400 113,088 Harsco Corp. 6,200 197,718 Kadant, Inc. (a) 6,600 99,000 Kennametal, Inc. 2,400 82,752 Mueller Industries, Inc. (a) 4,950 134,888 Robbins & Myers, Inc. 500 9,200 Tecumseh Products Co. 1,600 70,608 ------------ 720,729 ------------ TRADING COMPANIES & DISTRIBUTORS--0.5% Watsco, Inc. 5,450 89,271 ------------ COMMERCIAL SERVICES & SUPPLIES--8.0% COMMERCIAL PRINTING--1.1% Banta Corp. 3,300 103,191 Consolidated Graphics, Inc. 5,450 121,263 ------------ 224,454 ------------ DATA PROCESSING SERVICES--0.5% eFunds Corp. (a) 5,500 50,105 Intercept, Inc. (a) 2,750 46,560 ------------ 96,665 ------------ DIVERSIFIED COMMERCIAL SERVICES--1.9% Century Business Services, Inc. (a) 1,900 5,035 Handleman Co. (a) 8,200 94,300 Kimball International, Class B 8,500 121,125 Management Network Group, Inc. (a) 34,282 51,423 PLATO Learning, Inc. (a) 16,362 97,190 ProsoftTraining (a) 53,554 8,033 ------------ 377,106 ------------ EMPLOYMENT SERVICES--1.9% On Assignment, Inc. 16,200 138,024 MPS Group, Inc. (a) 24,800 137,392 Spherion Corp. (a) 14,650 98,155 ------------ 373,571 ------------ ENVIRONMENTAL SERVICES--1.6% Casella Waste Systems, Inc. (a) 16,400 145,796 Ionics, Inc. (a) 4,200 95,760 TRC Companies, Inc. (a) 5,900 77,467 ------------ 319,023 ------------ OFFICE SERVICES & SUPPLIES--1.0% Electro Rent Corp. (a) 2,650 32,121 Imagistics International, Inc. (a) 5,450 109,000 MCSi, Inc. (a) 12,600 59,850 ------------ 200,971 ------------ TRANSPORTATION--1.8% AIRLINES--0.1% Mesaba Holdings, Inc. (a) 3,850 23,562 ------------
See Notes to Investment Portfolio. 24
SHARES VALUE ------------ ------------ RAILROADS--0.7% Genesee & Wyoming, Inc. (a) 250 $ 5,088 Kansas City Southern 5,450 65,400 RailAmerica, Inc. (a) 10,400 74,568 ------------ 145,056 ------------ TRUCKING--1.0% Covenant Transport, Inc. (a) 5,450 103,332 Old Dominion Freight Line (a) 3,300 93,555 ------------ 196,887 ------------ INFORMATION TECHNOLOGY--10.5% SOFTWARE & SERVICES--3.9% APPLICATION SOFTWARE--0.9% JDA Software Group, Inc. (a) 10,150 98,049 Pervasive Software, Inc. (a) 13,050 53,766 Roxio, Inc. (a) 6,850 32,675 ------------ 184,490 ------------ INFORMATION TECHNOLOGY CONSULTING & SERVICES--1.3% Acxiom Corp. (a) 5,900 90,742 American Management Systems, Inc. (a) 10,700 128,293 Computer Horizons Corp. (a) 7,900 25,833 Tanning Technology Corp. (a) 21,230 16,135 ------------ 261,003 ------------ INTERNET SOFTWARE & SERVICES--0.9% Interland, Inc. (a) 22,050 28,665 SonicWALL, Inc. (a) 24,650 89,480 Valueclick, Inc. (a) 19,250 53,708 ------------ 171,853 ------------ SYSTEMS SOFTWARE--0.8% Novell, Inc. (a) 24,050 80,327 Sybase, Inc. (a) 5,900 79,060 ------------ 159,387 ------------ TECHNOLOGY HARDWARE & EQUIPMENT--6.6% COMPUTER STORAGE & PERIPHERALS--0.6% Crossroads Systems, Inc. (a) 12,100 11,253 InFocus Corp. (a) 9,200 56,672 Iomega Corp. (a) 7,800 61,230 ------------ 129,155 ------------ ELECTRONIC EQUIPMENT & INSTRUMENTS--4.0% Anixter International, Inc. (a) 5,350 124,388 Benchmark Electronics, Inc. (a) 2,700 77,382 MTS Systems Corp. 8,250 82,665 Nam Tai Electronics, Inc. 9,125 223,106 Nanometrics, Inc. (a) 15,600 65,364 NU Horizons Electronics Corp. (a) 5,300 30,634 Pioneer Standard Electronics 10,950 100,521 Somera Communications, Inc. (a) 9,800 26,460 Tektronix, Inc. (a) 3,300 60,027 Zomax, Inc. (a) 600 2,550 ------------ 793,097 ------------ NETWORKING EQUIPMENT--0.3% Computer Network Technology Corp. (a) 8,000 $ 56,800 Network Equipment Technologies, Inc. (a) 2,300 9,016 ------------ 65,816 ------------ SEMICONDUCTOR EQUIPMENT--0.5% Dupont Photomasks, Inc. (a) 3,850 89,513 ------------ SEMICONDUCTORS--0.3% Advanced Power Technology, Inc. (a) 600 1,949 Oak Technology, Inc. (a) 22,700 60,155 ------------ 62,104 ------------ TELECOMMUNICATIONS EQUIPMENT--0.9% Allen Telecom, Inc. (a) 9,400 89,018 Optical Communication Products, Inc. (a) 17,400 18,792 Tollgrade Communications, Inc. (a) 5,450 63,929 ------------ 171,739 ------------ MATERIALS--6.4% CHEMICALS--4.0% SPECIALTY CHEMICALS--3.1% Cytec Industries, Inc. (a) 7,200 196,416 H.B. Fuller Co. 3,400 87,992 Lubrizol Corp. 4,100 125,050 Minerals Technologies, Inc. 2,700 116,505 Schulman (A.), Inc. 5,450 101,425 ------------ 627,388 ------------ CONSTRUCTION MATERIALS--0.9% Centex Construction Products, Inc. 3,100 108,965 Texas Industries, Inc. 2,798 67,991 ------------ 176,956 ------------ CONTAINERS & PACKAGING--1.1% METAL & GLASS CONTAINERS--1.1% AptarGroup, Inc. 4,000 124,960 Greif Brothers Corp. 4,150 98,770 ------------ 223,730 ------------ METALS & MINING--1.1% DIVERSIFIED METALS & MINING--0.4% RTI International Metals, Inc. (a) 7,950 80,295 ------------ PRECIOUS METALS & MINERALS--0.1% Stillwater Mining Co. (a) 5,500 29,425 ------------ STEEL--0.6% Reliance Steel & Aluminum Co. 5,345 111,390 ------------ PAPER & FOREST PRODUCTS--0.2% PAPER PRODUCTS--0.2% Schweitzer-Mauduit International, Inc. 1,600 39,200 ------------
See Notes to Investment Portfolio. 25
SHARES VALUE ------------ ------------ TELECOMMUNICATION SERVICES--0.4% ALTERNATIVE CARRIERS--0.1% Covad Communications Group, Inc. (a) 16,650 $ 15,651 ------------ INTEGRATED TELECOMMUNICATION SERVICES--0.1% Mastec, Inc. (a) 7,800 23,010 ------------ WIRELESS TELECOMMUNICATIONS SERVICES--0.2% Metro One Telecommunications, Inc. (a) 5,500 35,475 ------------ UTILITIES--5.6% ELECTRIC UTILITIES--2.3% CH Energy Group, Inc. 4,600 214,498 Central Vermont Public Service Corp. 6,700 122,476 Maine Public Service Co. 1,300 41,600 MGE Energy, Inc. 3,000 80,313 ------------ 458,887 ------------ GAS UTILITIES--2.1% Cascade Natural Gas Corp. 3,400 68,000 Northwest Natural Gas Co. 6,800 184,008 WGL Holdings, Inc. 6,800 162,656 ------------ 414,664 ------------ MULTI-UTILITIES--1.2% MDU Resources Group, Inc. 9,600 247,776 ------------ TOTAL COMMON STOCKS (cost of $20,007,516) 19,526,348 ------------ LIMITED PURPOSE TRUST--0.2% INDUSTRIALS--0.2% CAPITAL GOODS--0.2% TRADING COMPANIES & DISTRIBUTORS--0.2% Versacold Income Fund (cost of $43,984) 8,150 41,532 ------------ SINGLE PURPOSE TRUST--0.2% MATERIALS--0.2% PAPER & FOREST PRODUCTS--0.2% FOREST PRODUCTS--0.2% PRT Forest Regeneration Income Fund (cost of $35,651) 5,500 34,851 ------------ PREFERRED STOCK--0.8% ENERGY--0.8% OIL & GAS EXPLORATION PRODUCTION--0.8% EXCO Resources, Inc. (cost of $144,104) 9,340 166,999 ------------ PAR VALUE ------------ ------------ SHORT-TERM OBLIGATION--1.7% Repurchase agreement with State Street Bank & Trust Co., dated 12/31/02, due 01/02/03 at 1.180%, collateralized by U.S. Treasury Bond maturing 08/15/20, market value $349,456 (repurchase proceeds $336,022) (cost of $336,000) $ 336,000 $ 336,000 ------------ TOTAL INVESTMENTS--100.7% (cost of $20,567,255) (b) 20,105,730 ------------ OTHER ASSETS & LIABILITIES, NET--(0.7)% (133,468) ------------ NET ASSETS--100.0% $ 19,972,262 ============
NOTES TO INVESTMENT PORTFOLIO: (a) Non-income producing. (b) Cost for federal income tax purposes is $20,589,930. The difference between cost for generally accepted accounting principles and cost on a tax basis is related to deferral of losses on wash sales. Realized losses have been deferred for tax purposes and cost adjusted acordingly. See Notes to Financial Statements. 26 STATEMENT OF ASSETS & LIABILITIES Colonial Small Cap Value Fund, Variable Series / December 31, 2002 ASSETS: Investments, at cost $ 20,567,255 ------------- Investments, at value $ 20,105,730 Cash 5,227 Foreign currency (cost of $1,267) 1,252 Receivable for: Investments sold 6,745 Fund shares sold 3,000 Interest 11 Dividends 18,313 Expense reimbursement due from Manager/Distributor 2,008 Deferred Trustees' compensation plan 2,104 ------------- TOTAL ASSETS 20,144,390 ------------- LIABILITIES: Payable for: Investments purchased 5,300 Fund shares repurchased 122,409 Management fee 13,975 Transfer agent fee 625 Pricing and bookkeeping fees 918 Audit fee 17,665 Deferred Trustees' fee 2,104 Other liabilities 9,132 ------------- TOTAL LIABILITIES 172,128 ------------- NET ASSETS $ 19,972,262 ============= COMPOSITION OF NET ASSETS: Paid-in capital $ 20,006,033 Undistributed net investment income 4,356 Accumulated net realized gain 423,421 Net unrealized depreciation on: Investments (461,525) Foreign currency translations (23) ------------- NET ASSETS $ 19,972,262 ============= CLASS A: Net assets $ 7,892,688 Shares outstanding 753,251 ============= Net asset value per share $ 10.48 ============= CLASS B: Net assets $ 12,079,574 Shares outstanding 1,153,459 ============= Net asset value per share $ 10.47 =============
See Notes to Financial Statements. 27 STATEMENT OF OPERATIONS Colonial Small Cap Value Fund, Variable Series For the Year Ended December 31, 2002 INVESTMENT INCOME: Dividends $ 241,508 Interest 26,111 ------------- Total Investment Income (net of foreign taxes withheld of $679) 267,619 ------------- EXPENSES: Management fee 167,427 Distribution fee--Class B 28,611 Pricing and bookkeeping fees 10,968 Transfer agent fee 7,500 Trustees' fee 5,568 Custody fee 19,413 Audit fee 17,840 Other expenses 10,468 ------------- Total Expenses 267,795 Fees and expenses waived or reimbursed by Manager (9,011) Fees reimbursed by Distributor--Class B (28,611) Custody earnings credit (46) ------------- Net Expenses 230,127 ------------- Net Investment Income 37,492 ------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY: Net realized gain (loss) on: Investments 1,098,450 Foreign currency transactions (322) ------------- Net realized gain 1,098,128 ------------- Net change in unrealized appreciation/depreciation on: Investments (2,952,593) Foreign currency translations (23) ------------- Net change in unrealized appreciation/depreciation (2,952,616) ------------- Net Loss (1,854,488) ------------- Net Decrease in Net Assets from Operations $ (1,816,996) =============
See Notes to Financial Statements. 28 STATEMENT OF CHANGES IN NET ASSETS Colonial Small Cap Value Fund, Variable Series
YEAR ENDED DECEMBER 31, ----------------------------- INCREASE (DECREASE) IN NET ASSETS: 2002 2001 ---------------------------------- ------------- ------------- OPERATIONS: Net investment income $ 37,492 $ 31,953 Net realized gain on investments and foreign currency transactions 1,098,128 290,158 Net change in unrealized appreciation/depreciation on investments and foreign currency translations (2,952,616) 1,151,725 ------------- ------------- Net Increase (Decrease) from Operations (1,816,996) 1,473,836 ------------- ------------- DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income: Class A (8,389) (18,025) Class B (12,808) (17,140) From net realized gains: Class A (263,235) (118,438) Class B (401,913) (112,618) ------------- ------------- Total Distributions Declared to Shareholders (686,345) (266,221) ------------- ------------- SHARE TRANSACTIONS: Class A: Subscriptions 4,146,927 8,574,770 Distributions reinvested 271,624 136,463 Redemptions (4,761,716) (7,574,247) ------------- ------------- Net Increase (Decrease) (343,165) 1,136,986 ------------- ------------- Class B: Subscriptions 6,130,731 13,166,781 Distributions reinvested 414,721 129,758 Redemptions (2,107,183) (8,345,154) ------------- ------------- Net Increase 4,438,269 4,951,385 ------------- ------------- Net Increase from Share Transactions 4,095,104 6,088,371 ------------- ------------- Total Increase in Net Assets 1,591,763 7,295,986 NET ASSETS: Beginning of period 18,380,499 11,084,513 ------------- ------------- End of period (including undistributed and overdistributed net investment income of $4,356 and $(2,525), respectively) $ 19,972,262 $ 18,380,499 ============= ============= CHANGES IN SHARES: Class A: Subscriptions 350,768 791,152 Issued for distributions reinvested 25,946 11,826 Redemptions (433,274) (702,942) ------------- ------------- Net Increase (Decrease) (56,560) 100,036 ------------- ------------- Class B: Subscriptions 524,962 1,215,774 Issued for distributions reinvested 39,619 11,252 Redemptions (191,963) (769,514) ------------- ------------- Net Increase 372,618 457,512 ------------- -------------
See Notes to Financial Statements. 29 NOTES TO FINANCIAL STATEMENTS Colonial Small Cap Value Fund, Variable Series / December 31, 2002 NOTE 1. ORGANIZATION AND ACCOUNTING POLICIES ORGANIZATION--Colonial Small Cap Value Fund, Variable Series (the "Fund"), a series of Liberty Variable Investment Trust (the "Trust"), is a diversified portfolio of a Massachusetts business trust, registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The Fund's investment goal is to seek long-term growth by investing primarily in smaller capitalization stocks of U.S. companies. The Fund's capitalization consists of an unlimited number of shares of beneficial interest without par value that represent a separate series of the Trust. The Fund offers two classes of shares: Class A and Class B. Each share of a class represents an equal proportionate beneficial interest in that share class and, when issued and outstanding, is fully paid and nonassessable. Shareholders would be entitled to share proportionally in the net assets of their share class available for distribution to shareholders upon liquidation of the Fund. Shares of the Fund are available and are being marketed exclusively as a pooled funding vehicle for variable annuity contracts ("VA contracts") and Variable Life Insurance Policies ("VLI Policies") offered by the separate accounts of certain life insurance companies ("Participating Insurance Companies"). The Participating Insurance Companies and their separate accounts own all the shares of the Fund. Liberty Advisory Services Corp. (the "Manager") ("LASC") provides investment management and advisory services to the Fund pursuant to its Management Agreement with the Fund. Colonial Management Associates, Inc. ("Colonial") provides sub-advisory services. LASC has delegated various administrative matters to Colonial. Colonial also provides pricing and bookkeeping services to the Fund. Liberty Funds Distributor, Inc. ("LFD"), an affiliate of the Manager, serves as the principal underwriter of the Fund. The Manager, Colonial and LFD are wholly-owned indirect subsidiaries of FleetBoston Financial Corporation ("FleetBoston"). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. SECURITY VALUATION AND TRANSACTIONS--Equity securities generally are valued at the last sale price or, in the case of unlisted or listed securities for which there were no sales during the day, at the current quoted bid price. Short-term obligations with a maturity of 60 days or less are valued at amortized cost. 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. 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. DETERMINATION OF CLASS NET ASSET VALUES AND FINANCIAL HIGHLIGHTS--All income, expenses (other than the Class B distribution fee), 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. The per share data was calculated using average shares outstanding during the period. In addition, Class B net investment income per share data and ratios reflect the distribution fee applicable to Class B shares only. 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. DISTRIBUTIONS TO SHAREHOLDERS--The Fund intends to distribute as income dividends or capital gains distributions, at least annually, substantially all of its net investment income and net profits realized from the sale of investments. All dividends and distributions are reinvested in additional shares of the Fund at net asset value as of the record date of the distribution. Income and capital gain distributions are determined in accordance with federal income tax regulations. FOREIGN CURRENCY TRANSACTIONS--Net realized and unrealized gains (losses) on foreign currency transactions includes gains (losses) arising from the fluctuations in exchange rates between trade and settlement dates on securities transactions, gains (losses) arising from the disposition of foreign currency, and currency gains (losses) between the accrual and payment dates on dividends, interest income and foreign withholding taxes. The Fund does not distinguish that portion of gains (losses) on investments which is due to changes in foreign exchange rates from that which is due to changes in market prices of the investments. Such fluctuations are included with the net realized and unrealized gains (losses) on investments. 30 OTHER--Interest income is recorded on the accrual basis. Corporate actions and dividend income are recorded on the ex-date (except for certain foreign securities which are recorded as soon after ex-date as the Fund becomes aware of such), net of non-reclaimable tax withholdings. Where a high level of uncertainty as to collection exists, income on securities is recorded net of all tax withholdings with any rebates recorded when received. The Fund's custodian takes possession through the federal book-entry system of securities collateralizing repurchase agreements. Collateral is marked-to-market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund. The Fund may experience costs and delays in liquidating the collateral if the issuer defaults or enters bankruptcy. NOTE 2. FEDERAL TAX INFORMATION Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from generally accepted accounting principles. These differences are primarily due to differing treatments for deferral of losses from wash sales. 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 December 31, 2002, permanent items identified and reclassified among the components of net assets are as follows:
UNDISTRIBUTED NET ACCUMULATED NET INVESTMENT INCOME REALIZED GAIN PAID-IN CAPITAL ----------------- --------------- --------------- $ (9,414) $ 8,466 $ 948
Net investment income, net realized gains (losses) and net assets were not affected by this reclassification. The tax character of distributions paid during 2002 and 2001 was as follows:
2002 2001 --------- --------- Distributions paid from: Ordinary income $ 86,968 $ 108,992 Long-term capital gains 599,377 157,229 --------- --------- $ 686,345 $ 266,221 ========= =========
As of December 31, 2002, the components of distributable earnings on a tax basis were as follows:
UNDISTRIBUTED UNDISTRIBUTED ORDINARY LONG-TERM UNREALIZED INCOME CAPITAL GAINS DEPRECIATION* ------------- ------------- ------------- $ 319,214 $ 134,080 $ (484,223)
* The difference between book-basis and tax basis unrealized depreciation is attributable primarily to the tax deferral of losses on wash sales. NOTE 3. FEES AND COMPENSATION PAID TO AFFILIATES MANAGEMENT AND SUB-ADVISORY FEES--The Manager receives a monthly fee equal to 0.80% annually of the Fund's average daily net assets. The Manager, out of the management fee it receives, pays Colonial a monthly sub-advisory fee equal to 0.60% annually of the Fund's average daily net assets. PRICING AND BOOKKEEPING FEES--Colonial is responsible for providing pricing and bookkeeping services to the Fund under a Pricing and Bookkeeping Agreement. Under a separate agreement (the "Outsourcing Agreement"), Colonial has delegated those functions to State Street Bank & Trust Company ("State Street"). Colonial pays fees to State Street under the Outsourcing Agreement. Under its pricing and bookkeeping agreement with the Fund, Colonial 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. The Fund also pays out-of-pocket costs for pricing services. TRANSFER AGENT FEE--Liberty Funds Services, Inc. (the "Transfer Agent"), an affiliate of the Manager, provides shareholder services for an annual rate of $7,500. DISTRIBUTION FEE--The Fund has adopted a 12b-1 plan, which requires it to pay LFD a monthly distribution fee equal to 0.25% annually of Class B average daily net assets as of the 20th of each month. EXPENSE LIMITS--The Manager and LFD have voluntarily agreed to reimburse all expenses, including management fees and distribution fees, but excluding interest, taxes, brokerage and extraordinary expenses incurred by the Fund in excess of 1.10% annually of the Fund's average daily net assets. LFD will first reimburse the Class B distribution fee up to 0.25% annually to reach the 1.10% limit on Class B expenses. If additional reimbursement is needed to meet the limit for each class, the Manager will then reimburse other expenses to the extent necessary. If additional reimbursement is still needed to reach the expense limit, the Manager will then waive a portion of its management fee to reach the expense limit. This arrangement may be terminated or modified by the Manager or LFD at any time. OTHER--The Fund pays no compensation to its officers, all of whom are employees of Colonial or its affiliates. 31 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 $46 of custody fees were reduced by balance credits for the year ended December 31, 2002. The Fund could have invested a portion of the assets utilized in connection with the expense offset arrangement in an income-producing asset if it had not entered into such an agreement. NOTE 4. PORTFOLIO INFORMATION INVESTMENT ACTIVITY--For the year ended December 31, 2002, purchases and sales of investments, other than short-term obligations, were $29,602,798 and $24,445,769, respectively. Unrealized appreciation (depreciation) at December 31, 2002, based on cost of investments for federal income tax purposes, was: Gross unrealized appreciation $ 1,257,596 Gross unrealized depreciation (1,741,796) ------------ Net unrealized depreciation $ (484,200) ============
OTHER--The Fund may focus its investments in certain industries, subjecting it to greater risk than a fund that is more diversified. NOTE 5. OTHER RELATED PARTY TRANSACTIONS For the year ended December 31, 2002, the Fund used AlphaTrade Inc., a wholly-owned subsidiary of Colonial, as a broker. Total commissions paid to AlphaTrade Inc. during the year were $1,491. 32 FINANCIAL HIGHLIGHTS Colonial Small Cap Value Fund, Variable Series--Class B Shares Selected data for a share outstanding throughout each period is as follows:
YEAR ENDED PERIOD DECEMBER 31, ENDED -------------------- DECEMBER 31, 2002 2001 2000 (a) -------- -------- ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 11.55 $ 10.73 $ 9.21 -------- -------- -------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (b) 0.02 0.02 0.06 Net realized and unrealized gain (loss) on investments and foreign currency (0.73) 0.97 1.57 -------- -------- -------- Total from Investment Operations (0.71) 0.99 1.63 -------- -------- -------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.01) (0.02) (0.05) From net realized gains (0.36) (0.15) (0.06) -------- -------- -------- Total Distributions Declared to Shareholders (0.37) (0.17) (0.11) -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 10.47 $ 11.55 $ 10.73 ======== ======== ======== Total return (c)(d)(e) (6.14)% 9.20% 17.72%(f) RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA: Expenses (g) 1.10% 1.10% 1.10%(h) Net investment income (g) 0.18% 0.22% 1.01%(h) Waiver/reimbursement 0.29% 0.47% 1.07%(h) Portfolio turnover rate 125% 56% 54% Net assets, end of period (000's) $ 12,080 $ 9,020 $ 3,469
(a) For the period from commencement of operations on June 1, 2000 to December 31, 2000. (b) Per share data was calculated using average shares outstanding during the period. (c) Total return at net asset value assuming all distributions reinvested. (d) Had the Manager and/or Distributor not waived or reimbursed a portion of expenses, total return would have been reduced. (e) Total return figure does not include any insurance company charges associated with a variable annuity. If included, total return would be reduced. (f) Not annualized. (g) The benefits derived from custody credits and directed brokerage arrangements, if applicable, had an impact of less than 0.01%. (h) Annualized. 33 REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of Liberty Variable Investment Trust and the Class B Shareholders of Colonial Small Cap Value Fund, Variable Series In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio, and the related statements of operations and of changes in net assets and the Class B financial highlights present fairly, in all material respects, the financial position of Colonial Small Cap Value Fund, Variable Series (the "Fund") (a series of Liberty Variable Investment Trust) at December 31, 2002, and the results of its operations, the changes in its net assets and the Class B financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and the Class B financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2002 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts February 12, 2003 34 UNAUDITED INFORMATION FEDERAL INCOME TAX INFORMATION 70.14% of the ordinary income distributed by the Fund, for the year ended December 31, 2002, qualifies for the corporate dividends received deduction. For the fiscal year ended December 31, 2002, the Fund designates long-term capital gains of $733,457. 35 PORTFOLIO MANAGER'S DISCUSSION Colonial Strategic Income Fund, Variable Series / December 31, 2002 Colonial Strategic Income Fund, Variable Series seeks current income consistent with prudent risk and maximum total return. Laura A. Ostrander is the fund's portfolio manager. Ms. Ostrander is senior vice president of Colonial Management Associates, Inc. For the year that ended December 31, 2002, the fund underperformed the 11.02% return of its benchmark, the Lehman Brothers Government/Credit Index, chiefly because of weakness in the high-yield market. However, the fund outperformed its peer group, the Lipper General Bond Funds category which returned 8.53%. Holdings of foreign bonds denominated in currencies that were stronger than the US dollar helped the fund outperform its peer group. A DEFENSIVE STANCE AT THE OUTSET As the year began, expectations ran high that the post-September 11 economic rebound would continue. However, we did not share that opinion and we took steps to reduce the fund's risk exposure by boosting the overall credit quality of our holdings. We sold lower rated high-yield issues and reduced the fund's emerging markets investments in favor of holdings in developed nations such as Sweden, Norway and Italy. However, we maintained commitments in oil-producing emerging nations such as Russia and Mexico. When oil prices rose, these investments were rewarded. We also expanded holdings in bonds denominated in foreign currencies, because continued economic weakness in the United States was putting pressure on the dollar. By midyear, we had upgraded the portfolio's overall credit quality from BBB+ to A-, where it remained through the year. Overall, our strategies aided performance, although we were somewhat late in initiating the quality upgrade. ALLOCATIONS ADJUSTED LATER IN THE YEAR Beginning in October, as the economic outlook for the United States and other countries improved, we sought opportunities for price appreciation and higher yields. We cut back the fund's investment in US government bonds from approximately 29% of net assets to 25% of net assets because of low yields and our estimation of their limited appreciation potential going forward. We used the proceeds to expand the fund's investments in high-yield and emerging markets, emphasizing high-yield securities rated "BB," which is the highest rating for non-investment grade bonds. Broader exposure to corporate issues aided results in the fourth quarter. Holdings in manufacturing and housing continued to do well. PRESSURE CONTINUED ON HIGH-YIELD BONDS Our investments in high-yield bonds generally detracted from performance. Our holdings in the cellular and cable television industries were a drag on performance. Bonds of US cable company Charter Communications (0.3% of net assets) suffered a substantial decline as Adelphia's accounting scandal spread concerns throughout the industry, lowering asset valuations and reducing financing available to all cable companies. Our holdings in Adelphia, once the third largest issuer in the high yield market, were sold as concerns about management increased, enabling us to avoid significant price declines in subsequent months. Some of our losses were offset by favorable results from homebuilders D.R. Horton and K. Hovnanian Enterprises (0.6% and 0.3% of net assets, respectively), as the strong housing market continued through most of 2002. POSITIONED FOR A GRADUAL RECOVERY The year-end positioning of the portfolio reflected growing confidence that a modest global recovery would be underway by late 2003. Current interest rate and tax policies seem positioned to accommodate this anticipated growth, barring the impact of any geopolitical shocks, which, of course, cannot be easily estimated. If economic activity accelerates, money now sheltered in US government bonds could flow into corporate securities. European holdings could benefit from the strong euro and possible interest rate cuts. But a delayed US recovery would postpone any upsurge in European export activity. We believe that success in emerging market investments will likely be tied to structural reform as well as to oil prices, both for importing and exporting nations. ---------- Economic and market conditions can frequently change. There is no assurance that the trends described here will continue or commence. Strategic investing offers attractive income and total return opportunities, but also involves certain risks. The value and return of your investment may fluctuate as a result of changes in interest rates, the financial strength of issuers of lower-rated bonds, foreign, political and economic developments, and changes in currency exchange rates. Lipper Inc., a widely respected cap provider in the industry, calculates an average total return for mutual funds with similar investment objectives as those of the fund. Holdings are disclosed as of December 31, 2002, and are subject to change. 36 PERFORMANCE INFORMATION Colonial Strategic Income Fund, Variable Series / December 31, 2002 AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 2002 (%)
1-YEAR 5-YEAR LIFE ---------------------------------------------------------------- Class B(1) (6/1/00) 8.08 3.86 6.68 Lehman Brothers Government/ Credit Index(2) 11.02 7.61 8.24
Inception date of share class is in parentheses. [CHART] VALUE OF A $10,000 INVESTMENT, 7/5/94(3) - 12/31/02 CLASS B: $17,321
CLASS B SHARES LEHMAN BROTHERS GOVERNMENT/CREDIT INDEX $ 10,000 $ 10,000 7/5/1994 - 7/31/1994 $ 10,080 $ 10,200 08/01/1994 - 08/31/1994 $ 10,130 $ 10,204 09/01/1994 - 09/30/1994 $ 10,091 $ 10,050 10/01/1994 - 10/31/1994 $ 10,131 $ 10,039 11/01/1994 - 11/30/1994 $ 10,021 $ 10,021 12/01/1994 - 12/31/1994 $ 10,110 $ 10,087 01/01/1995 - 01/31/1995 $ 10,244 $ 10,281 02/01/1995 - 02/28/1995 $ 10,492 $ 10,519 03/01/1995 - 03/31/1995 $ 10,678 $ 10,590 04/01/1995 - 04/30/1995 $ 10,875 $ 10,738 05/01/1995 - 05/31/1995 $ 11,174 $ 11,188 06/01/1995 - 06/30/1995 $ 11,225 $ 11,277 07/01/1995 - 07/31/1995 $ 11,328 $ 11,233 08/01/1995 - 08/31/1995 $ 11,328 $ 11,377 09/01/1995 - 09/30/1995 $ 11,524 $ 11,493 10/01/1995 - 10/31/1995 $ 11,679 $ 11,662 11/01/1995 - 11/30/1995 $ 11,792 $ 11,855 12/01/1995 - 12/31/1995 $ 11,959 $ 12,029 01/01/1996 - 01/31/1996 $ 12,134 $ 12,103 02/01/1996 - 02/29/1996 $ 12,036 $ 11,847 03/01/1996 - 03/31/1996 $ 11,982 $ 11,747 04/01/1996 - 04/30/1996 $ 12,036 $ 11,666 05/01/1996 - 05/31/1996 $ 12,046 $ 11,646 06/01/1996 - 06/30/1996 $ 12,122 $ 11,801 07/01/1996 - 07/31/1996 $ 12,220 $ 11,828 08/01/1996 - 08/31/1996 $ 12,362 $ 11,799 09/01/1996 - 09/30/1996 $ 12,612 $ 12,009 10/01/1996 - 10/31/1996 $ 12,807 $ 12,289 11/01/1996 - 11/30/1996 $ 13,112 $ 12,515 12/01/1996 - 12/31/1996 $ 13,134 $ 12,376 01/01/1997 - 01/31/1997 $ 13,099 $ 12,391 02/01/1997 - 02/28/1997 $ 13,195 $ 12,417 03/01/1997 - 03/31/1997 $ 13,005 $ 12,269 04/01/1997 - 04/30/1997 $ 13,171 $ 12,448 05/01/1997 - 05/31/1997 $ 13,386 $ 12,564 06/01/1997 - 06/30/1997 $ 13,576 $ 12,715 07/01/1997 - 07/31/1997 $ 13,898 $ 13,104 08/01/1997 - 08/31/1997 $ 13,803 $ 12,957 09/01/1997 - 09/30/1997 $ 14,101 $ 13,160 10/01/1997 - 10/31/1997 $ 14,125 $ 13,371 11/01/1997 - 11/30/1997 $ 14,197 $ 13,442 12/01/1997 - 12/31/1997 $ 14,335 $ 13,583 01/01/1998 - 01/31/1998 $ 14,566 $ 13,775 02/01/1998 - 02/28/1998 $ 14,604 $ 13,747 03/01/1998 - 03/31/1998 $ 14,706 $ 13,790 04/01/1998 - 04/30/1998 $ 14,771 $ 13,859 05/01/1998 - 05/31/1998 $ 14,836 $ 14,007 06/01/1998 - 06/30/1998 $ 14,861 $ 14,150 07/01/1998 - 07/31/1998 $ 14,990 $ 14,161 08/01/1998 - 08/31/1998 $ 14,435 $ 14,437 09/01/1998 - 09/30/1998 $ 14,757 $ 14,850 10/01/1998 - 10/31/1998 $ 14,782 $ 14,745 11/01/1998 - 11/30/1998 $ 15,207 $ 14,833 12/01/1998 - 12/31/1998 $ 15,198 $ 14,870 01/01/1999 - 01/31/1999 $ 15,321 $ 14,976 02/01/1999 - 02/28/1999 $ 15,143 $ 14,619 03/01/1999 - 03/31/1999 $ 15,349 $ 14,692 04/01/1999 - 04/30/1999 $ 15,555 $ 14,729 05/01/1999 - 05/31/1999 $ 15,239 $ 14,577 06/01/1999 - 06/30/1999 $ 15,253 $ 14,532 07/01/1999 - 07/31/1999 $ 15,239 $ 14,492 08/01/1999 - 08/31/1999 $ 15,184 $ 14,480 09/01/1999 - 09/30/1999 $ 15,266 $ 14,610 10/01/1999 - 10/31/1999 $ 15,266 $ 14,648 11/01/1999 - 11/30/1999 $ 15,362 $ 14,639 12/01/1999 - 12/31/1999 $ 15,468 $ 14,550 01/01/2000 - 01/31/2000 $ 15,320 $ 14,546 02/01/2000 - 02/29/2000 $ 15,513 $ 14,728 03/01/2000 - 03/31/2000 $ 15,454 $ 14,941 04/01/2000 - 04/30/2000 $ 15,321 $ 14,868 05/01/2000 - 05/31/2000 $ 15,188 $ 14,855 06/01/2000 - 06/30/2000 $ 15,470 $ 15,158 07/01/2000 - 07/31/2000 $ 15,589 $ 15,318 08/01/2000 - 08/31/2000 $ 15,737 $ 15,534 09/01/2000 - 09/30/2000 $ 15,566 $ 15,593 10/01/2000 - 10/31/2000 $ 15,268 $ 15,692 11/01/2000 - 11/30/2000 $ 15,016 $ 15,960 12/01/2000 - 12/31/2000 $ 15,479 $ 16,274 01/01/2001 - 01/31/2001 $ 16,120 $ 16,548 02/01/2001 - 02/28/2001 $ 16,170 $ 16,718 03/01/2001 - 03/31/2001 $ 15,808 $ 16,795 04/01/2001 - 04/30/2001 $ 15,627 $ 16,669 05/01/2001 - 05/31/2001 $ 15,743 $ 16,766 06/01/2001 - 06/30/2001 $ 15,562 $ 16,846 07/01/2001 - 07/31/2001 $ 15,627 $ 17,266 08/01/2001 - 08/31/2001 $ 15,907 $ 17,487 09/01/2001 - 09/30/2001 $ 15,446 $ 17,648 10/01/2001 - 10/31/2001 $ 15,874 $ 18,096 11/01/2001 - 11/30/2001 $ 16,088 $ 17,799 12/01/2001 - 12/31/2001 $ 16,028 $ 17,658 01/01/2002 - 01/31/2002 $ 16,083 $ 17,787 02/01/2002 - 02/28/2002 $ 16,118 $ 17,939 03/01/2002 - 03/31/2002 $ 16,171 $ 17,574 04/01/2002 - 04/30/2002 $ 16,477 $ 17,915 05/01/2002 - 05/31/2002 $ 16,550 $ 18,080 06/01/2002 - 06/30/2002 $ 16,316 $ 18,234 07/01/2002 - 07/31/2002 $ 16,155 $ 18,453 08/01/2002 - 08/31/2002 $ 16,424 $ 18,866 09/01/2002 - 09/30/2002 $ 16,515 $ 19,272 10/01/2002 - 10/31/2002 $ 16,569 $ 19,087 11/01/2002 - 11/30/2002 $ 16,911 $ 19,098 12/01/2002 - 12/31/2002 $ 17,321 $ 19,604
NET ASSET VALUE PER SHARE ($) 12/31/01 12/31/02 --------------------------------------------------------------- Class B 8.91 8.89
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 SHARES. Total return performance includes changes in share price and reinvestment of all distributions. The Lehman Brothers Intermediate Government/Credit Index is an unmanaged index that tracks the performance of a selection of US government and investment grade US corporate bonds. Indexes are not investments, do not incur fees or expenses and are not pro- fessionally managed. It is not possible to invest directly in an index. Securities in the fund may not match those in the index. MUTUAL FUND PERFORMANCE CHANGES OVER TIME. CURRENT RETURNS FOR THE FUND MAY BE DIFFERENT THAN THAT SHOWN. Performance numbers reflect all fund expenses, but do not include any insurance charges imposed by your insurance company's sep- arate accounts. If performance included the effect of these additional charges, it would be lower. (1) Class B share(newer class shares) performance information includes returns of the fund's class A shares (the olderexisting fund class) for periods prior to the inception of the newer class shares. These class A share returns were not restated to reflect any expense differential (e.g., Rule 12b-1 fees) between class A shares and the newer class shares. If differences in expenses were reflected, the returns for the periods prior to the inception of the newer class shares would be lower. (2) Index performance is from June 30, 1994. (3) Inception date of class A shares (oldest existing share class). 37 INVESTMENT PORTFOLIO Colonial Strategic Income Fund, Variable Series / December 31, 2002
PAR VALUE ------------- ------------- CORPORATE FIXED-INCOME BONDS & NOTES--38.8% CONSTRUCTION--2.1% BUILDING CONSTRUCTION--2.1% Associated Materials, Inc., 9.75% 04/15/12 $ 190,000 $ 199,500 Atrium Companies, Inc., 10.500% 05/01/09 130,000 126,750 Congoleum Corp., 8.625% 08/01/08 140,000 60,200 D.R. Horton, Inc.: 8.000% 02/01/09 200,000 200,000 9.750% 09/15/10 575,000 589,375 K. Hovnanian Enterprise, Inc.: 8.875% 04/01/12 45,000 42,750 10.500% 10/01/07 390,000 419,250 KB Home, 8.625% 12/15/08 295,000 304,587 Lennar Corp., 7.625% 03/01/09 310,000 320,850 Ryland Group, 9.125% 06/15/11 220,000 233,200 Standard Pacific Corp., 9.250% 04/15/12 435,000 417,600 ------------- 2,914,062 ------------- FINANCE, INSURANCE & REAL ESTATE--1.1% DEPOSITORY INSTITUTIONS--0.6% Sovereign Bancorp, Inc., 10.500% 11/15/06 750,000 845,063 ------------- FINANCIAL SERVICES--0.3% MDP Acquisitions PLC, 9.625% 10/01/12 (a) 340,000 355,300 ------------- MULTI-LINE INSURANCE--0.1% Willis Corroon Corp., 9.000% 02/01/09 190,000 200,450 ------------- REAL ESTATE--0.1% iStar Financial, Inc., 8.750% 08/15/08 125,000 131,250 ------------- MANUFACTURING--9.9% APPAREL--0.1% William Carter Co., 10.875% 08/15/11 150,000 163,500 ------------- AUTO PARTS & EQUIPMENT--0.1% American Axle & Manufacturing, Inc., 9.750% 03/01/09 110,000 118,250 Rexnord Corp., 10.125% 12/15/12 (a) 85,000 87,975 ------------- 206,225 ------------- CHEMICALS & ALLIED PRODUCTS--2.5% Avecia Group PLC, 11.000% 07/01/09 200,000 156,000 FMC Corp., 10.250% 11/01/09 (a) 280,000 302,400 Huntsman ICI Holdings LLC, (b) 12/31/09 $ 2,410,000 $ 554,300 Koppers Industries, Inc., 9.875% 12/01/07 425,000 382,500 IMC Global, Inc., 11.250% 06/01/11 (a) 265,000 287,525 Lyondell Chemical Co.: 11.125% 07/15/12 285,000 282,150 9.625% 05/01/07 275,000 263,312 MacDermid, Inc., 9.125% 07/15/11 260,000 278,200 Millennium America, Inc., 9.250% 06/15/08 175,000 182,875 Terra Industries, Inc., 12.875% 10/15/08 400,000 428,000 Texas Petrochemical Corp., 11.125% 07/01/06 535,000 326,350 ------------- 3,443,612 ------------- ELECTRONIC & ELECTRICAL EQUIPMENT--0.3% Amphenol Corp., 9.875% 05/15/07 50,000 52,125 Flextronics International Ltd., 9.875% 07/01/10 300,000 324,000 ------------- 376,125 ------------- FABRICATED METAL--0.2% Earle M. Jorgensen & Co., 9.750% 06/01/12 250,000 255,000 ------------- FOOD & KINDRED PRODUCTS--1.2% Dole Food Co., 7.250% 05/01/09 215,000 204,250 New World Pasta Co., 9.250% 02/15/09 175,000 87,500 Premier International Foods PLC, 12.000% 09/01/09 750,000 802,500 Roundy's Inc., 8.875% 06/15/02 275,000 271,563 Smithfield Foods, Inc., 8.000% 10/15/09 295,000 300,900 ------------- 1,666,713 ------------- FURNITURE & FIXTURES--0.2% Juno Lighting, Inc., 11.875% 07/01/09 195,000 195,000 Simmons Co., 10.250% 03/15/09 50,000 54,250 ------------- 249,250 ------------- MACHINERY & COMPUTER EQUIPMENT--0.2% JLG Industries Inc, 8.375% 06/15/12 140,000 115,500 Numatics, Inc., 9.625% 04/01/08 300,000 135,000 ------------- 250,500 ------------- MEASURING & ANALYZING INSTRUMENTS--0.2% Fisher Scientific International Inc., 8.125% 05/01/12 250,000 258,125 -------------
See Notes to Investment Portfolio. 38
PAR VALUE ------------- ------------- MISCELLANEOUS MANUFACTURING--1.7% Actuant Corp., 13.000% 05/01/09 $ 211,000 $ 246,870 AGCO Corp., 9.500% 05/01/08 220,000 237,600 American Standard, Inc., 7.375% 02/01/08 260,000 271,700 Applied Extrusion Technologies, Inc., 10.750% 07/01/11 215,000 137,600 Ball Corp., 8.250% 08/01/08 140,000 147,000 Flowserve Corp., 12.250% 08/15/10 205,000 223,450 Owens-Illinois, Inc.: 7.150% 05/15/05 90,000 87,300 7.500% 05/15/10 370,000 342,250 SPX Corp., 7.500% 01/01/13 165,000 167,063 Tekni-Plex, Inc., 12.750% 06/15/10 550,000 500,500 Terex Corp., 10.375% 04/01/11 95,000 89,300 ------------- 2,450,633 ------------- PAPER PRODUCTS--1.1% Corp Durango SA de CV, 13.125% 08/01/06 280,000 100,800 Jefferson Smurfit Corp., 8.250% 10/01/12 (a) 165,000 169,125 Packaging Corp., 9.625% 04/01/09 260,000 280,800 Riverwood International Corp., 10.875% 04/01/08 675,000 681,750 Tembec Industries, Inc., 8.500% 02/01/11 250,000 251,250 ------------- 1,483,725 ------------- PRIMARY METAL--0.5% AK Steel Corp., 7.75% 06/15/12 170,000 171,275 Bayou Steel Corp., 9.500% 05/15/08 (c) 500,000 75,000 Kaiser Aluminum & Chemical Corp., 10.875% 10/15/06 (c)(d) 420,000 281,400 Oregon Steel Mills, Inc., 10.000% 07/15/09 (a) 130,000 131,300 WCI Steel, Inc., 10.000% 12/01/04 (c) 320,000 73,600 Wheeling-Pittsburgh Corp., 9.250% 11/15/07 (c)(d) 750,000 22,500 ------------- 755,075 ------------- PRINTING & PUBLISHING--1.5% American Greetings Corp., 11.750% 07/15/08 175,000 190,750 Dex Media East LLC, 12.125% 11/15/12 (a) 370,000 409,775 Primedia, Inc., 8.875% 05/15/11 375,000 340,312 Quebecor Media, Inc., 11.125% 07/15/11 $ 400,000 $ 368,000 Von Hoffman Corp., 10.250% 03/15/09 285,000 270,750 Yell Finance BV, 10.750% 08/01/11 470,000 512,300 ------------- 2,091,887 ------------- TRANSPORTATION EQUIPMENT--0.1% Teekay Shipping Corp., 8.875% 07/15/11 85,000 87,125 ------------- MINING & ENERGY--4.2% METAL MINING--0.3% Trimas Corp., 9.875% 06/15/12 (a) 355,000 351,450 ------------- OIL & GAS EXTRACTION--3.8% Benton Oil & Gas Co., 9.375% 11/01/07 215,000 193,500 Compton Petroleum Corp., 9.90% 05/15/09 195,000 204,750 Chesapeake Energy Corp., 7.750% 01/15/15 185,000 184,075 Denbury Management, Inc., 9.000% 03/01/08 80,000 82,000 Encore Ecquisition Co., 8.375% 06/15/12 195,000 202,800 Forest Oil Corp., 8.000% 06/15/08 250,000 263,750 Magnum Hunter Resources, Inc., 10.000% 06/01/07 450,000 470,250 Mariner Energy, Inc., 10.500% 08/01/06 375,000 352,500 Pemex Project Funding Master Trust: 7.375% 12/15/14 270,000 281,078 9.125% 10/13/10 950,000 1,087,750 PDVSA Finance Ltd.: 6.250% 02/15/06 503,700 456,919 6.650% 02/15/06 240,000 203,700 Pioneer Natural Resource: 7.500% 04/15/12 70,000 73,850 9.625% 04/01/10 315,000 366,975 Pogo Producing Co., 8.250% 04/15/11 425,000 446,250 Stone Energy Corp., 8.250% 12/15/11 135,000 139,388 XTO Energy Inc., 7.500% 04/15/12 325,000 344,500 ------------- 5,354,035 ------------- OIL & GAS FIELD SERVICES--0.1% Newpark Resources, Inc., 8.625% 12/15/07 195,000 182,325 -------------
See Notes to Investment Portfolio. 39
PAR VALUE ------------- ------------- RETAIL TRADE--0.9% FOOD STORES--0.1% Winn-Dixie Stores, Inc., 8.875% 04/01/08 $ 190,000 $ 193,800 ------------- MISCELLANEOUS RETAIL--0.4% JC Penney Co., Inc., 9.000% 08/01/12 285,000 290,700 Steinway Musical Instruments, Inc., 8.750% 04/15/11 270,000 264,600 ------------- 555,300 ------------- RESTAURANTS--0.4% Yum! Brands Inc.: 7.700% 07/01/12 200,000 209,000 8.875% 04/15/11 265,000 288,850 ------------- 497,850 ------------- SERVICES--9.5% AMUSEMENT & RECREATION--4.3% Ameristar Casinos, Inc., 10.750% 02/15/09 215,000 234,350 Argosy Gaming Co., 10.750% 06/01/09 305,000 335,500 Boyd Gaming Corp.: 7.750% 12/15/12 (a) 140,000 138,600 9.500% 07/15/07 150,000 156,750 Circus & Eldorado/Silver Legacy Capital Corp., 10.125% 03/01/12 270,000 265,950 Coast Hotels & Casinos, Inc., 9.500% 04/01/09 325,000 345,312 Corrections Corp., 9.875% 05/01/09 180,000 192,600 Hollywood Casino Corp., 11.250% 05/01/07 470,000 509,950 Hollywood Casino Shreveport, 13.000% 08/01/06 470,000 479,400 Hollywood Park, Inc., 9.250% 02/15/07 750,000 667,500 International Game Technology, Inc., 8.375% 05/15/09 265,000 292,825 MGM Mirage, Inc., 8.375% 02/01/11 265,000 284,875 Majestic Investment Holdings LLC, 11.653% 11/30/07 135,000 126,900 Mohegan Tribal Gaming: 8.000% 04/01/12 350,000 366,625 8.375% 07/01/11 125,000 131,562 Park Place Entertainment Corp., 9.375% 02/15/07 285,000 303,525 Penn National Gaming, Inc., 11.125% 03/01/08 275,000 299,750 Regal Cinemas Inc., 9.375% 02/01/12 360,000 382,500 Riviera Holding Corp., 11.000% 06/15/10 20,000 18,000 Six Flags, Inc., 9.500% 02/01/09 $ 300,000 $ 288,750 Venetian Casino/LV Sands, 11.000% 06/15/10 205,000 214,225 ------------- 6,035,449 ------------- AUTO EQUIPMENT & RENTAL SERVICES--1.1% Collins & Aikman Products Co., 10.750% 12/31/11 435,000 413,250 Dana Corp.: 9.000% 08/15/11 135,000 130,612 10.125% 03/15/10 125,000 126,875 Dura Operating Corp., 8.625% 04/15/12 225,000 227,250 Lear Corp., 8.110% 05/15/09 355,000 375,412 United Rentals, Inc.: 8.800% 08/15/08 195,000 156,000 9.500% 06/01/08 155,000 127,100 ------------- 1,556,499 ------------- FUNERAL SERVICES--0.5% Service Corp. International, 7.700% 04/15/09 400,000 380,000 Stewart Enterprises, Inc., 10.750% 07/01/08 235,000 259,675 ------------- 639,675 ------------- HEALTH SERVICES--2.9% AmerisourceBergen: 7.250% 11/15/12 (a) 140,000 143,850 8.125% 09/01/08 250,000 267,500 Coventry Health Care Inc., 8.125% 02/15/12 265,000 279,575 HCA-The Healthcare Co., 8.750% 09/01/10 710,000 813,546 Healthsouth Corp., 7.625% 06/01/12 275,000 226,875 Insight Health Services Corp., 9.875% 11/01/11 300,000 286,500 Magellan Health Services, Inc.: 9.000% 02/15/08 475,000 118,750 9.375% 11/15/07 (a) 210,000 163,800 Medquest, Inc., 11.875% 08/15/12 (a) 335,000 331,650 Pacificare Health Systems, Inc., 10.750% 06/01/09 325,000 347,750 Radiologix, Inc., 10.500% 12/15/08 165,000 128,700 Res Care, Inc., 10.625% 11/15/08 325,000 250,250 Tenet Healthcare Corp., 6.375% 12/01/11 405,000 363,488 United Surgical Partners, 10.000% 12/15/11 250,000 256,250 ------------- 3,978,484 -------------
See Notes to Investment Portfolio. 40
PAR VALUE ------------- ------------- HOTELS, CAMPS & LODGING--0.7% Host Marriott LP, 9.500% 01/15/07 $ 540,000 $ 548,100 Starwood Hotels & Resorts Worldwide, Inc., 7.875% 05/01/12 375,000 371,250 ------------- 919,350 ------------- TRANSPORTATION, COMMUNICATIONS, ELECTRIC, GAS & SANITARY SERVICES--10.8% AEROSPACE--1.3% BE Aerospace, Inc., 8.875% 05/01/11 175,000 129,500 L-3 Communication Corp., 7.625% 06/15/12 280,000 289,800 Sequa Corp., 8.875% 04/01/08 315,000 300,834 TransDigm, Inc., 10.375% 12/01/08 1,000,000 1,030,000 ------------- 1,750,134 ------------- AIR TRANSPORTATION--0.7% Northwest Airlines Inc., 9.875% 03/15/07 220,000 140,800 Petroleum Helicopters, Inc., 9.375% 05/01/09 325,000 341,250 U.S. Airways, Inc., 10.375% 03/01/13 (d) 850,000 425,000 ------------- 907,050 ------------- BROADCASTING--1.5% Advanstar Communications, Inc., 12.000% 02/15/11 300,000 234,000 Allbritton Communications Co., 9.750% 11/30/07 225,000 233,775 Canwest Media, Inc., 10.625% 05/15/11 300,000 319,500 Corus Entertainment Inc., 8.750% 03/01/12 115,000 121,900 Emmis Communications, (e) 3/15/11 (12.500% 03/15/06) 317,000 254,392 LIN Holding Corp., (e) 3/1/08 (10.000% 03/01/03) 735,000 749,700 TV Azteca SA de CV, 10.500% 02/15/07 250,000 225,000 ------------- 2,138,267 ------------- CABLE--2.0% British Sky Broadcasting Group, 8.200% 07/15/09 535,000 584,450 Cable Satisfaction International, Inc., 12.750% 03/01/10 325,000 65,000 Charter Communications Holding LLC: (e) 04/01/11 (9.920% 04/01/04) 555,000 194,250 10.000% 04/01/09 275,000 121,000 10.750% 10/01/09 100,000 45,000 Comcast UK Cable Partners Ltd., 11.200% 11/15/07 $ 450,000 $ 319,500 EchoStar DBS Corp.: 9.250% 02/01/06 575,000 602,313 9.375% 02/01/09 200,000 212,000 Insight Communications, (e) 02/15/11 (12.250% 02/15/06) 460,000 253,000 Northland Cable Television, Inc., 10.250% 11/15/07 500,000 335,000 ------------- 2,731,513 ------------- COMMUNICATIONS--0.2% XM Satellite Radio Holdings, Inc., 14.000% 03/15/10 500,000 340,000 ------------- COMMUNICATION SERVICES--0.2% Crown Castle International Corp., (e) 05/15/11 (10.375% 05/01/04) 175,000 113,750 SBA Communication Corp., 10.250% 02/01/09 290,000 157,325 ------------- 271,075 ------------- ELECTRIC, GAS & SANITARY SERVICES--1.2% Allied Waste North America, Inc.: 8.500% 12/01/08 285,000 286,425 10.000% 08/01/09 1,090,000 1,084,550 HydroChem Industrial Services, Inc., 10.375% 08/01/07 350,000 262,500 ------------- 1,633,475 ------------- ELECTRIC SERVICES--1.3% AES Corp., 9.500% 06/01/09 250,000 152,500 Beaver Valley Funding Corp., 9.000% 06/01/17 455,000 504,295 Caithness Coso Funding Corp., 9.050% 12/15/09 324,852 318,355 Calpine Corp., 8.500% 02/15/11 530,000 235,850 CMS Energy Corp., 8.900% 07/15/08 60,000 53,400 Nevada Power Co., 10.875% 10/15/09 (a) 175,000 180,250 PSE&G Energy Holdings, 8.625% 02/15/08 215,000 174,150 Western Resources, Inc., 7.875% 05/01/07 180,000 180,000 ------------- 1,798,800 ------------- MARINE SERVICES--0.2% Stena AB, 9.625% 12/01/12 (a) 170,000 175,100 Trico Marine Services, Inc., 8.875% 05/15/12 170,000 156,400 ------------- 331,500 ------------- MOTOR FREIGHT & WAREHOUSING--0.1% Quality Distribution Inc., LLC: 12.000% 06/15/09 (a) 79,486 11,824 12.500% 06/15/08 (a) 333,000 166,084 ------------- 177,908 -------------
See Notes to Investment Portfolio. 41
PAR VALUE --------------- ------------- POLLUTION CONTROL--0.0% Envirosource, Inc., 14.000% 12/15/08 $ 79,548 $ 71,593 ------------- RADIO & TELEPHONE COMMUNICATIONS--1.2% Airgate Pcs, Inc., (e) 10/01/04 (13.500% 10/01/09) 230,000 25,300 Clear Channel Communications, 8.000% 11/01/08 85,000 92,225 Horizon PCS, Inc., 13.750% 06/15/11 285,000 54,150 Nextel Communications, Inc.: (e) 10/31/07 685,000 637,050 (9.375% 11/15/09) 355,000 322,162 Nextel Partners, Inc., 11.000% 03/15/10 225,000 193,500 Rogers Cantel, Inc., 9.750% 06/01/16 285,000 253,650 U.S. Unwired, Inc., (e) 11/01/09 (13.375% 11/01/04) 500,000 30,000 ------------- 1,608,037 ------------- RAIL ROAD--0.3% Kansas City Southern Railway, 7.500% 06/15/09 140,000 147,000 TFM SA de CV, Quality Distribution Inc., LLC, 12.500% 06/15/12 230,000 229,138 ------------- 376,138 ------------- TELECOMMUNICATIONS--0.6% AT&T Wireless Services, Inc., 7.875% 03/01/11 225,000 225,000 Carrier1 International SA, 13.250% 02/15/09 (c)(d) 500,000 15,000 Insight Midwest/Insight Capital, 9.750% 10/01/09 (a) 270,000 255,150 RCN, Inc., 11.125% 10/15/07 500,000 110,000 Time Warner Telecom, Inc.: 10.125% 02/01/11 295,000 162,250 9.750% 07/15/08 200,000 110,000 ------------- 877,400 ------------- WHOLESALE TRADE--0.3% DURABLE GOODS--0.3% Armkel LLC, 9.500% 08/15/09 115,000 124,487 Playtex Products, Inc., 9.375% 06/01/11 300,000 327,000 ------------- 451,487 ------------- TOTAL CORPORATE FIXED INCOME BONDS & NOTES (cost of $58,838,323) 53,912,214 ------------- FOREIGN GOVERNMENT & AGENCY OBLIGATIONS--33.0% Euro Investment Bank, 7.625% 12/07/07 GBP 550,000 $ 1,007,437 Government of Australia, 6.250% 05/15/15 AUD 1,525,000 924,153 Government of Canada, 10.000% 06/01/08 CAD 2,656,000 2,154,997 Government of Italy: 5.250% 08/01/11 ITL 2,330,000 2,632,944 9.500% 02/01/06 860,000 1,070,295 Government of New Zealand: 6.000% 11/15/11 NZD 6,410,000 3,341,513 6.500% 04/15/13 545,000 294,094 8.000% 11/15/06 1,755,000 986,996 Government of Sweden: 6.750% 05/05/14 SEK 10,870,000 1,456,941 10.250% 05/05/03 9,200,000 1,080,477 Kingdom of Norway: 6.750% 01/15/07 NOK 14,485,000 2,184,263 6.000% 05/16/11 20,420,000 2,984,278 Poland Government Bond, 8.500% 05/12/07 PLN 7,730,000 2,238,092 Republic of Brazil: 8.000% 04/15/14 $ 1,237,567 810,717 14.500% 10/15/09 725,000 601,750 11.000% 08/17/40 443,000 275,768 12.000% 11/17/06 EUR 370,000 299,551 Republic of Bulgaria, 7.500% 01/15/13 1,978,000 2,181,156 Republic of Colombia: 9.750% 04/09/11 $ 677,634 699,657 10.000% 01/23/12 430,000 434,300 11.375% 01/31/08 EUR 255,000 269,959 Republic of Greece: 8.900% 03/21/04 865,393 973,930 8.800% 06/19/07 425,532 543,467 8.600% 03/26/08 871,431 1,124,213 Republic of Hungary, 8.500% 10/12/05 HUF 200,000,000 912,399 Republic of Panama, 10.750% 05/15/20 $ 665,000 741,475 Republic of South Africa: 9.125% 05/19/09 340,000 405,450 12.000% 02/28/05 ZAR 4,345,000 515,375 13.000% 08/31/10 8,525,000 1,108,586 Republic of Venezuela, 9.250% 09/15/27 $ 753,000 512,040 Russian Federation: 5.000% 03/31/30 1,710,000 1,350,900 9.000% 03/25/04 DEM 1,370,000 762,864 11.000% 07/24/18 $ 445,000 531,998 12.750% 06/24/28 1,505,000 1,994,125 Treasury Corp. of Victoria, Australia, 7.500% 08/15/08 AUD 2,805,000 1,757,321 United Kingdom, 9.000% 07/12/11 GBP 950,000 2,022,570
See Notes to Investment Portfolio. 42
PAR VALUE --------------- ------------- United Mexican States: 8.125% 12/30/19 $ 590,000 $ 622,450 8.300% 08/15/31 355,000 374,525 11.000% 05/08/17 ITL 610,000,000 411,491 11.375% 09/15/16 $ 892,000 1,195,280 ------------- TOTAL FOREIGN GOVERNMENT & AGENCY OBLIGATIONS (Cost of $41,841,374) 45,789,797 ------------- U.S. GOVERNMENT AGENCIES & OBLIGATIONS--24.8% Federal Home Loan Mortgage Corp., 8.000% 10/01/26 442,644 477,918 ------------- Federal National Mortgage Association, 6.500% TBA (f) . 2,795,000 2,909,422 ------------- Government National Mortgage Association, 8.000% 04/15/17 254,412 279,276 ------------- U.S. Treasury Bonds: 8.750% 05/15/17 4,411,000 6,377,340 10.375% 11/15/12 3,800,000 5,078,936 11.625% 11/15/04 2,900,000 3,436,274 12.000% 08/15/13 9,548,000 13,903,158 ------------- 28,795,708 ------------- U.S. Treasury Notes, 6.500% 10/15/06 1,730,000 1,987,068 ------------- TOTAL U.S. GOVERNMENT AGENCIES & OBLIGATIONS (cost of $32,842,927) 34,449,392 ------------- TOTAL BONDS & NOTES (cost of $133,522,624) . 134,151,403 ------------- SHARES --------------- PREFERRED STOCKS--0.7% TRANSPORTATION, COMMUNICATIONS, ELECTRIC, GAS & SANITARY SERVICES--0.7% BROADCASTING--0.2% Sinclair Broadcast Group, Inc., 11.625% . 2,000 215,000 ------------- CABLE--0.5% CSC Holdings Ltd., PIK: 11.125% 4,482 419,068 11.750% 2,291 218,790 ------------- 637,858 ------------- COMMUNICATIONS--0.0 Dobson Communication Corp., 12.250% PIK, 80 38,275 ------------- POLLUTION CONTROL--0.0% Envirosource, Inc. 7.250% 500 23,148 ------------- TOTAL PREFERRED STOCKS (cost of $1,053,551) 914,281 ------------- SHARES VALUE --------------- ------------- COMMON STOCKS--0.0% TRANSPORTATION, COMMUNICATIONS, ELECTRIC, GAS & SANITARY SERVICES--0.0% POLLUTION CONTROL--0.0% Envirosource, Inc 2,000 $ 460 Fairlane Management Corp. (g) 2,000 -- ------------- 460 ------------- TELECOMMUNICATIONS--0.0% Price Communications Corp 1 14 ------------- TOTAL COMMON STOCKS (cost of $64) 474 ------------- UNITS --------------- WARRANTS--0.0% (h) RETAIL TRADE--0.0% FOOD STORES--0.0% Pathmark Stores, Inc., expires 2/1/12 2,938 2,262 ------------- TRANSPORTATION, COMMUNICATIONS, ELECTRIC, GAS & SANITARY SERVICES--0.0% CABLE--0.0% Cable Satisfaction International, Inc., expires 3/1/05 515 52 Ono Finance PLC: expires 2/15/11 150 1 expires 5/31/09 500 1 ------------- 54 ------------- COMMUNICATIONS--0.0% UbiquiTel Operating Co., expires 4/15/10 (a) 225 56 ------------- TELECOMMUNICATIONS--0.0% Carrier 1 International SA, expires 2/19/09 (a) 235 2 Horizon PCS, Inc., expires 10/1/10 (a) 315 -- Jazztel PLC, Expires 07/15/10 95 -- XM Satellite Radio Holdings, Inc., expires 3/15/10 (a) 150 113 ------------- 115 ------------- TRANSPORTATION--0.0% QDI, Inc., Expires 6/15/06 (a) 1,021 -- ------------- TOTAL WARRANTS (cost of $467,107) 2,487 -------------
See Notes to Investment Portfolio. 43
PAR VALUE --------------- ------------- SHORT-TERM OBLIGATION--3.0% Repurchase agreement with State Street Bank & Trust Co., dated 12/31/02, due 1/02/03 at 1.180%, collateralized by U.S. Treasury Bond maturing 2/15/20, market value $4,327,986 (repurchase proceeds $4,236,278) (cost of $4,236,000) $ 4,236,000 $ 4,236,000 ------------- TOTAL INVESTMENTS--100.3% (cost of $139,279,346) (i) 139,304,645 ------------- OTHER ASSETS & LIABILITIES, NET--(0.3)% (482,874) ------------- NET ASSETS--100.0% $ 138,821,771 =============
NOTES TO INVESTMENT PORTFOLIO: (a) These securities are exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At December 31, 2002 the value of these securities amounted to $3,661,329 or 2.6% of net assets. (b) Zero coupon bond. (c) This issuer is in default of certain debt covenants. Income is not being fully accrued. (d) As of December 31, 2002, the fund held certain securities that have filed for bankruptcy protection under Chapter 11, representing 0.5% of net assets. (e) Stepped coupon bond currently accruing at zero. Shown parenthetically is the next interest rate to be paid and the date the Fund will begin accruing this rate. (f) Settlement of this security is on a delayed delivery basis. (g) Represents fair value as determined in good faith under the direction of the Trustees. (h) Non-income producing. (i) Cost for federal income tax purposes is $139,578,133. The difference between cost for generally accepted accounting principles and cost on a tax basis is related to deferral of losses on wash sales and amortization/accretion tax fixed income securities. As of December 31, 2002, the Fund had entered into the following for- ward currency contracts:
IN NET UNREALIZED CONTRACTS EXCHANGE SETTLEMENT APPRECIATION/ TO DELIVER FOR DATE DEPRECIATION ------------- ----------- ----------- -------------- CAD 746,000 US$ 472,075 01/09/03 $ 6,928 EUR 3,227,500 US$ 3,382,356 01/16/03 (108,717) GBP 457,500 US$ 735,506 01/16/03 (16,514) NOK 8,438,000 US$ 1,213,971 01/16/03 (51,039) SEK 6,530,000 US$ 750,233 01/16/03 (23,482) -------------- $ (192,824) ==============
SUMMARY OF SECURITIES BY COUNTRY % OF TOTAL (UNAUDITED) VALUE INVESTMENTS --------------------- -------------- ----------------- United States $ 95,926,201 68.9% Norway 5,168,541 3.7% Russia 4,639,887 3.3% New Zealand 4,622,603 3.3% Italy 3,703,239 2.7% Australia 2,681,474 1.9% Greece 2,641,610 1.9% Mexico 2,603,746 1.9% Sweden 2,537,418 1.8% Poland 2,238,092 1.6% Bulgaria 2,181,156 1.6% Canada 2,154,997 1.5% South Africa 2,029,411 1.5% United Kingdom 2,022,570 1.4% Brazil 1,987,786 1.4% Hungary 912,399 0.7% Panama 741,475 0.5% Venezuela 512,040 0.4% ------------- ----- $ 139,304,645 100.0% ============= =====
Certain securities are listed by country of underlying exposure but may trade predominantly on other exchanges.
ACRONYM NAME -------- ---- PIK Payment-In-Kind AUD Australian Dollars CAD Canadian Dollars DEM German Deutschemarks EUR Euro Currency GBP British Pounds HUF Hungarian Forint ITL Italian Lira NOK Norwegian Krona NZD New Zealand Dollars PLN Polish Zloty ZAR South African Rand SEK Swedish Krona
See Notes to Financial Statements. 44 STATEMENT OF ASSETS & LIABILITIES Colonial Strategic Income Fund, Variable Series / December 31, 2002
ASSETS: Investments, at cost $ 139,279,346 ------------- Investments, at value $ 139,304,645 Cash 325,452 Receivable for: Fund shares sold 167,587 Interest 3,236,183 Dividends 19,196 Deferred Trustees' compensation plan 4,192 Other assets 3,113 ------------- TOTAL ASSETS 143,060,368 ------------- LIABILITIES: Payable to foreign custodian bank (cost of $461) 476 Net unrealized depreciation on foreign forward currency contracts 192,824 Payable for: Investments purchased on a delayed delivery basis 2,896,323 Investments purchased 664,590 Expense reimbursement due to Distributor 4,977 Fund shares repurchased 332,511 Management fee 73,260 Transfer agent fee 625 Pricing and bookkeeping fees 5,097 Audit fee 27,095 Reports to shareholders 30,025 Deferred Trustees' fee 4,192 Other liabilities 6,602 ------------- TOTAL LIABILITIES 4,238,597 ------------- NET ASSETS $ 138,821,771 ============= COMPOSITION OF NET ASSETS: Paid-in capital $ 169,746,179 Overdistributed net investment income (1,605,285) Accumulated net realized loss (29,190,076) Net unrealized appreciation (depreciation) on: Investments 25,299 Foreign currency translations (154,346) ------------- NET ASSETS $ 138,821,771 ============= CLASS A: Net assets $ 106,414,581 Shares outstanding 11,956,756 ============= Net asset value per share $ 8.90 ============= CLASS B: Net assets $ 32,407,190 Shares outstanding 3,644,878 ============= Net asset value per share $ 8.89 =============
See Notes to Financial Statements. 45 STATEMENT OF OPERATIONS Colonial Strategic Income Fund, Variable Series For the Year Ended December 31, 2002 INVESTMENT INCOME: Dividends $ 154,302 Interest 10,797,840 Dollar roll fee income 65,157 ------------ Total Investment Income (net of foreign taxes withheld of $67,596) 11,017,299 ------------ EXPENSES: Management fee 904,382 Distribution fee -- Class B 64,933 Pricing and bookkeeping fees 66,564 Transfer agent fee 7,500 Trustees' fee 9,495 Custody fee 40,182 Other expenses 31,452 ------------ Total Expenses 1,124,508 Fees reimbursed by Distributor -- Class B (2,715) Custody earnings credit (1,056) ------------ Net Expenses 1,120,737 ------------ Net Investment Income 9,896,562 ------------ NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY: Net realized loss on: Investments (7,380,722) Foreign currency transactions (1,102,743) ------------ Net realized loss (8,483,465) ------------ Net change in unrealized appreciation/depreciation on: Investments 9,723,210 Foreign currency translations (125,772) ------------ Net change in unrealized appreciation/depreciation 9,597,438 ------------ Net Gain 1,113,973 ------------ Net Increase in Net Assets from Operations $ 11,010,535 ============
See Notes to Financial Statements. 46 STATEMENT OF CHANGES IN NET ASSETS Colonial Strategic Income Fund, Variable Series
YEAR ENDED DECEMBER 31, ------------------------------ INCREASE (DECREASE) IN NET ASSETS: 2002 2001 ---------------------------------- ------------- ------------- OPERATIONS: Net investment income $ 9,896,562 $ 12,286,462 Net realized loss on investments and foreign currency transactions (8,483,465) (11,584,971) Net change in unrealized appreciation/depreciation on investments and foreign currency translations 9,597,438 4,582,688 ------------- ------------- Net Increase from Operations 11,010,535 5,284,179 ------------- ------------- DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income: Class A (8,337,510) (10,506,698) Class B (2,438,046) (1,614,888) Return of capital: Class A (171,968) (248,628) Class B (50,287) (38,214) ------------- ------------- Total Distributions Declared to Shareholders (10,997,811) (12,408,428) ------------- ------------- SHARE TRANSACTIONS: CLASS A: Subscriptions 3,738,599 4,421,529 Distributions reinvested 8,509,478 10,755,326 Redemptions (29,202,076) (29,988,980) ------------- ------------- Net Decrease (16,953,999) (14,812,125) ------------- ------------- CLASS B: Subscriptions 15,913,161 18,160,945 Distributions reinvested 2,488,333 1,653,102 Redemptions (5,160,875) (2,562,947) ------------- ------------- Net Increase 13,240,619 17,251,100 ------------- ------------- Net Increase (Decrease) from Share Transactions (3,713,380) 2,438,975 ------------- ------------- Total Decrease in Net Assets (3,700,656) (4,685,274) NET ASSETS: Beginning of period 142,522,427 147,207,701 ------------- ------------- End of period (including overdistributed net investment income of $(1,605,285) and $(1,441,525), respectively) $ 138,821,771 $ 142,522,427 ============= ============= CHANGES IN SHARES: Class A: Subscriptions 407,376 461,767 Issued for distributions reinvested 956,121 1,208,398 Redemptions (3,201,245) (3,114,264) ------------- ------------- Net Decrease (1,837,748) (1,444,099) ------------- ------------- Class B: Subscriptions 1,749,903 1,889,796 Issued for distributions reinvested 279,902 186,160 Redemptions (572,003) (269,371) ------------- ------------- Net Increase 1,457,802 1,806,585 ------------- -------------
See Notes to Financial Statements. 47 NOTES TO FINANCIAL STATEMENTS Colonial Strategic Income Fund, Variable Series / December 31, 2002 NOTE 1. ORGANIZATION AND ACCOUNTING POLICIES ORGANIZATION--Colonial Strategic Income Fund, Variable Series (the "Fund"), a series of Liberty Variable Investment Trust (the "Trust"), is a diversified portfolio of a Massachusetts business trust, registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The Fund's investment goal is to seek current income, consistent with prudent risk and maximum total return. The Fund's capitalization consists of an unlimited number of shares of beneficial interest without par value that represent a separate series of the Trust. The Fund offers two classes of shares: Class A and Class B. Each share of a class represents an equal proportionate beneficial interest in that share class and, when issued and outstanding, is fully paid and nonassessable. Shareholders would be entitled to share proportionally in the net assets of their share class available for distribution to shareholders upon liquidation of the Fund. Shares of the Fund are available and are being marketed exclusively as a pooled funding vehicle for variable annuity contracts ("VA contracts") and Variable Life Insurance Policies ("VLI Policies") offered by the separate accounts of certain life insurance companies ("Participating Insurance Companies"). The Participating Insurance Companies and their separate accounts own all the shares of the Fund. Liberty Advisory Services Corp. (the "Manager") ("LASC") provides investment management and advisory services to the Fund pursuant to its Management Agreement with the Fund. Colonial Management Associates, Inc. ("Colonial") provides sub-advisory services. LASC has delegated various administrative matters to Colonial. Colonial also provides pricing and bookkeeping services to the Fund. Liberty Funds Distributor, Inc. ("LFD"), an affiliate of the Manager, serves as the principal underwriter of the Fund. The Manager, Colonial and LFD are wholly-owned indirect subsidiaries of FleetBoston Financial Corporation ("FleetBoston"). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. SECURITY VALUATION AND TRANSACTIONS--Debt securities generally are valued by a pricing service based upon market transactions for normal, institutional-size trading units of similar securities. When management deems it appropriate, an over-the-counter or exchange bid quotation is used. Equity securities generally are valued at the last sale price or, in the case of unlisted or listed securities for which there were no sales during the day, at the current quoted bid price. Forward currency contracts are valued based on the weighted value of exchange-traded contracts with similar durations. Short-term obligations with a maturity of 60 days or less are valued at amortized cost. The values of all assets and liabilities quoted in foreign currencies are translated into U.S. dollars at that day's exchange rates. 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. Generally, trading in foreign securities is substantially completed each day at various times prior to the close of the New York Stock Exchange ("NYSE"). The values of such securities used in computing the net asset value of the Fund's shares are determined as of such times. Foreign currency exchange rates are also generally determined prior to the close of the NYSE. Occasionally, events affecting the values of such securities and such exchange rates may occur between the times at which they are determined and the close of the customary trading session of the NYSE which would not be reflected in the computation of the Fund's net asset value. If events materially affecting the value of such securities and such exchange rates occur during such period, then these securities will be valued at their fair value as determined in good faith by or under the supervision of the Board of Trustees. 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 enter into mortgage dollar roll transactions. A mortgage dollar roll transaction involves a sale by the Fund of securities that it holds with an agreement by the Fund to repurchase substantially similar securities at an agreed upon price and date. During the period between the sale and the repurchase, the Fund will not be entitled to accrue interest and receive principal payments on the securities sold. Mortgage dollar roll transactions involve the risk that the market value of the securities sold by the Fund may decline below the repurchase price of those securities. In the event the buyer of the securities under a 48 mortgage dollar roll transaction files for bankruptcy or becomes insolvent, the Fund's use of proceeds of the transaction may be restricted pending a determination by or with respect to the other party. 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. The Fund maintains U.S. government securities or other liquid high-grade debt obligations as collateral with respect to mortgage dollar roll transactions and securities traded on other than normal settlement terms. DETERMINATION OF CLASS NET ASSET VALUES AND FINANCIAL HIGHLIGHTS--All income, expenses (other than the Class B distribution fee), 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. The per share data was calculated using average shares outstanding during the period. In addition, Class B net investment income per share data and ratios reflect the distribution fee applicable to Class B shares only. 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. INTEREST INCOME, DEBT DISCOUNT AND PREMIUM--Interest income is recorded on the accrual basis. Discount is accreted to interest income over the life of a security with a corresponding increase in the cost basis. Premium is amortized against interest income with a corresponding decrease in the cost basis. DISTRIBUTIONS TO SHAREHOLDERS--The Fund intends to distribute as income dividends or capital gains distributions, at least annually, substantially all of its net investment income and net profits realized from the sale of investments. All dividends and distributions are reinvested in additional shares of the Fund at net asset value as of the record date of the distribution. Income and capital gain distributions are determined in accordance with federal income tax regulations. FOREIGN CURRENCY TRANSACTIONS--Net realized and unrealized gains (losses) on foreign currency transactions includes gains (losses) arising from the fluctuations in exchange rates between trade and settlement dates on securities transactions, gains (losses) arising from the disposition of foreign currency, and currency gains (losses) between the accrual and payment dates on dividends, interest income and foreign withholding taxes. The Fund does not distinguish that portion of gains (losses) on investments which is due to changes in foreign exchange rates from that which is due to changes in market prices of the investments. Such fluctuations are included with the net realized and unrealized gains (losses) on investments. FORWARD CURRENCY CONTRACTS--The Fund may enter into forward currency contracts to purchase or sell foreign currencies at predetermined exchange rates in connection with the settlement of purchases and sales of securities. The Fund may also enter into forward currency contracts to hedge certain other foreign currency denominated assets. The contracts are used to minimize the exposure to foreign exchange rate fluctuations during the period between trade and settlement date of the contracts. All contracts are marked-to-market daily, resulting in unrealized gains (losses) which become realized at the time the forward currency contracts are closed or mature. Realized and unrealized gains (losses) arising from such transactions are included in net realized and unrealized gains (losses) on foreign currency transactions. Forward currency contracts do not eliminate fluctuations in the prices of the Fund's portfolio securities. While the maximum potential loss from such contracts is the aggregate face value in U.S. dollars at the time the contract was opened, exposure is typically limited to the change in value of the contract (in U.S. dollars) over the period it remains open. Risks may also arise if counterparties fail to perform their obligations under the contracts. OTHER--Corporate actions and dividend income are recorded on the ex-date (except for certain foreign securities which are recorded as soon after ex-date as the Fund becomes aware of such), net of non-reclaimable tax withholdings. Where a high level of uncertainty as to collection exists, income on securities is recorded net of all tax withholdings with any rebates recorded when received. The Fund's custodian takes possession through the federal book-entry system of securities collateralizing repurchase agreements. Collateral is marked-to-market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund. The Fund may experience costs and delays in liquidating the collateral if the issuer defaults or enters bankruptcy. NOTE 2. FEDERAL TAX INFORMATION Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from generally accepted accounting principles. These differences are primarily due to differing treatments for foreign currency transactions, deferral of losses from wash sales, discount accretion/premium amortization on debt securities, defaulted bonds, capital loss carryforwards and 49 non-deductible expenses. Reclassifications are made to the Fund's capital accounts to reflect income and gains available for distribution (or available capital loss carryfor-wards) under income tax regulations. For the year ended December 31, 2002, permanent items identified and reclassified among the components of net assets are as follows:
OVERDISTRIBUTED ACCUMULATED NET INVESTMENT NET REALIZED PAID-IN INCOME LOSS CAPITAL --------------- ------------- -------- $ 715,234 $ (842,161) $ 126,927
Net investment income, net realized gains (losses) and net assets were not affected by this reclassification. The tax character of distributions paid during 2002 and 2001 was as follows:
2002 2001 ------------ ------------ Distributions paid from: Ordinary income $ 10,775,556 $ 12,121,586 Return of capital 222,255 286,842 ------------ ------------ $ 10,997,811 $ 12,408,428 ------------ ------------
As of December 31, 2002, the components of distributable earnings on a tax basis were as follows:
UNREALIZED DEPRECIATION* ------------- $(427,834)
*The difference between book-basis and tax-basis unrealized depreciation is attributable primarily to the tax deferral of losses on wash sales and the realization for tax purposes of unrealized gains on certain forward foreign currency contracts. The following capital loss carryforwards are available to reduce taxable income arising from future net realized gains on investments, if any, to the extent permitted by the Internal Revenue Code:
YEAR OF CAPITAL LOSS EXPIRATION CARRYFORWARD ---------- ------------ 2006 $ 101,588 2007 844,603 2008 5,837,414 2009 11,079,118 2010 11,028,566 ------------ $ 28,891,289 ============
Under current tax rules, certain capital losses realized after October 31 may be deferred and treated as occurring on the first day of the following fiscal year. As of December 31, 2002, for federal income tax purposes, post October losses of $75,183 were deferred to January 1, 2003. NOTE 3. FEES AND COMPENSATION PAID TO AFFILIATES MANAGEMENT AND SUB-ADVISORY FEES--The Manager receives a monthly fee equal to 0.65% annually of the Fund's average daily net assets. The Manager, out of the management fee it receives, pays Colonial a monthly sub-advisory fee equal to 0.45% annually of the Fund's average daily net assets. PRICING AND BOOKKEEPING FEES--Colonial is responsible for providing pricing and bookkeeping services to the Fund under a Pricing and Bookkeeping Agreement. Under a separate agreement (the "Outsourcing Agreement"), Colonial has delegated those functions to State Street Bank & Trust Company ("State Street"). Colonial pays fees to State Street under the Outsourcing Agreement. Under its pricing and bookkeeping agreement with the Fund, Colonial 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 December31, 2002, the net asset based fee rate was 0.036%. The Fund also pays out-of-pocket costs for pricing services. TRANSFER AGENT FEE--Liberty Funds Services, Inc. (the "Transfer Agent"), an affiliate of the Manager, provides shareholder services for an annual rate of $7,500. DISTRIBUTION FEE--The Fund has adopted a 12b-1 plan, which requires it to pay LFD a monthly distribution fee equal to 0.25% annually of Class B average daily net assets as of the 20th of each month. EXPENSE LIMITS--The Manager and LFD have voluntarily agreed to reimburse all expenses, including management fees and distribution fees, but excluding interest, taxes, brokerage and extraordinary expenses incurred by the Fund in excess of 1.00% annually of the Fund's average daily net assets. LFD will first reimburse the Class B distribution fee up to 0.25% annually to reach the 1.00% limit on Class B expenses. If additional reimbursement is needed to meet the limit for each class, the Manager will then reimburse other expenses to the extent necessary. If additional reimbursement is still needed to reach the expense limit, the Manager will then waive a portion of its management fee to reach the expense limit. This arrangement may be terminated or modified by the Manager or LFD at any time. OTHER--The Fund pays no compensation to its officers, all of whom are employees of Colonial or its affiliates. 50 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 $1,056 of custody fees were reduced by balance credits for the year ended December 31, 2002. The Fund could have invested a portion of the assets utilized in connection with the expense offset arrangement in an income-producing asset if it had not entered into such an agreement. NOTE 4. PORTFOLIO INFORMATION INVESTMENT ACTIVITY--For the year ended December 31, 2002, purchases and sales of investments, other than short-term obligations, were $82,754,354 and $86,627,111, respectively, of which $7,149,419 and $13,953,014, respectively, were U.S. Government Securities. Unrealized appreciation (depreciation) at December 31, 2002, based on cost of investments for federal income tax purposes, was: Gross unrealized appreciation $ 8,600,695 Gross unrealized depreciation (8,874,183) ------------ Net unrealized depreciation $ (273,488) ============
OTHER--There are certain additional risks involved when investing in foreign securities that are not inherent with investments in domestic securities. These risks may involve foreign currency exchange rate fluctuations, adverse political and economic developments and the possible prevention of foreign currency exchange or the imposition of other foreign governmental laws or restrictions. The Fund may focus its investments in certain industries, subjecting it to greater risk than a fund that is more diversified. 51 FINANCIAL HIGHLIGHTS Colonial Strategic Income Fund, Variable Series--Class B Shares Selected data for a share outstanding throughout each period is as follows:
YEAR ENDED PERIOD DECEMBER 31, ENDED ------------------------- DECEMBER 31, 2002 2001 2000 (a) ---------- ---------- ----------- NET ASSET VALUE, BEGINNING OF PERIOD $ 8.91 $ 9.41 $ 10.24 ---------- ---------- ---------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (b) 0.63 0.79(c) 0.56 Net realized and unrealized gain (loss) on investments and foreign currency 0.09 (0.46)(c) (0.37) ---------- ---------- ---------- Total from Investment Operations 0.72 0.33 0.19 ---------- ---------- ---------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.72) (0.81) (0.99) Return of capital (0.02) (0.02) (0.03) ---------- ---------- ---------- Total Distributions Declared to Shareholders (0.74) (0.83) (1.02) ---------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 8.89 $ 8.91 $ 9.41 ========== ========== ========== Total return (d)(e)(f) 8.08% 3.54% 1.92%(g) RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA: Expenses (h) 1.00% 1.00% 1.00%(i) Net investment income (h) 6.92% 8.27%(c) 9.39%(i) Waiver/reimbursement 0.01% 0.10% 0.03%(i) Portfolio turnover rate 62% 62% 31% Net assets, end of period (000's) $ 32,407 $ 19,481 $ 3,579
(a) For the period from commencement of operations on June 1, 2000 to December 31, 2000. (b) Per share data was calculated using average shares outstanding during the period. (c) Effective January 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 December31, 2001 was to decrease net investmentincome per share by $0.03, increase net realized and unrealized gain/loss per share by $0.03 and decrease the ratio of net investment income to average net assets from 8.55% to 8.27%. Per share data and ratios for periods prior to December 31, 2001 have not been restated to reflect this change in presentation. (d) Total return at net asset value assuming all distributions reinvested. (e) Had the Manager and/or Distributor not waived or reimbursed a portion of expenses, total return would have been reduced. (f) Total return figure does not include any insurance company charges associated with a variable annuity. If included, total return would be reduced. (g) Not annualized. (h) The benefits derived from custody credits and directed brokerage arrangements, if applicable, had an impact of less than 0.01%. (i) Annualized. 52 REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of Liberty Variable Investment Trust and the Class B Shareholders of Colonial Strategic Income Fund, Variable Series In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio, and the related statements of operations and of changes in net assets and the Class B financial highlights present fairly, in all material respects, the financial position of Colonial Strategic Income Fund, Variable Series (the "Fund") (a series of Liberty Variable Investment Trust) at December 31, 2002, and the results of its operations, the changes in its net assets and the Class B financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and the Class B financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2002 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts February 12, 2003 53 UNAUDITED INFORMATION FEDERAL INCOME TAX INFORMATION 1.42% of the ordinary income distributed by the Fund, for the year ended December 31, 2002, qualifies for the corporate dividends received deduction. 54 PORTFOLIO MANAGERS' DISCUSSION Colonial U.S. Growth & Income Fund, Variable Series / December 31, 2002 Colonial U.S. Growth & Income Fund, Variable Series seeks long-term growth and income. As of January 21, 2003, Scott Schermerhorn became the sole portfolio manager of the fund. Mr. Schermerhorn is a senior vice president of Colonial Management Associates, Inc. ANOTHER DIFFICULT YEAR FOR STOCKS As the year began, an aggressive government stimulus package, combined with brisk consumer spending, helped stocks recover from their lows of the previous fall. By mid-year, however, both value and growth stocks headed down as investors responded to growing revelations of financial and accounting irregularities in a variety of Fortune 500 companies. Our investments in three of these companies, WorldCom, The Williams Companies and El Paso Corporation (0.4% of net assets) were the main reason for the fund's negative performance. Even though the markets moved higher in the fourth quarter of the calendar year, those positive returns were not enough to overcome the deficit created earlier in the year. We eliminated our positions in WorldCom and The Williams Companies prior to the end of the period. HELP FROM TELECOMMUNICATIONS AND PHARMACEUTICALS The telecommunications sector contributed to fund performance as many local providers returned to a slower growth strategy with greater emphasis on paying stable dividends. We increased our exposure to telecommunications companies at the end of the third quarter, and our positions in Verizon, Bell South and SBC (2.9%, 2.2% and 2.2% of net assets, respectively) all helped performance. We did well with health care and pharmaceutical stocks. Earnings at Merck (2.8% of net assets) were flat compared to the previous year, which was a good sign in a generally weak market for corporate profits. Overall, we reduced our position for the period, we are maintaining this holding because we believe the company has the potential to perform well. We also favored the energy sector, but we believe the companies we own would still have reasonable profit potential even if the price of oil settles at around $25 a barrel, which is what we expect it to do in the year ahead. BACK TO BASICS Based on our belief that consumers may substantially reduce their spending on non-essential items, we reduced our retail holdings. In the same spirit, we started a position in Safeway (2.4% of net assets), a well-managed, high quality grocery store chain that has the potential to fare well even if consumers pull back on spending. While we don't anticipate another lapse into recession, we believe that much of the spending fueled by mortgage refinancing and zero-percent vehicle loans is likely to fall off in the coming year. MODEST RECOVERY EXPECTED NEXT YEAR Looking forward to 2003, we expect a gradual economic recovery that may not be as robust as investors would like. We are focusing on undervalued sectors that we believe should appreciate over time, with a bias toward stocks that pay dividends. These companies may have an advantage in difficult markets: they can cut dividends if necessary to maintain their financial strength without having to resort to borrowing. Despite the economic uncertainty, we still believe that the greatest risk is not to be invested in the stock market. ---------- Economic and market conditions can frequently change. There is no assurance that the trends described here will continue or commence. An investment in Colonial U.S. Growth & Income Fund, Variable Series offers significant long-term growth potential, but also involves certain risks. The fund may be affected by stock market fluctuations that occur in response to economic and business developments. Holdings are disclosed as of December 31, 2002, and are subject to change. 55 PERFORMANCE INFORMATION Colonial U.S. Growth and Income Fund, Variable Series / December 31, 2002 AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 2002(%)
1-YEAR 5-YEAR LIFE ------------------------------------------------------------ Class B(1) (6/1/00) -22.06 1.51 10.59 S&P 500 Index(2) -22.09 -0.58 10.28
Inception date of share class is in parentheses. [CHART] VALUE OF A $10,000 INVESTMENT, 7/5/94(3) - 12/31/02 Class B: $23,510
CLASS B S&P 500 SHARES INDEX 7/5/94 $10,000 $10,000 7/30/94 $10,260 $10,328 8/31/94 $10,670 $10,750 9/30/94 $10,460 $10,488 10/31/94 $10,631 $10,723 11/30/94 $10,251 $10,333 12/31/94 $10,441 $10,486 1/31/95 $10,705 $10,757 2/28/95 $11,132 $11,176 3/31/95 $11,427 $11,505 4/30/95 $11,661 $11,844 5/31/95 $12,078 $12,316 6/30/95 $12,342 $12,602 7/31/95 $12,769 $13,019 8/31/95 $12,718 $13,052 9/30/95 $13,145 $13,602 10/31/95 $13,094 $13,553 11/30/95 $13,592 $14,147 12/31/95 $13,541 $14,420 1/31/96 $13,903 $14,910 2/29/96 $14,177 $15,049 3/31/96 $14,253 $15,193 4/30/96 $14,779 $15,417 5/31/96 $15,130 $15,813 6/30/96 $14,801 $15,873 7/31/96 $14,089 $15,172 8/31/96 $14,560 $15,492 9/30/96 $15,272 $16,362 10/31/96 $15,655 $16,814 11/30/96 $16,773 $18,083 12/31/96 $16,498 $17,725 1/31/97 $17,704 $18,831 2/28/97 $17,692 $18,980 3/31/97 $16,984 $18,202 4/30/97 $17,889 $19,287 5/31/97 $18,911 $20,465 6/30/97 $19,629 $21,376 7/31/97 $21,196 $23,075 8/31/97 $20,465 $21,783 9/30/97 $21,520 $22,975 10/31/97 $20,535 $22,207 11/30/97 $21,371 $23,235 12/31/97 $21,815 $23,635 1/31/98 $22,055 $23,895 2/28/98 $23,581 $25,618 3/31/98 $24,772 $26,930 4/30/98 $24,760 $27,204 5/31/98 $24,143 $26,736 6/30/98 $25,068 $27,822 7/31/98 $24,572 $27,527 8/31/98 $20,569 $23,549 9/30/98 $21,519 $25,059 10/31/98 $23,355 $27,094 11/30/98 $24,775 $28,735 12/31/98 $26,209 $30,391 1/31/99 $26,893 $31,661 2/28/99 $25,820 $30,676 3/31/99 $26,657 $31,903 4/30/99 $27,395 $33,138 5/31/99 $27,034 $32,356 6/30/99 $28,610 $34,145 7/31/99 $27,897 $33,083 8/31/99 $27,590 $32,918 9/30/99 $26,641 $32,016 10/31/99 $27,702 $34,043 11/30/99 $28,064 $34,734 12/31/99 $29,355 $36,776 1/31/2000 $27,773 $34,930 2/29/2000 $26,826 $34,270 3/31/2000 $29,474 $37,621 4/30/2000 $29,444 $36,489 5/31/2000 $29,297 $35,741 6/30/2000 $28,884 $36,620 7/31/2000 $29,092 $36,049 8/31/2000 $30,954 $38,287 9/30/2000 $30,233 $36,266 10/31/2000 $30,447 $36,113 11/30/2000 $28,962 $33,268 12/31/2000 $30,366 $33,431 1/31/2001 $30,166 $34,617 2/28/2001 $29,949 $31,464 3/31/2001 $28,802 $29,472 4/30/2001 $29,300 $31,759 5/31/2001 $29,848 $31,972 6/30/2001 $29,149 $31,195 7/31/2001 $29,997 $30,889 8/31/2001 $29,815 $28,959 9/30/2001 $28,616 $26,622 10/31/2001 $28,762 $27,130 11/30/2001 $29,921 $29,211 12/31/2001 $30,169 $29,468 1/31/2002 $29,666 $29,038 2/28/2002 $29,354 $28,478 3/31/2002 $30,696 $29,548 4/30/2002 $29,587 $27,758 5/31/2002 $29,549 $27,555 6/30/2002 $26,402 $25,593 7/31/2002 $24,226 $23,599 8/31/2002 $24,537 $23,753 9/30/2002 $21,020 $21,173 10/31/2002 $22,807 $23,034 11/30/2002 $24,557 $24,389 12/31/2002 $23,510 $22,967
NET ASSET VALUE PER SHARE ($) 12/31/01 12/31/02 ------------------------------------------------------------ Class B 15.53 11.95
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 SHARES. Total return performance includes changes in share price and reinvestment of all distributions. The S&P (Standard & Poor's) 500 Index is an unmanaged index that tracks the performance of 500 widely held, large-capitalization US stocks. Indexes are not investments, do not incur fees or expenses and are not professionally managed. It is not possible to invest directly in an index. Securities in the fund may not match those in the index. MUTUAL FUND PERFORMANCE CHANGES OVER TIME. CURRENT RETURNS FOR THE FUND MAY BE DIFFERENT THAN THAT SHOWN. Performance numbers reflect all fund expenses, but do not include any insurance charges imposed by your insurance company's separate accounts. If performance included the effect of these additional charges, it would be lower. (1) Class B share (newer class shares) performance information includes returns of the fund's class A shares (the older existing fund class) for periods prior to the inception of the newer class shares. These class A share returns were not restated to reflect any expense differential (e.g., Rule 12b-1 fees) between class A shares and the newer class shares. If differences in expenses were reflected, the returns for the periods prior to the inception of the newer class shares would be lower. (2) Index performance is from June 30, 1994. (3) Inception date of class A shares (oldest existing share class). 56 INVESTMENT PORTFOLIO Colonial U.S. Growth & Income Fund, Variable Series / December 31, 2002
SHARES VALUE ------------ ------------ COMMON STOCKS--100.4% CONSUMER DISCRETIONARY--11.8% AUTOMOBILES & COMPONENTS--1.5% AUTO PARTS & EQUIPMENT--1.5% Delphi Automotive Systems Corp. 269,400 $ 2,168,670 ------------ AUTOMOBILE MANUFACTURERS--0.0% Ford Motor Co. 16 149 ------------ CONSUMER DURABLES & APPAREL--1.0% CONSUMER ELECTRONICS--1.0% Matsushita Electric Industrial Co., Ltd. 147,300 1,414,080 ------------ HOTELS, RESTAURANTS & LEISURE--2.1% RESTAURANTS--2.1% McDonald's Corp. 187,000 3,006,960 ------------ MEDIA--5.4% ADVERTISING--1.1% Interpublic Group of Companies, Inc. 104,300 1,468,544 ------------ BROADCASTING & CABLE--1.8% Comcast Corp., Special Class A (a) 109,148 2,572,618 ------------ MOVIES & ENTERTAINMENT--2.5% AOL Time Warner, Inc. (a) 101,400 1,328,340 News Corp., Ltd., ADR 81,100 2,128,875 ------------ 3,457,215 ------------ RETAILING--1.8% SPECIALTY STORES--1.8% Office Depot, Inc. (a) 172,000 2,538,720 ------------ CONSUMER STAPLES--12.8% FOOD & DRUG RETAILING--2.4% FOOD RETAIL--2.4% Safeway, Inc. (a) 146,100 3,412,896 ------------ FOOD, BEVERAGES & TOBACCO--10.4% AGRICULTURAL PRODUCTS--1.0% Archer Daniels Midland Co. 112,100 1,390,040 ------------ PACKAGED FOODS--8.5% ConAgra Foods, Inc. 189,600 4,741,896 Del Monte Foods Co. (a) 23,402 180,194 H.J. Heinz Co. 52,400 1,722,388 Sara Lee Corp. 238,300 5,364,133 ------------ 12,008,611 ------------ TOBACCO--0.9% Philip Morris Companies, Inc. 29,600 1,199,688 ------------ ENERGY--12.1% INTEGRATED OIL & GAS--9.3% BP PLC, ADR 23,300 947,145 ChevronTexaco Corp. 18,400 1,223,232 ConocoPhillips 63,800 3,087,282 Exxon Mobil Corp. 40,070 1,400,046 Marathon Oil Corp. 138,800 2,955,052 Royal Dutch Petroleum Co., - NY Shares 81,300 3,578,826 ------------ 13,191,583 ------------ OIL & GAS EQUIPMENT & SERVICES--1.6% Halliburton Co. 119,500 2,235,845 ------------ OIL & GAS EXPLORATION & PRODUCTS--1.2% Anadarko Petroleum Corp. 35,500 $ 1,700,450 ------------ FINANCIALS--21.2% DIVERSIFIED FINANCIALS--7.8% DIVERSIFIED FINANCIAL SERVICES--7.8% Citigroup, Inc. 166,200 5,848,578 Freddie Mac 37,500 2,214,375 J.P. Morgan & Chase Co. 121,200 2,908,800 ------------ 10,971,753 ------------ INSURANCE--13.4% INSURANCE BROKERS--1.5% AFLAC, Inc. 69,300 2,087,316 ------------ LIFE & HEALTH INSURANCE--1.5% Lincoln National Corp. 65,900 2,081,122 ------------ MULTI-LINE INSURANCE--2.7% American International Group, Inc. 65,400 3,783,390 ------------ PROPERTY & CASUALTY INSURANCE--7.7% Berkshire Hathaway, Inc., Class A (a) 90 6,547,500 Chubb Corp. 45,800 2,390,760 St. Paul Companies, Inc. 56,000 1,906,800 ------------ 10,845,060 ------------ HEALTH CARE--9.0% HEALTH CARE EQUIPMENT & SERVICES--3.8% MANAGED HEALTH CARE--3.8% Aetna, Inc. 130,100 5,349,712 ------------ PHARMACEUTICALS & BIOTECHNOLOGY--5.2% PHARMACEUTICALS--5.2% Bristol-Myers Squibb Co. 51,900 1,201,485 Merck & Co., Inc. 70,300 3,979,683 Wyeth 58,200 2,176,680 ------------ 7,357,848 ------------ INDUSTRIALS--7.5% CAPITAL GOODS--5.2% AEROSPACE & DEFENSE--2.7% Honeywell International, Inc. 97,200 2,332,800 Raytheon Co. 48,700 1,497,525 ------------ 3,830,325 ------------ INDUSTRIAL CONGLOMERATES--1.5% Textron, Inc. 49,100 2,110,809 ------------ INDUSTRIAL MACHINERY--1.0% Dover Corp. 49,700 1,449,252 ------------ COMMERCIAL SERVICES & SUPPLIES--1.7% ENVIRONMENTAL SERVICES--1.7% Waste Management, Inc. 104,100 2,385,972 ------------ TRANSPORTATION--0.6% AIRLINES--0.6% AMR Corp. (a) 132,400 873,840 ------------
See Notes to Investment Portfolio. 57
SHARES VALUE ------------ ------------ INFORMATION TECHNOLOGY--4.4% SOFTWARE & SERVICES--1.5% INFORMATION TECHNOLOGY CONSULTING & SERVICES--1.5% Electronic Data Systems Corp. 118,200 $ 2,178,426 ------------ TECHNOLOGY HARDWARE & EQUIPMENT--2.9% ELECTRONIC EQUIPMENT & INSTRUMENTS--0.7% Celestica, Inc. (a) 66,200 933,420 ------------ OFFICE ELECTRONICS--1.5% Xerox Corp. (a) 265,600 2,138,080 ------------ TELECOMMUNICATIONS EQUIPMENT--0.7% Motorola, Inc. 110,900 959,285 ------------ MATERIALS--6.5% CHEMICALS--1.3% DIVERSIFIED CHEMICALS--1.3% Akzo Nobel N.V 57,900 1,846,431 ------------ METALS & MINING--1.6% GOLD--1.0% Barrick Gold Corp. 93,800 1,445,458 ------------ STEEL--0.6% Nucor Corp. 22,000 908,600 ------------ PAPER & FOREST PRODUCTS--3.6% PAPER PRODUCTS--3.6% Bowater, Inc. 29,000 1,216,550 Georgia-Pacific Corp. 141,500 2,286,640 International Paper Co. 43,000 1,503,710 ------------ 5,006,900 ------------ TELECOMMUNICATION SERVICES--10.3% DIVERSIFIED TELECOMMUNICATIONS SERVICES--10.3% INTEGRATED TELECOMMUNICATIONS SERVICES--10.3% AT&T Corp. 93,780 2,448,596 BellSouth Corp. 118,200 3,057,834 Deutsche Telekom AG, ADR 146,150 1,856,105 SBC Communications, Inc. 114,800 3,112,228 Verizon Communications, Inc. 104,600 4,053,250 ------------ 14,528,013 ------------ UTILITIES--4.8% ELECTRIC UTILITIES--2.9% American Electric Power Co., Inc. 27,400 748,842 PG&E Corp. (a) 152,700 2,122,530 TXU Corp. 61,500 1,148,820 ------------ 4,020,192 ------------ GAS UTILITIES--0.4% El Paso Corp. 80,200 558,192 ------------ MULTI-UTILITIES & UNREGULATED POWER -- 1.5% Duke Energy Corp. (a) 111,100 2,170,894 ------------ TOTAL COMMON STOCKS (cost of $161,162,154) 141,586,359 ------------ PAR VALUE ----------- ------------- SHORT-TERM OBLIGATION--0.6% Repurchase agreement with State Street Bank & Trust Co., dated 12/31/02, due 01/02/03 at 1.180%, collateralized by U.S. Treasury Note maturing 02/15/12, market value $873,974 (repurchase proceeds $852,056) (cost of $852,000) $ 852,000 $ 852,000 ------------- TOTAL INVESTMENTS--101.0% (cost of $162,014,154) (b) 142,438,359 ------------- OTHER ASSETS & LIABILITIES, NET--(1.0)% (1,347,373) ------------- NET ASSETS--100.0% $ 141,090,986 =============
NOTES TO INVESTMENT PORTFOLIO: (a) Non-income producing. (b) Cost for federal income tax purposes is $162,391,512. The difference between cost for generally accepted accounting principles and cost on a tax basis is related to deferral of losses on wash sales. Realized losses have been deferred for tax purposes and cost adjusted accordingly.
ACRONYM NAME ------- ---- ADR American Depositary Receipt See Notes to Financial Statements.
58 STATEMENT OF ASSETS AND LIABILITIES Colonial U.S. Growth & Income Fund, Variable Series / December 31, 2002 ASSETS: Investments, at cost $ 162,014,154 ------------- Investments, at value $ 142,438,359 Cash 230 Receivable for: Fund shares sold 8,620 Interest 28 Dividends 250,899 Deferred Trustees' compensation plan 4,773 ------------- TOTAL ASSETS 142,702,909 ------------- LIABILITIES: Expense reimbursement due to Distributor 3,811 Payable for: Investments purchased 146,324 Fund shares repurchased 1,283,180 Management fee 100,314 Transfer agent fee 625 Pricing and bookkeeping fees 4,690 Audit fee 26,695 Reports to Shareholders 38,480 Deferred Trustees' fee 4,773 Other liabilities 3,031 ------------- TOTAL LIABILITIES 1,611,923 ------------- NET ASSETS $ 141,090,986 ============= COMPOSITION OF NET ASSETS: Paid-in capital $ 189,708,864 Overdistributed net investment income (6,499) Accumulated net realized loss (29,035,584) Net unrealized depreciation on investments (19,575,795) ------------- NET ASSETS $ 141,090,986 ============= CLASS A: Net assets $ 113,334,521 Shares outstanding 9,469,358 ============= Net asset value per share $ 11.97 ============= CLASS B: Net assets $ 27,756,465 Shares outstanding 2,323,412 ============= Net asset value per share $ 11.95 =============
See Notes to Financial Statements. 59 STATEMENT OF OPERATIONS Colonial U.S. Growth & Income Fund, Variable Series For the Year Ended December 31, 2002 INVESTMENT INCOME: Dividends $ 3,386,800 Interest 46,564 ------------- Total Investment Income (net of foreign taxes withheld of $42,710) 3,433,364 ------------- EXPENSES: Management fee 1,398,399 Distribution fee -- Class B 71,044 Pricing and bookkeeping fees 75,063 Transfer agent fee 7,500 Trustees' fee 11,576 Custody fee 11,575 Other expenses 33,735 ------------- Total Expenses 1,608,892 Fees reimbursed by Distributor -- Class B (36,414) Custody earnings credit (62) ------------- Net Expenses 1,572,416 ------------- Net Investment Income 1,860,948 ------------- NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS: Net realized loss on investments (28,158,847) Net change in unrealized appreciation/depreciation on investments (19,133,885) ------------- Net Loss (47,292,732) ------------- Net Decrease in Net Assets from Operations $ (45,431,784) =============
See Notes to Financial Statements. 60 STATEMENT OF CHANGES IN NET ASSETS Colonial U.S. Growth & Income Fund, Variable Series
YEAR ENDED DECEMBER 31, ----------------------------- INCREASE (DECREASE) IN NET ASSETS: 2002 2001 ---------------------------------- ------------- ------------- OPERATIONS: Net investment income $ 1,860,948 $ 1,846,337 Net realized gain (loss) on investments (28,158,847) 11,413,678 Net change in unrealized appreciation/depreciation on investments (19,133,885) (14,659,660) ------------- ------------- Net Decrease from Operations (45,431,784) (1,399,645) ------------- ------------- DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income: Class A (1,556,810) (1,618,150) Class B (354,201) (227,386) From net realized gains: Class A -- (24,552,219) Class B -- (2,855,642) Return of capital (a): Class A -- (452,489) Class B -- (57,896) ------------- ------------- Total Distributions Declared to Shareholders (1,911,011) (29,763,782) ------------- ------------- SHARE TRANSACTIONS: Class A: Subscriptions 6,842,505 13,542,021 Distributions reinvested 1,556,810 26,622,858 Redemptions (35,673,636) (35,076,818) ------------- ------------- Net Increase (Decrease) (27,274,321) 5,088,061 ------------- ------------- Class B: Subscriptions 13,543,954 21,941,596 Distributions reinvested 354,201 3,140,924 Redemptions (3,985,341) (896,338) ------------- ------------- Net Increase 9,912,814 24,186,182 ------------- ------------- Net Increase (Decrease) from Share Transactions (17,361,507) 29,274,243 ------------- ------------- Total Decrease in Net Assets (64,704,302) (1,889,184) NET ASSETS: Beginning of period 205,795,288 207,684,472 ------------- ------------- End of period (including overdistributed net investment income of $(6,499) and and $(5,598), respectively) $ 141,090,986 $ 205,795,288 ============= ============= CHANGES IN SHARES: Class A: Subscriptions 498,777 779,000 Issued for distributions reinvested 131,377 1,699,584 Redemptions (2,737,362) (2,033,991) ------------- ------------- Net Increase (Decrease) (2,107,208) 444,593 ------------- ------------- CLASS B: Subscriptions 950,359 1,273,453 Issued for distributions reinvested 29,941 201,036 Redemptions (314,657) (53,180) ------------- ------------- Net Increase 665,643 1,421,309 ------------- -------------
(a) Return of capital includes redesignation of $248,113 from distributions declared to shareholders from net investment income. See Notes to Financial Statements. 61 NOTES TO FINANCIAL STATEMENTS Colonial U.S. Growth & Income Fund, Variable Series / December 31, 2002 NOTE 1. ORGANIZATION AND ACCOUNTING POLICIES ORGANIZATION--Colonial U.S. Growth & Income Fund, Variable Series (the "Fund"), a series of Liberty Variable Investment Trust (the "Trust"), is a diversified portfolio of a Massachusetts business trust, registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The Fund's investment goal is to seek long-term growth and income. The Fund's capitalization consists of an unlimited number of shares of beneficial interest without par value that represent a separate series of the Trust. The Fund offers two classes of shares: Class A and Class B. Each share of a class represents an equal proportionate beneficial interest in that share class and, when issued and outstanding, is fully paid and nonassessable. Shareholders would be entitled to share proportionally in the net assets of their share class available for distribution to shareholders upon liquidation of the Fund. Shares of the Fund are available and are being marketed exclusively as a pooled funding vehicle for variable annuity contracts ("VA contracts") and Variable Life Insurance Policies ("VLI Policies") offered by the separate accounts of certain life insurance companies ("Participating Insurance Companies"). The Participating Insurance Companies and their separate accounts own all the shares of the Fund. Liberty Advisory Services Corp. (the "Manager") ("LASC") provides investment management and advisory services to the Fund pursuant to its Management Agreement with the Fund. Colonial Management Associates, Inc. ("Colonial") provides sub-advisory services. LASC has delegated various administrative matters to Colonial. Colonial also provides pricing and bookkeeping services to the Fund. Liberty Funds Distributor, Inc. ("LFD"), an affiliate of the Manager, serves as the principal underwriter of the Fund. The Manager, Colonial and LFD are wholly-owned indirect subsidiaries of FleetBoston Financial Corporation ("FleetBoston"). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. SECURITY VALUATION AND TRANSACTIONS--Equity securities generally are valued at the last sale price or, in the case of unlisted or listed securities for which there were no sales during the day, at the current quoted bid price. Debt securities generally are valued by a pricing service based upon market transactions for normal, institutional-size trading units of similar securities. When management deems it appropriate, an over-the-counter or exchange bid quotation is used. Short-term obligations with a maturity of 60 days or less are valued at amortized cost. 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. 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. DETERMINATION OF CLASS NET ASSET VALUES AND FINANCIAL HIGHLIGHTS--All income, expenses (other than the Class B distribution fee), 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. The per share data was calculated using average shares outstanding during the period. In addition, Class B net investment income per share data and ratios reflect the distribution fee applicable to Class B shares only. 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. DISTRIBUTIONS TO SHAREHOLDERS--The Fund intends to distribute as income dividends or capital gains distributions, at least annually, substantially all of its net investment income and net profits realized from the sale of investments. All dividends and distributions are reinvested in additional shares of the Fund at net asset value as of the record date of the distribution. Income and capital gain distributions are determined in accordance with federal income tax regulations. OTHER--Interest income is recorded on the accrual basis. Corporate actions and dividend income are recorded on the ex-date. The Fund's custodian takes possession through the federal book-entry system of securities collateralizing repurchase agreements. Collateral is marked-to-market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund. The Fund may experience costs and delays in liquidating the collateral if the issuer defaults or enters bankruptcy. 62 NOTE 2. FEDERAL TAX INFORMATION Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from generally accepted accounting principles. These differences are primarily due to differing treatments for deferral of losses from wash sales, post-October losses, capital loss carryforwards 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 December 31, 2002, permanent items identified and reclassified among the components of net assets are as follows:
OVERDISTRIBUTED ACCUMULATED NET INVESTMENT NET REALIZED PAID-IN INCOME LOSS CAPITAL --------------- ------------ ----------- $ 49,162 $ 1 $ (49,163)
Net investment income, net realized gains (losses) and net assets were not affected by this reclassification. The tax character of distributions paid during 2002 and 2001 was as follows:
2002 2001 ----------- ------------ Distributions paid from: Ordinary income $ 1,911,011 $ 9,202,843 Long-term capital gains -- 20,050,554 ----------- ------------ 1,911,011 29,253,397 Return of capital -- 510,385 ----------- ------------ $ 1,911,011 $ 29,763,782 =========== ============
As of December 31, 2002, the components of distributable earnings on a tax basis were as follows:
UNREALIZED DEPRECIATION* --------------- $ (19,953,153)
* The difference between book-basis and tax-basis unrealized depreciation is attributable primarily to the tax deferral of losses on wash sales. The following capital loss carryforwards are available to reduce taxable income arising from future net realized gains on investments, if any, to the extent permitted by the Internal Revenue Code:
YEAR OF CAPITAL LOSS EXPIRATION CARRYFORWARD ---------- ------------ 2010 $ 28,492,336
Under current tax rules, certain capital losses realized after October 31 may be deferred and treated as occurring on the first day of the following fiscal year. As of December 31, 2002, for federal income tax purposes, post October losses of $165,890 were deferred to January 1, 2003. NOTE 3. FEES AND COMPENSATION PAID TO AFFILIATES MANAGEMENT AND SUB-ADVISORY FEES--The Manager receives a monthly fee equal to 0.80% annually of the first $1 billion of the Fund's average daily net assets and 0.70% in excess of $1 billion. The Manager, out of the management fee it receives, pays Colonial a monthly sub-advisory fee equal to 0.60% annually of the Fund's average daily net assets. PRICING AND BOOKKEEPING FEES--Colonial is responsible for providing pricing and bookkeeping services to the Fund under a Pricing and Bookkeeping Agreement. Under a separate agreement (the "Outsourcing Agreement"), Colonial has delegated those functions to State Street Bank & Trust Company ("State Street"). Colonial pays fees to State Street under the Outsourcing Agreement. Under its pricing and bookkeeping agreement with the Fund, Colonial 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 December 31, 2002, the net asset based fee rate was 0.036%. The Fund also pays out-of-pocket costs for pricing services. TRANSFER AGENT FEE--Liberty Funds Services, Inc. (the "Transfer Agent"), an affiliate of the Manager, provides shareholder services for an annual rate of $7,500. DISTRIBUTION FEE--The Fund has adopted a 12b-1 plan, which requires it to pay LFD a monthly distribution fee equal to 0.25% annually of Class B average daily net assets as of the 20th of each month. EXPENSE LIMITS--The Manager and LFD have voluntarily agreed to reimburse all expenses, including management fees and distribution fees, but excluding interest, taxes, brokerage and extraordinary expenses incurred by the Fund in excess of 1.00% annually of the Fund's average daily net assets. LFD will first reimburse the Class B distribution fee up to 0.25% annually to reach the 1.00% limit on Class B expenses. If additional reimbursement is needed to meet the limit for each class, the Manager will then reimburse other expenses to the extent necessary. If additional reimbursement is still needed to reach the expense limit, the Manager will then waive a portion of its management fee to reach the expense limit. This 63 arrangement may be terminated or modified by the Manager or LFD at any time. OTHER--The Fund pays no compensation to its officers, all of whom are employees of Colonial 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 $62 of custody fees were reduced by balance credits for the year ended December 31, 2002. The Fund could have invested a portion of the assets utilized in connection with the expense offset arrangement in an income- producing asset if it had not entered into such an agreement. NOTE 4. PORTFOLIO INFORMATION INVESTMENT ACTIVITY--For the year ended December 31, 2002, purchases and sales of investments, other than short-term obligations, were $118,640,138 and $126,559,505, respectively. Unrealized appreciation (depreciation) at December 31, 2002, based on cost of investments for federal income tax purposes, was: Gross unrealized appreciation $ 7,770,012 Gross unrealized depreciation (27,723,165) ------------ Net unrealized depreciation (19,953,153) ============
OTHER--The Fund may focus its investments in certain industries, subjecting it to greater risk than a fund that is more diversified. NOTE 5. OTHER RELATED PARTY TRANSACTIONS For the year ended December 31, 2002, the Fund used AlphaTrade Inc. and Fleet Securities, Inc., both wholly-owned subsidiaries of Colonial, as brokers. Total commissions paid to AlphaTrade Inc. and Fleet Securities, Inc. during the year were $19,051 and $670, respectively. 64 FINANCIAL HIGHLIGHTS Colonial U.S. Growth & Income Fund, Variable Series--Class B SharesSelected data for a share outstanding throughout each period is as follows:
YEAR ENDED PERIOD DECEMBER 31, ENDED -------------------- DECEMBER 31, 2002 2001 2000 (a) -------- -------- ------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 15.53 $ 18.26 $ 19.82 -------- -------- ---------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (b) 0.13 0.15 0.08 Net realized and unrealized gain (loss) on investments (3.56) (0.35) 0.65 -------- -------- ---------- Total from Investment Operations (3.43) (0.20) 0.73 -------- -------- ---------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.15) (0.15) (0.17) In excess of net investment income -- -- --(c) From net realized gains -- (2.34) (2.12) Return of capital -- (0.04) -- -------- -------- ---------- Total Distributions Declared to Shareholders (0.15) (2.53) (2.29) -------- -------- ---------- NET ASSET VALUE, END OF PERIOD $ 11.95 $ 15.53 $ 18.26 ======== ======== ========== Total return (d)(e)(f) (22.06)% (0.65)% 3.64%(g) RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA: Expenses (h) 1.00% 1.00% 1.00%(i) Net investment income (h) 0.96% 0.88% 0.71%(i) Waiver/reimbursement 0.13% 0.21% 0.13%(i) Portfolio turnover rate 69% 53% 120% Net assets, end of period (000's) $ 27,756 $ 25,742 $ 4,318
(a) For the period from commencement of operations on June 1, 2000 to December 31, 2000. (b) Per share data was calculated using average shares outstanding during the period. (c) Rounds to less than $0.01 per share. (d) Total return at net asset value assuming all distributions reinvested. (e) Had the Manager and/or Distributor not waived or reimbused a portion of expenses, total return would have been reduced. (f) Total return figure does not include any insurance company charges associated with a variable annuity. If included, total return would be reduced. (g) Not annualized. (h) The benefits derived from custody credits and directed brokerage arrangements, if applicable, had an impact of less than 0.01%. (i) Annualized. 65 REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of Liberty Variable Investment Trust and the Class B Shareholders of Colonial U.S. Growth and Income Fund, Variable Series In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio, and the related statements of operations and of changes in net assets and the Class B financial highlights present fairly, in all material respects, the financial position of Colonial U.S. Growth and Income Fund, Variable Series (the "Fund") (a series of Liberty Variable Investment Trust) at December 31, 2002, and the results of its operations, the changes in its net assets and the Class B financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and the Class B financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2002 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts February 12, 2003 66 UNAUDITED INFORMATION FEDERAL INCOME TAX INFORMATION 100.00% of the ordinary income distributed by the Fund, for the year ended December 31, 2002, qualifies for the corporate dividends received deduction. 67 PORTFOLIO MANAGER'S DISCUSSION Crabbe Huson Real Estate Investment Fund, Variable Series / December 31, 2002 Crabbe Huson Real Estate Investment Fund, Variable Series seeks to provide growth of capital and current income John E. Maack Jr. is the fund's portfolio manager. Mr. Maack has managed various funds for Crabbe Huson Group, Inc. since 1988. Real estate securities demonstrated their diversification benefits for equity investors during 2002, although the second half of the year proved to be much more challenging for property companies than the first half. For the 12-month period that ended December 31, 2002, the NAREIT Equity Index returned 3.81%, as compared to the S&P 500 Index, which declined 22.09%.(1) CONSERVATIVE POSTURE, SECTOR WEIGHTINGS HURT RETURNS When the year began we did not believe that REITs were likely to outperform the stock market for a third consecutive year. Declining job growth (a leading indicator of the health of the nation's property markets), rising vacancies and, in some cases, flat to declining rental rate growth suggested to us that the real estate cycle was about to reverse direction. However, REITs continued to attract capital during the first half of the year, as investors sought higher-yielding alternatives to stocks and fixed-income investments. Inflows of new capital helped send REIT prices higher, and the asset class on the whole performed well. This environment was not well suited to your fund's value-oriented, contrarian management style, which seeks to acquire stocks at a significant discount to their intrinsic worth. As a result of our market expectations, we positioned the portfolio conservatively going into the year. We underweighted the hospitality sector, which we believed would suffer if corporate-travel budgets were sharply reduced, and the consumer-oriented retail sector, which we felt could underperform if consumer demand weakened. We also held a larger-than-average cash position. And, we missed out on the sharp rebound in lodging and retail REITs that occurred in the first quarter. Although our selection of securities within these sectors performed well, we were significantly underweight compared to the fund's benchmark and peer group. This underweighting, combined with the fund's large cash position, resulted in overall underperformance for the quarter and, consequently, for the year. SECOND HALF OF YEAR TOUGHER FOR REIT STOCKS, BETTER FOR FUND During the second half of the year, however, our predictions for a correction in the property markets proved correct, and REITs gave back most of their previous six-month gains. Our conservative positioning benefited the fund during this period, helping us outperform the NAREIT Equity Index in the third and fourth quarters. As REIT prices declined during the second half of the year, we took advantage of much cheaper prices and shifted assets into non-REIT real-estate-related investments, including Martin Marietta, a roofing materials supplier; and Lafarge, a diversified manufacturer of cement building products (1.7% and 2.2% of net assets, respectively). Characterized by increased market volatility and negative investor sentiment, the second half of the year proved to be more hospitable to our investment approach. OUTLOOK IS CAUTIOUSLY POSITIVE FOR 2003 Prospects for economic recovery, even if markets are choppy, look generally positive for 2003. An improved business climate would be good for REITs. However, we believe there are two reasons to maintain a generally conservative posture. First, we are concerned about some companies' abilities to maintain their dividends after an extended period of increasing vacancy and flat rental growth. Second, the Bush administration's proposal to eliminate double taxation of corporate dividends could have a negative impact on the demand for REIT shares. We continue to focus our investments on higher-quality REITs and real estate operating companies that can maintain adequate dividend coverage in what appears to be a gradually improving but not yet robust economic recovery. -------------- Economic and market conditions can frequently change. There is no assurance that the trends described here will continue or commence. An investment in the fund may be subject to certain risks associated with ownership of real estate such as possible declines in value, environmental problems, natural disasters, changes in interest rates and local economic conditions. The fund may be affected be stock market fluctuations that occur in response to economic and business developments. Holdings are disclosed as of December 31, 2002 and are subject to change. (1) The definition of the NAREIT Equity Index is on the next page. The S&P 500 Index is an unmanaged index that tracks the performance of 500 widely-held, large-capitalization US stocks. 68 PERFORMANCE INFORMATION Crabbe Huson Real Estate Investment Fund, Variable Series / December 31, 2002 AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 2002 (%)
1-YEAR LIFE ------------------------------------------------ Class B (6/1/99) 0.42 4.00 NAREIT Equity Index(1) 3.81 8.48
Inception date of share class is in parentheses. [CHART] VALUE OF A $10,000 INVESTMENT, 6/1/99 - 12/31/02 CLASS B: $11,509
CLASS B SHARES NAREIT EQUITY INDEX 6/1/99 $ 10,000 $ 10,000 6/30/99 $ 9,590 $ 9,838 7/31/99 $ 9,420 $ 9,525 8/31/99 $ 9,140 $ 9,404 9/30/99 $ 8,890 $ 9,047 10/31/99 $ 8,730 $ 8,824 11/30/99 $ 8,570 $ 8,680 12/31/99 $ 8,620 $ 8,956 1/31/00 $ 8,713 $ 8,985 2/29/00 $ 8,682 $ 8,878 3/31/00 $ 8,837 $ 9,170 4/30/00 $ 9,323 $ 9,787 5/31/00 $ 9,282 $ 9,882 6/30/00 $ 9,520 $ 10,136 7/31/00 $ 10,088 $ 11,022 8/31/00 $ 9,985 $ 10,575 9/30/00 $ 10,006 $ 10,911 10/31/00 $ 9,500 $ 10,439 11/30/00 $ 9,375 $ 10,572 12/31/00 $ 10,007 $ 11,317 1/31/01 $ 10,312 $ 11,434 2/28/01 $ 10,051 $ 11,251 3/31/01 $ 10,181 $ 11,361 4/30/01 $ 10,454 $ 11,632 5/31/01 $ 10,705 $ 11,914 6/30/01 $ 11,327 $ 12,612 7/31/01 $ 11,185 $ 12,361 8/31/01 $ 11,447 $ 12,813 9/30/01 $ 10,945 $ 12,281 10/31/01 $ 10,617 $ 11,930 11/30/01 $ 11,108 $ 12,586 12/31/01 $ 11,460 $ 12,893 1/31/02 $ 11,242 $ 12,919 2/28/02 $ 11,357 $ 13,168 3/31/02 $ 12,046 $ 13,959 4/30/02 $ 12,011 $ 14,077 5/31/02 $ 12,172 $ 14,267 6/30/02 $ 12,402 $ 14,657 7/31/02 $ 11,909 $ 13,890 8/31/02 $ 11,955 $ 13,862 9/30/02 $ 11,427 $ 13,330 10/31/02 $ 10,967 $ 12,689 11/30/02 $ 11,473 $ 13,287 12/31/02 $ 11,509 $ 13,385
NET ASSET VALUE PER SHARE ($) 12/31/01 12/31/02 ------------------------------------------------------- Class B 9.98 9.37
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 SHARES. Total return performance includes changes in share price and reinvestment of all distributions. The NAREIT Equity Index is an unmanaged index that tracks the performance of all equity real estate investment trusts (REITs) that trade on the New York Stock Exchange, the American Stock Exchange, and the Nasdaq. Indexes are not investments, do not incur fees or expenses and are not professionally managed. It is not possible to invest directly in an index. Securities in the fund may not match those in the index. MUTUAL FUND PERFORMANCE CHANGES OVER TIME. CURRENT RETURNS FOR THE FUNDS MAY BE DIFFERENT THAN THAT SHOWN. Performance numbers reflect all fund expenses, but do not include any insurance charges imposed by your insurance company's separate accounts. If performance included the effect of these additional charges, it would be lower. (1) Index performance is from May 31, 1999. 69 INVESTMENT PORTFOLIO Crabbe Huson Real Estate Investment Fund, Variable Series / December 31, 2002
SHARES VALUE ----------- ----------- COMMON STOCKS--87.4% CONSUMER DISCRETIONARY--2.1% HOTELS, RESTAURANTS & LEISURE--2.1% HOTELS, RESORTS & CRUISE LINES--2.1% Startwood Hotels & Resorts Worldwide, Inc. 3,800 $ 90,212 ----------- FINANCIALS--78.9% REAL ESTATE INVESTMENT TRUST--78.9% APARTMENTS--20.2% Archstone Communities Trust 8,300 195,382 Arden Realty, Inc. 2,200 48,730 Avalonbay Communities, Inc. 2,400 93,936 BRE Properties, Inc., Class A 1,400 43,680 Camden Property Trust 1,200 39,600 CarAmerica Realty Corp. 2,100 52,605 Equity Residential Properties Trust 9,100 223,678 Essex Property Trust, Inc. 1,100 55,935 Gables Residential Trust 800 19,944 HRPT Properties Trust 4,100 33,784 United Dominion Realty Trust, Inc. 3,300 53,988 ----------- 861,262 ----------- DIVERSIFIED--5.7% Cousins Properties, Inc. 2,700 66,690 Glenborough Realty Trust, Inc. 2,300 40,986 Washington Real Estate Investment Trust 1,400 35,700 Weingarten Realty Investors 2,700 99,522 ----------- 242,898 ----------- HOTELS--4.1% Hospitality Properties Trust 2,700 95,040 Host Marriott Corp. 9,100 80,535 ----------- 175,575 ----------- INDUSTRIAL--7.0% AMB Property Corp. 3,300 90,288 CenterPoint Properties Corp. 600 34,290 First Industrial Realty Trust, Inc. 1,500 42,000 Prologis Trust 5,200 130,780 ----------- 297,358 ----------- MANUFACTURED HOMES--0.8% Chateau Communities, Inc. 1,600 36,800 ----------- MIXED--5.7% Duke-Weeks Realty Corp 3,900 99,255 Kilroy Realty Corp. 1,300 29,965 Liberty Property Trust 2,200 70,268 Reckson Associates Realty Corp. 2,000 42,100 ----------- 241,588 ----------- OFFICE--13.7% Boston Properties, Inc. 3,100 114,266 Equity Office Properties Trust 13,340 333,233 Highwoods Properties, Inc. 1,700 37,570 Mack-Cali Realty Corp. 1,700 51,510 Prentiss Properties Trust 1,700 48,076 ----------- 584,655 ----------- REGIONAL MALLS--9.8% Simon Property Group, Inc. 5,600 $ 190,792 Taubman Centers, Inc. 1,500 24,345 The Rouse Co. 2,500 79,250 Vornado Realty Trust 3,300 122,760 ----------- 417,147 ----------- SELF STORAGE--2.0% Shurgard Storage Centers, Inc. 1,400 43,876 Sovran Self Storage, Inc. 1,500 42,540 ----------- 86,416 ----------- STRIP CENTERS--6.2% Kimco Realty Corp. 3,600 110,304 New Plan Realty Trust 2,300 43,907 Regency Centers Corp. 3,400 110,160 ----------- 264,371 ----------- TRIPLE NET LEASE--3.7% Capital Automotive Real Estate Investment Trust 2,200 52,140 Commercial Net Lease Realty 7,000 107,310 ----------- 159,450 ----------- HEALTH CARE--2.5% HEALTH CARE FACILITIES--2.5% Sunrise Assisted Living, Inc. (a) 4,200 104,538 ----------- MATERIALS--3.9% CONSTRUCTION MATERIALS--3.9% Lafarge North America, Inc. 2,800 91,980 Martin Marietta Materials, Inc. 2,400 73,584 ----------- 165,564 ----------- TOTAL COMMON STOCKS (cost of $3,505,810) 3,727,834 ----------- PAR ----------- SHORT-TERM OBLIGATION--13.1% Repurchase agreement with State Street Bank & Trust Co., dated 12/31/02, due 01/02/03 at 1.180%, collateralized by U.S. Treasury Note maturing 01/15/09, market value $575,575 (repurchase proceeds $561,037) (cost of $561,000) $ 561,000 561,000 ----------- TOTAL INVESTMENTS--100.5% (cost of $4,066,810) (b) 4,288,834 ----------- OTHER ASSETS & LIABILITIES, NET--(0.5)% (21,199) ----------- NET ASSETS--100.0% $ 4,267,635 ===========
NOTES TO INVESTMENT PORTFOLIO: (a) Non-income producing. (b) Cost for federal income tax purposes is $4,025,680. The difference between cost for generally accepted accounting principles and cost on a tax basis is related to investments in real estate investment trusts. See Notes to Financial Statements. 70 STATEMENT OF ASSETS AND LIABILITIES Crabbe Huson Real Estate Investment Fund, Variable Series / December 31, 2002 ASSETS: Investments, at cost (includes short-term obligation) $ 4,066,810 ----------- Investments, at value $ 3,727,834 Short-term obligation 561,000 Cash 356 Receivable for: Interest 18 Dividends 23,836 Deferred Trustees' compensation plan 1,418 ----------- TOTAL ASSETS 4,314,462 ----------- LIABILITIES: Expense reimbursement due to Manager 331 Payable for: Fund shares repurchased 13,054 Management fee 3,629 Transfer agent fee 625 Pricing and bookkeeping fees 925 Audit fee 20,500 Reports to Shareholders 4,882 Deferred Trustees' fee 1,418 Other liabilities 1,463 ----------- TOTAL LIABILITIES 46,827 ----------- NET ASSETS $ 4,267,635 =========== COMPOSITION OF NET ASSETS: Paid-in capital $ 4,006,546 Undistributed net investment income 39,065 Net unrealized appreciation on investments 222,024 ----------- NET ASSETS $ 4,267,635 =========== CLASS A: Net assets $ 1,250 Shares outstanding 133 =========== Net asset value per share $ 9.40 =========== CLASS B: Net assets $ 4,266,385 Shares outstanding 455,301 =========== Net asset value per share $ 9.37 ===========
See Notes to Financial Statements. 71 STATEMENT OF OPERATIONS Crabbe Huson Real Estate Investment Fund, Variable Series For the Year Ended December 31, 2002 INVESTMENT INCOME: Dividends $ 261,970 Interest 6,865 ----------- Total Investment Income (net of foreign taxes withheld of $85) 268,835 ----------- EXPENSES: Management fee 45,586 Distribution fee--Class B 11,393 Pricing and bookkeeping fees 10,835 Transfer agent fee 7,500 Trustees' fee 5,282 Custody fee 2,295 Audit fee 18,975 Other expenses 4,330 ----------- Total Expenses 106,196 Fees and expenses reimbursed by Manager (40,095) Custody earnings credit (16) ----------- Net Expenses 66,085 ----------- Net Investment Income 202,750 ----------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain on investments 130,876 Net change in unrealized appreciation/depreciation on investments (305,522) ----------- Net Loss (174,646) ----------- Net Increase in Net Assets from Operations $ 28,104 ===========
See Notes to Financial Statements. 72 STATEMENTS OF CHANGES IN NET ASSETS Crabbe Huson Real Estate Investment Fund, Variable Series
YEAR ENDED DECEMBER 31, ---------------------------- INCREASE (DECREASE) IN NET ASSETS: 2002 2001 ---------------------------------- ----------- ----------- OPERATIONS: Net investment income $ 202,750 $ 228,301 Net realized gain (loss) on investments 130,876 (117,479) Net change in unrealized appreciation/depreciation on investments (305,522) 534,733 ----------- ----------- Net Increase from Operations 28,104 645,555 ----------- ----------- DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income: Class A (63) (42) Class B (204,964) (159,182) From net realized gains: Class A (20) -- Class B (71,353) -- Return of capital: Class A -- (19) Class B -- (70,936) ----------- ----------- Total Distributions Declared to Shareholders (276,400) (230,179) ----------- ----------- SHARE TRANSACTIONS: Class A: Distributions reinvested 83 61 ----------- ----------- Net Increase 83 61 ----------- ----------- Class B: Subscriptions 49,371 1,020,155 Distributions reinvested 276,317 230,118 Redemptions (553,041) (1,075,083) ----------- ----------- Net Increase (Decrease) (227,353) 175,190 ----------- ----------- Net Increase (Decrease) from Share Transactions (227,270) 175,251 ----------- ----------- Total Increase (Decrease) in Net Assets (475,566) 590,627 NET ASSETS: Beginning of period 4,743,201 4,152,574 ----------- ----------- End of period (including undistributed net investment income of $39,065 and $33,188, respectively) $ 4,267,635 $ 4,743,201 =========== =========== CHANGES IN SHARES: Class A: Issued for distributions reinvested 9 6 ----------- ----------- Net Increase 9 6 ----------- ----------- Class B: Subscriptions 4,886 108,294 Issued for distributions reinvested 29,711 23,197 Redemptions (54,587) (108,681) ----------- ----------- Net Increase (Decrease) (19,990) 22,810 ----------- -----------
See Notes to Financial Statements. 73 NOTES TO FINANCIAL STATEMENTS Crabbe Huson Real Estate Investment Fund, Variable Series / December 31, 2002 NOTE 1. ORGANIZATION AND ACCOUNTING POLICIES ORGANIZATION--Crabbe Huson Real Estate Investment Fund, Variable Series (the "Fund"), a series of Liberty Variable Investment Trust (the "Trust"), is a diversified portfolio of a Massachusetts business trust, registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The Fund's investment goal is to provide growth of capital and current income. The Fund's capitalization consists of an unlimited number of shares of beneficial interest without par value that represent a separate series of the Trust. The Fund offers two classes of shares: Class A and Class B. Each share of a class represents an equal proportionate beneficial interest in that share class and, when issued and outstanding, is fully paid and nonassessable. Shareholders would be entitled to share proportionally in the net assets of their share class available for distribution to shareholders upon liquidation of the Fund. Shares of the Fund are available and are being marketed exclusively as a pooled funding vehicle for variable annuity contracts ("VA contracts") and Variable Life Insurance Policies ("VLI Policies") offered by the separate accounts of certain life insurance companies ("Participating Insurance Companies"). The Participating Insurance Companies and their separate accounts own all the shares of the Fund. Liberty Advisory Services Corp. (the "Manager") ("LASC") provides investment management and advisory services to the Fund pursuant to its Management Agreement with the Fund. LASC has appointed Crabbe Huson Group, Inc. ("Crabbe Huson"), an affiliate of LASC, as Sub-Advisor to the Fund. LASC has delegated various administrative matters to Colonial Management Associates, Inc. ("Colonial"). Colonial also provides pricing and bookkeeping services to the Fund. Liberty Funds Distributor, Inc. ("LFD"), an affiliate of the Manager, serves as the principal underwriter of the Fund. The Manager, Colonial, Crabbe Huson and LFD are wholly-owned indirect subsidiaries of FleetBoston Financial Corporation ("FleetBoston"). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. SECURITY VALUATION AND TRANSACTIONS--Equity securities generally are valued at the last sale price or, in the case of unlisted or listed securities for which there were no sales during the day, at the current quoted bid price. Short-term obligations with a maturity of 60 days or less are valued at amortized cost. The values of all assets and liabilities quoted in foreign currencies are translated into U.S. dollars at that day's exchange rates. 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. 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. DETERMINATION OF CLASS NET ASSET VALUES AND FINANCIAL HIGHLIGHTS--All income, expenses (other than the Class B distribution fee), 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. The per share data was calculated using average shares outstanding during the period. In addition, Class B net investment income per share data and ratios reflect the distribution fee applicable to Class B shares only. 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. DISTRIBUTIONS TO SHAREHOLDERS--The Fund intends to distribute as income dividends or capital gains distributions, at least annually, substantially all of its net investment income and net profits realized from the sale of investments. All dividends and distributions are reinvested in additional shares of the Fund at net asset value as of the record date of the distribution. Income and capital gain distributions are determined in accordance with federal income tax regulations. OTHER--Interest income is recorded on the accrual basis. Corporate actions and dividend income are recorded on the ex-date. The Fund's custodian takes possession through the federal book-entry system of securities collateralizing repurchase agreements. Collateral is marked-to-market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund. The Fund may experience costs and delays in liquidating the collateral if the issuer defaults or enters bankruptcy. 74 NOTE 2. FEDERAL TAX INFORMATION Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from generally accepted accounting principles. These differences are primarily due to differing treatments for real estate investment trusts 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 December 31, 2002, permanent items identified and reclassified among the components of net assets are as follows:
UNDISTRIBUTED NET INVESTMENT ACCUMULATED NET INCOME REALIZED LOSS PAID-IN CAPITAL -------------- --------------- --------------- $ 8,154 $ 16,097 $ (24,251)
Net investment income, net realized gains (losses) and net assets were not affected by this reclassification. The tax character of distributions paid during 2002 and 2001 was as follows:
2002 2001 --------- --------- Distributions paid from: Ordinary income $ 160,135 $ 159,224 Long-term captial gain 116,265 -- --------- --------- 276,400 159,224 Return of capital -- 70,955 --------- --------- $ 276,400 $ 230,179 ========= =========
As of December 31, 2002, the components of distributable earnings on a tax basis were as follows:
UNREALIZED APPRECIATION* ------------- $ 263,154
* The difference between book-basis and tax-basis unrealized appreciation is attributable primarily to investments in real estate investment trusts. NOTE 3. FEES AND COMPENSATION PAID TO AFFILIATES MANAGEMENT AND SUB-ADVISORY FEES--The Manager receives a monthly fee equal to 1.00% annually of the Fund's average daily net assets. The Manager, out of the management fee it receives, pays Crabbe Huson a monthly sub-advisory fee equal to 0.80% annually of the Fund's average daily net assets. PRICING AND BOOKKEEPING FEES--Colonial is responsible for providing pricing and bookkeeping services to the Fund under a Pricing and Bookkeeping Agreement. Under a separate agreement (the "Outsourcing Agreement"), Colonial has delegated those functions to State Street Bank & Trust Company ("State Street"). Colonial pays fees to State Street under the Outsourcing Agreement. Under its pricing and bookkeeping agreement with the Fund, Colonial 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. The Fund also pays out-of-pocket costs for pricing services. TRANSFER AGENT FEE--Liberty Funds Services, Inc. (the "Transfer Agent"), an affiliate of the Manager, provides shareholder services for an annual rate of $7,500. DISTRIBUTION FEE--The Fund has adopted a 12b-1 plan, which requires it to pay LFD a monthly distribution fee equal to 0.25% annually of ClassB average daily net assets as of the 20th of each month. EXPENSE LIMITS--The Manager has voluntarily agreed to reimburse all expenses, including management fees, but excluding interest, taxes, distribution fees, brokerage and extraordinary expenses incurred by the Fund in excess of 1.20% annually of the Fund's average daily net assets. This arrangement may be terminated or modified by the Manager at any time. OTHER--The Fund pays no compensation to its officers, all of whom are employees of Colonial 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 $16 of custody fees were reduced by balance credits for the year ended December 31, 2002. The Fund could have invested a portion of the assets utilized in connection with the expense offset arrangement in an income-producing asset if it had not entered into such an agreement. NOTE 4. PORTFOLIO INFORMATION INVESTMENT ACTIVITY--For the year ended December 31, 2002, purchases and sales of investments, other than short-term obligations, were $1,321,147 and $1,726,280, respectively. 75 Unrealized appreciation (depreciation) at December 31, 2002, based on cost of investments for federal income tax purposes, was: Gross unrealized appreciation $ 425,513 Gross unrealized depreciation (162,359) ---------- Net unrealized appreciation $ 263,154 ==========
OTHER--The Fund may focus its investments in certain industries, subjecting it to greater risk than a fund that is more diversified. NOTE 5. PROPOSED REORGANIZATION The Board of Trustees has approved a proposal to reorganize the Fund, subject to shareholder approval and the satisfaction of certain other conditions. Shareholders of the Fund are scheduled to vote on the proposal at a special meeting of shareholders to be held on February 19, 2003. If approved at the special meeting, the reorganization is proposed to take place on or around April 11, 2003. 76 FINANCIAL HIGHLIGHTS Crabbe Huson Real Estate Investment Fund, Variable Series--Class B Shares Selected data for a share outstanding throughout each period is as follows:
PERIOD YEAR ENDED DECEMBER 31, ENDED ---------------------------------------- DECEMBER 31, 2002 2001 2000 1999 (a) ---------- ---------- ---------- ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 9.98 $ 9.17 $ 8.34 $ 10.00 ---------- ---------- ---------- ---------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (b) 0.46 0.48 0.64 0.31 Net realized and unrealized gain (loss) on investments (0.42) 0.85 0.70 (1.70) ---------- ---------- ---------- ---------- Total from Investment Operations 0.04 1.33 1.34 (1.39) ---------- ---------- ---------- ---------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.48) (0.36) (0.29) (0.22) In excess of net investment income -- -- (0.12) -- From net realized gains (0.17) -- -- -- Return of capital -- (0.16) (0.10) (0.05) ---------- ---------- ---------- ---------- Total Distributions Declared to Shareholders (0.65) (0.52) (0.51) (0.27) ---------- ---------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 9.37 $ 9.98 $ 9.17 $ 8.34 ========== ========== ========== ========== Total return (c)(d)(e) 0.42% 14.54% 16.09% (13.80)%(f) RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA: Expenses (g) 1.45% 1.45% 1.45% 1.45%(h) Net investment income (g) 4.45% 4.89% 6.96% 5.90%(h) Waiver/reimbursement 0.88% 1.80% 1.66% 2.80%(h) Portfolio turnover rate 32% 35% 85% 57%(f) Net assets, end of period (000's) $ 4,266 $ 4,742 $ 4,152 $ 2,180
(a) For the period from commencement of operations June 1, 1999 to December 31, 2000. (b) Per share data was calculated using average shares outstanding during the period. (c) Total return at net asset value assuming all distributions reinvested. (d) Had the Manager not waived or reimbursed a portion of expenses, total return would have been reduced. (e) Total return figure does not include any insurance company charges associated with a variable annuity. If included, total return would be reduced. (f) Not annualized. (g) The benefits derived from custody credits and directed brokerage arrangements, if applicable, had an impact of less than 0.01%. (h) Annualized. 77 REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of Liberty Variable Investment Trust and the Class B Shareholders of Crabbe Huson Real Estate Investment Fund, Variable Series In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio, and the statements of operations and of changes in net assets and the Class B financial highlights present fairly, in all respects, the financial position of Crabbe Huson Real Estate Investment Fund, Variable Series (the "Fund") (a series Liberty Variable Investment Trust) at December 31, 2002, and the results of its operations, the changes in its net and the Class B financial highlights for the periods indicated, in conformity with accounting principles generally in the United States of America. These financial statements and the Class B financial highlights (hereafter referred to "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing accounting principles used and significant estimates made by management, and evaluating the overall financial presentation. We believe that our audits, which included confirmation of securities at December 31, 2002 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts February 12, 2003 78 UNAUDITED INFORMATION FEDERAL INCOME TAX INFORMATION For the fiscal year ended December 31, 2002, the Fund designates long-term capital gains of $116,265. 79 PORTFOLIO MANAGERS' DISCUSSION Liberty All-Star Equity Fund, Variable Series / December 31, 2002 Liberty All-Star Equity Fund, Variable Series seeks total investment return, comprised of long-term capital appreciation and current income, through investments primarily in a diversified portfolio of equity securities. The fund's investment program is based upon Liberty Asset Management Company's (LAMCO) multi-manager concept. LAMCO allocates the fund's portfolio assets on an approximately equal basis among a number of independent investment management organizations ("Portfolio Managers")--currently five in number. Each Portfolio Manager employs a different investment style. LAMCO, from time to time, rebalances the portfolio among the Portfolio Managers to maintain an approximately equal allocation of the portfolio among them throughout all market cycles. The fund's current Portfolio Managers are: - Boston Partners Asset Management, L.P.; INVESTMENT STYLE-VALUE - Oppenheimer Capital; INVESTMENT STYLE-VALUE - Mastrapasqua & Associates; INVESTMENT STYLE-GROWTH - Schneider Capital Management Corporation; and INVESTMENT STYLE-VALUE - TCW Investment Management Company. INVESTMENT STYLE-GROWTH INVESTMENT APPROACH Instead of relying on a single investment manager, LAMCO employs a multi-management approach to the portfolio. Because investment styles go in and out of favor, a style that produces strong returns one year may produce disappointing results the next. By contrast, a multi-management approach combines managers who practice different investment styles in an attempt to reduce volatility while providing attractive returns. Liberty All-Star Equity Fund, Variable Series is structured as a core investment, combining both growth and value style managers within the fund. Using our expertise, experience and state-of-the-art tools, we select managers for the fund and evaluate them on an ongoing basis. The investment managers LAMCO selects for the fund are distinguished by the following characteristics: - a consistent focus on a particular style of investing - a disciplined investment decision-making process - a record of success relative to their peers who practice the same strategy - continuity among the investment professionals, so that those who have built the record remain the managers - a well-managed, highly responsive organization LAMCO performs all the due diligence, research, selection and monitoring that would be expected of a professional investment management firm. LAMCO adds value by selecting 'best of breed' managers and replacing them when necessary. NEGATIVE EVENTS OF 2002 SHATTER INVESTOR CONFIDENCE IN STOCKS In 2002, the US equity markets experienced their third straight year of negative performance--the first time that has occurred since 1939-1941. After a flat first quarter, the broad market fell across all styles and capitalization ranges, as extremely negative domestic and geo-political events shattered investor confidence worldwide. The fund was not immune to these conditions, given the sharp decline in both value and growth stocks. A large portion of the fund's underperformance relative to the S&P 500 Index during the year was attributable to an overweight in technology and an underweight in consumer staples. Several of the fund's managers overweighted technology, an out-of-favor sector, because they believed that certain technology stocks had become attractively priced. Conversely, the managers believed that many consumer staples stocks had become expensive during the year, so the fund was underweight in this sector. Many consumer stocks were bid up by investors who considered them safer choices in a volatile market. Despite our underperformance in 2002, the fund's three-year performance period ended December 31, 2002 was better than both the Russell 3000 and S&P 500 Indexes. The fund's multi-managed structure during this extended period of extreme market volatility was the primary factor behind those positive relative comparisons. ---------- Economic and market conditions can frequently change. There is no assurance that the trends described here will continue to commence. The fund is intended to be a long-term investment vehicle and is not designed to provide a means of speculating on short-term stock market movements. The fund has adopted certain investment policies in managing its portfolio that are designed to maintain the diversity of the fund's investment portfolio and reduce risk. The fund may not always achieve its investment objective. The fund's investment objective and non-fundamental investment policies may be changed without shareholder approval. 80 PERFORMANCE INFORMATION Liberty All-Star Equity Fund, Variable Series / December 31, 2002 AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 2002 (%)
1-YEAR 5-YEAR LIFE ------------------------------------------------------------- Class B(1) (6/1/00) -25.96 -2.46 -2.25 Russell 3000 Index(2) -21.54 -0.71 -0.31 S&P 500 Index(2) -22.09 -0.58 -0.24
Inception date of share class is in parentheses. [CHART] VALUE OF A $10,000 INVESTMENT, 11/17/97(3) - 12/31/02 CLASS B: $8,900
CLASS B SHARES S&P 500 INDEX RUSSELL 3000 INDEX 11/17/97 $ 10,000 11/30/97 $ 10,000 $ 10,000 $ 10,000 12/31/97 $ 10,080 $ 10,200 $ 10,172 1/31/98 $ 10,030 $ 10,253 $ 10,284 2/28/98 $ 10,900 $ 10,986 $ 11,025 3/31/98 $ 11,421 $ 11,531 $ 11,590 4/30/98 $ 11,522 $ 11,644 $ 11,708 5/31/98 $ 11,212 $ 11,356 $ 11,507 6/30/98 $ 11,462 $ 11,740 $ 11,974 7/31/98 $ 11,221 $ 11,527 $ 11,847 8/31/98 $ 9,469 $ 9,761 $ 10,135 9/30/98 $ 10,080 $ 10,426 $ 10,785 10/31/98 $ 10,821 $ 11,218 $ 11,660 11/30/98 $ 11,351 $ 11,904 $ 12,367 12/31/98 $ 11,962 $ 12,661 $ 13,079 1/31/99 $ 11,982 $ 13,092 $ 13,626 2/28/99 $ 11,561 $ 12,628 $ 13,202 3/31/99 $ 11,963 $ 13,092 $ 13,730 4/30/99 $ 12,677 $ 13,682 $ 14,262 5/31/99 $ 12,496 $ 13,422 $ 13,925 6/30/99 $ 12,988 $ 14,100 $ 14,695 7/31/99 $ 12,456 $ 13,673 $ 14,238 8/31/99 $ 12,073 $ 13,517 $ 14,167 9/30/99 $ 11,782 $ 13,171 $ 13,779 10/31/99 $ 12,275 $ 13,997 $ 14,651 11/30/99 $ 12,395 $ 14,389 $ 14,949 12/31/99 $ 12,976 $ 15,307 $ 15,828 1/31/00 $ 12,550 $ 14,707 $ 15,033 2/29/00 $ 12,404 $ 14,844 $ 14,749 3/31/00 $ 13,653 $ 16,006 $ 16,191 4/30/00 $ 13,466 $ 15,442 $ 15,704 5/31/00 $ 13,497 $ 15,009 $ 15,382 6/30/00 $ 13,559 $ 15,453 $ 15,760 7/31/00 $ 13,434 $ 15,179 $ 15,515 8/31/00 $ 14,371 $ 16,306 $ 16,478 9/30/00 $ 14,063 $ 15,567 $ 15,608 10/31/00 $ 14,273 $ 15,346 $ 15,542 11/30/00 $ 13,158 $ 13,931 $ 14,318 12/31/00 $ 13,787 $ 14,165 $ 14,388 1/31/01 $ 13,998 $ 14,649 $ 14,899 2/28/01 $ 12,865 $ 13,310 $ 13,541 3/31/01 $ 12,011 $ 12,443 $ 12,684 4/30/01 $ 12,977 $ 13,441 $ 13,668 5/31/01 $ 13,065 $ 13,548 $ 13,760 6/30/01 $ 12,821 $ 13,299 $ 13,426 7/31/01 $ 12,521 $ 13,079 $ 13,294 8/31/01 $ 11,743 $ 12,308 $ 12,463 9/30/01 $ 10,414 $ 11,222 $ 11,457 10/31/01 $ 10,858 $ 11,484 $ 11,676 11/30/01 $ 11,871 $ 12,368 $ 12,572 12/31/01 $ 12,018 $ 12,542 $ 12,682 1/31/02 $ 11,789 $ 12,385 $ 12,497 2/28/02 $ 11,356 $ 12,133 $ 12,256 3/31/02 $ 11,995 $ 12,664 $ 12,717 4/30/02 $ 11,345 $ 11,999 $ 11,946 5/31/02 $ 11,083 $ 11,860 $ 11,859 6/30/02 $ 10,010 $ 11,006 $ 11,015 7/31/02 $ 9,074 $ 10,131 $ 10,157 8/31/02 $ 9,086 $ 10,179 $ 10,223 9/30/02 $ 8,035 $ 9,109 $ 9,112 10/31/02 $ 8,777 $ 9,834 $ 9,913 11/30/02 $ 9,621 $ 10,429 $ 10,496 12/31/02 $ 8,900 $ 9,841 $ 9,880
NET ASSET VALUE PER SHARE ($) 12/31/01 12/31/02 ----------------------------------------------------------- Class B 10.53 7.78
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 SHARES. Total return performance includes changes in share price and reinvestment of all distributions. The Russell 3000 Index is an unmanaged index that tracks the performance of the 3,000 largest US companies based on total market capitalization. The S&P (Standard & Poor's) 500 Index is an unmanaged index that tracks the performance of 500 widely held, large-capitalization US stocks. Indexes are not investments, do not incur fees or expenses and are not professionally managed. It is not possible to invest directly in an index. Securities in the fund may not match those in the index. MUTUAL FUND PERFORMANCE CHANGES OVER TIME. CURRENT RETURNS FOR THE FUND MAY BE DIFFERENT THAN THAT SHOWN. Performance numbers reflect all fund expenses, but do not include any insurance charges imposed by your insurance company's separate accounts. If performance included the effect of these additional charges, it would be lower. (1) Class B share (newer class shares) performance information includes returns of the fund's class A shares (the older existing fund class) for periods prior to the inception of the newer class shares. These class A share returns were not restated to reflect any expense differential (e.g., Rule 12b-1 fees) between class A shares and the newer class shares. If differences in expenses were reflected, the returns for the periods prior to the inception of the newer class shares would be lower. (2) Index performance is from November 30, 1997. (3) Inception date of class A shares (oldest existing share class). 81 INVESTMENT PORTFOLIO Liberty All-Star Equity Fund, Variable Series / December 31, 2002
SHARES VALUE ------------ ------------ COMMON STOCKS--97.7% CONSUMER DISCRETIONARY--15.6% AUTOMOBILES & COMPONENTS--0.8% AUTO PARTS & EQUIPMENT--0.4% Visteon Corp. 18,800 $ 130,848 ------------ AUTOMOBILE MANUFACTURERS--0.4% Ford Motor Co. 16,300 151,590 ------------ CONSUMER DURABLES & APPAREL--2.0% APPAREL & ACCESSORIES--0.7% Liz Claiborne, Inc. 8,100 240,165 ------------ HOMEBUILDING--0.5% Clayton Homes, Inc. 12,900 157,122 ------------ LEISURE PRODUCTS--0.4% Brunswick Corp. 1,900 37,734 Mattel, Inc. 5,000 95,750 ------------ 133,484 ------------ PHOTOGRAPHIC PRODUCTS--0.4% Eastman Kodak Co. 4,000 140,160 ------------ HOTELS, RESTAURANTS & LEISURE--3.4% CASINOS & GAMING--0.7% Mandalay Resort Group (a) 7,800 238,758 ------------ HOTELS--1.8% Carnival Corp. 18,600 464,070 Starwood Hotels & Resorts Worldwide, Inc. 6,800 161,432 ------------ 625,502 ------------ RESTAURANTS--0.9% Brinker International, Inc. (a) 2,600 83,850 McDonald's Corp. 14,000 225,120 ------------ 308,970 ------------ MEDIA--4.2% BROADCASTING & CABLE--2.6% Clear Channel Communications, Inc. (a) 6,000 223,740 Fox Entertainment Group, Inc. (a) 5,000 129,650 Liberty Media Corp., Class A (a) 46,461 415,361 Scripps Co. (E.W.) 1,600 123,120 ------------ 891,871 ------------ MOVIES & ENTERTAINMENT--1.2% AOL Time Warner, Inc. (a) 10,000 131,000 Pixar, Inc. (a) 5,000 264,950 ------------ 395,950 ------------ PUBLISHING & PRINTING--0.4% Gannett Co., Inc. 1,700 122,060 ------------ RETAILING--5.2% APPAREL RETAIL--0.4% Abercrombie & Fitch Co. (a) 7,300 149,358 ------------ DEPARTMENT STORES--2.2% Federated Department Stores, Inc. (a) 7,100 204,196 J.C. Penney Co., Inc. 17,550 403,825 May Department Stores Co. 6,000 137,880 ------------ 745,901 ------------ GENERAL MERCHANDISE STORES--1.4% Dollar General Corp. 10,000 $ 119,500 Target Corp. 4,800 144,000 Wal-Mart Stores, Inc. 4,200 212,142 ------------ 475,642 ------------ HOME IMPROVEMENT RETAIL--0.3% The Home Depot, Inc. 5,000 119,800 ------------ INTERNET RETAIL--0.8% Amazon.Com, Inc. (a) 6,600 124,674 eBay, Inc. (a) 2,100 142,422 ------------ 267,096 ------------ SPECIALTY STORES--0.1% Toys R Us, Inc. (a) 4,300 43,000 ------------ CONSUMER STAPLES--4.4% FOOD & DRUG RETAILING--1.3% DRUG RETAIL--0.6% CVS Corp. 8,000 199,760 ------------ FOOD RETAIL--0.7% Kroger Co. (a) 15,000 231,750 ------------ FOOD, BEVERAGES & TOBACCO--1.7% AGRICULTURAL PRODUCTS--0.7% Archer Daniels Midland Co. 19,700 244,280 ------------ TOBACCO--1.0% UST, Inc. 10,200 340,986 ------------ HOUSEHOLD & PERSONAL PRODUCTS--1.4% PERSONAL PRODUCTS--1.4% Avon Products, Inc. 6,000 323,220 Gillette Co. 5,000 151,800 ------------ 475,020 ------------ ENERGY--5.9% INTEGRATED OIL & GAS--1.5% ChevronTexaco Corp. 7,600 505,248 ------------ OIL & GAS DRILLING--1.7% Nabors Industries, Inc. (a) 8,600 303,322 Patterson-UTI Energy, Inc. (a) 3,800 114,646 Transocean, Inc. 7,300 169,360 ------------ 587,328 ------------ OIL & GAS EXPLORATION & PRODUCTION--2.2% Burlington Resources, Inc. 6,100 260,165 Canadian Natural Resources Ltd 5,600 166,152 Kerr-McGee Corp. 7,500 332,250 ------------ 758,567 ------------ OIL & GAS REFINING & MARKETING--0.5% Valero Energy Corp. 4,400 162,536 ------------ FINANCIALS--21.5% BANKS--1.9% FleetBoston Financial Corp. 12,000 291,600
See Notes to Investment Portfolio. 82
SHARES VALUE ------------ ------------ Wells Fargo & Co. 7,800 $ 365,586 ------------ 657,186 ------------ DIVERSIFIED FINANCIALS--9.9% CONSUMER FINANCE--2.6% AmeriCredit Corp. (a) 18,700 144,738 Countrywide Credit Industries, Inc 14,250 736,013 ------------ 880,751 ------------ DIVERSIFIED FINANCIAL SERVICES--7.2% Charles Schwab Corp. 19,750 214,287 Citigroup, Inc. 19,099 672,094 Freddie Mac 17,450 1,030,422 J.P. Morgan Chase & Co. 8,700 208,800 Merrill Lynch & Co., Inc. 5,500 208,725 Morgan Stanley 3,000 119,760 ------------ 2,454,088 ------------ MULTI-SECTOR HOLDINGS--0.1% iShares Russell 1000 Value Index Fund 800 36,840 ------------ INSURANCE--9.5% INSURANCE BROKERS--0.4% AON Corp. 7,500 141,675 ------------ LIFE & HEALTH INSURANCE--1.9% AFLAC, Inc. 17,200 518,064 UnumProvident Corp. 7,000 122,780 ------------ 640,844 ------------ MULTI-LINE INSURANCE--2.0% American Financial Group, Inc. 1,100 25,377 American International Group, Inc 10,581 612,111 Loews Corp. 1,400 62,244 ------------ 699,732 ------------ PROPERTY & CASUALTY INSURANCE--5.2% ACE Ltd. 10,000 293,400 Allstate Corp. 7,600 281,124 The Progressive Corp. 13,960 692,835 Travelers Property Casualty Corp 8,700 127,455 XL Capital Ltd., Class A 5,000 386,250 ------------ 1,781,064 ------------ REAL ESTATE--0.2% REAL ESTATE MANAGEMENT & DEVELOPMENT--0.2% The St. Joe Co. 2,700 81,000 ------------ HEALTH CARE--13.0% HEALTH CARE EQUIPMENT & SERVICES--2.2% HEALTH CARE DISTRIBUTORS & SERVICES--0.1% Quest Diagnostic, Inc. 900 51,210 ------------ HEALTH CARE EQUIPMENT--0.6% Applera Corp. - Applied Biosystems Group 3,700 64,898 Biomet, Inc. 5,200 149,032 ------------ 213,930 ------------ HEALTH CARE FACILITIES--0.3% Tenet Healthcare Corp. (a) 5,900 $ 96,760 ------------ HEALTH CARE SUPPLIES--0.4% Alcon, Inc. (a) 3,900 153,855 ------------ MANAGED HEALTH CARE--0.8% Aetna, Inc. 6,250 257,000 ------------ PHARMACEUTICALS & BIOTECHNOLOGY--10.8% BIOTECHNOLOGY--5.2% Amgen, Inc. (a) 10,100 488,234 Biogen, Inc. (a) 7,300 292,438 Genentech, Inc. (a) 12,470 413,505 Genzyme Corp. (a) 7,400 218,818 IDEC Pharmaceuticals Corp. (a) 3,000 99,510 Invitrogen Corp. (a) 3,000 93,870 MedImmune, Inc. (a) 6,560 178,235 ------------ 1,784,610 ------------ PHARMACEUTICALS--5.6% Biovail Corp. (a) 5,000 132,050 Bristol-Myers Squibb Co. 8,000 185,200 Eli Lilly & Co. 4,400 279,400 King Pharmaceuticals, Inc. (a) 9,300 159,867 Pfizer, Inc. 4,500 137,565 Pharmacia Corp. 9,300 388,740 Schering-Plough Corp. 5,000 111,000 Shire Pharmaceuticals PLC 6,700 126,563 Wyeth 10,500 392,700 ------------ 1,913,085 ------------ INDUSTRIALS--7.9% CAPITAL GOODS--5.1% AEROSPACE & DEFENSE--1.5% Boeing Co. 7,000 230,930 General Dynamics Corp. 800 63,496 L-3 communications Holdings, Inc. (a) 3,100 139,221 Lockheed Martin Corp. 1,600 92,400 ------------ 526,047 ------------ BUILDING PRODUCTS--0.1% York International Corp. 800 20,456 ------------ CONSTRUCTION & FARM MACHINERY--1.1% Deere & Co. 700 32,095 PACCAR, Inc. 7,800 359,814 ------------ 391,909 ------------ INDUSTRIAL CONGLOMERATES--2.4% 3M Co. 3,000 369,900 General Electric Co. 6,200 150,970 Tyco International Ltd. 18,200 310,856 ------------ 831,726 ------------ COMMERCIAL SERVICES & SUPPLIES--0.7% DATA PROCESSING SERVICES--0.7% Paychex, Inc. 7,980 222,642 ------------
See Notes to Investment Portfolio. 83
SHARES VALUE ------------ ------------ TRANSPORTATION--2.1% AIR FREIGHT & LOGISTICS--0.4% Expeditors International Washington, Inc. 4,500 $ 146,925 ------------ AIRLINES--0.6% Southwest Airlines Co. 13,850 192,515 ------------ RAILROADS--0.7% CSX Corp. 8,400 237,804 ------------ TRUCKING--0.4% Swift Transportation Co., Inc. (a) 6,100 122,110 ------------ INFORMATION TECHNOLOGY--22.1% SOFTWARE & SERVICES--5.1% APPLICATION SOFTWARE--0.9% PeopleSoft, Inc. (a) 6,200 113,460 Siebel Systems, Inc. (a) 26,260 196,425 ------------ 309,885 ------------ INFORMATION TECHNOLOGY CONSULTING & SERVICES--0.3% Electronic Data Systems Corp. 4,700 86,621 ------------ SYSTEMS SOFTWARE--3.9% Microsoft Corp. (a) 19,505 1,008,409 Oracle Corp. (a) 23,300 251,640 VERITAS Software Corp. (a) 5,600 87,472 ------------ 1,347,521 ------------ TECHNOLOGY HARDWARE & EQUIPMENT--17.0% COMPUTER HARDWARE--2.9% Dell Computer Corp. (a) 17,700 473,298 Hewlett Packard Co. 19,300 335,048 Sun Microsystems, Inc. (a) 54,200 168,562 ------------ 976,908 ------------ COMPUTER STORAGE & PERIPHERALS--1.4% EMC Corp. (a) 31,100 190,954 Network Appliance, Inc. (a) 30,100 301,000 ------------ 491,954 ------------ ELECTRONIC EQUIPMENT & INSTRUMENTS--2.3% Agilent Technologies, Inc. (a) 20,700 371,772 Arrow Electronics, Inc. (a) 5,600 71,624 Sanmina Corp. (a) 37,100 166,579 Symbol Technologies, Inc. 4,750 39,045 Waters Corp. (a) 6,000 130,680 ------------ 779,700 ------------ NETWORKING EQUIPMENT--2.0% 3Com Corp. (a) 43,800 202,794 Cisco Systems, Inc. (a) 37,900 496,490 ------------ 699,284 ------------ SEMICONDUCTOR EQUIPMENT--2.7% Applied Materials, Inc. (a) 35,100 457,353 Novellus Systems, Inc. (a) 5,000 140,400 Teradyne, Inc. (a) 25,550 332,405 ------------ 930,158 ------------ SEMICONDUCTORS--4.5% Analog Devices, Inc. (a) 5,000 119,350 Broadcom Corp., Class A (a) 7,100 106,926 Intel Corp. 22,700 $ 353,439 Maxim Integrated Products, Inc. (a) 10,500 346,920 Micron Technology, Inc. (a) 27,450 267,363 Texas Instruments, Inc. 8,700 130,587 Xilinx, Inc. (a) 9,600 197,760 ------------ 1,522,345 ------------ TELECOMMUNICATIONS EQUIPMENT--1.2% Nokia OYJ, ADR 7,800 120,900 QUALCOMM, Inc. (a) 8,300 302,037 ------------ 422,937 ------------ MATERIALS--4.1% CHEMICALS--2.0% COMMODITY CHEMICALS--1.0% Tate & Lyle PLC, ADR 16,700 338,753 ------------ DIVERSIFIED CHEMICALS--0.1% Dow Chemical Co. 1,400 41,580 ------------ FERTILIZER & AGRICULTURAL CHEMICALS--0.7% IMC Global, Inc. 21,850 233,140 Monsanto Co. 682 13,128 ------------ 246,268 ------------ SPECIALTY CHEMICALS--0.2% International Flavors & Fragrances, Inc. 2,000 70,200 ------------ CONTAINERS & PACKAGING--0.8% PAPER PACKAGING--0.8% Smurfit-Stone Container Corp. (a) 17,700 272,421 ------------ METALS & MINING--1.3% ALUMINUM--0.8% Alcan, Inc. 4,800 141,696 Alcoa, Inc. 5,000 113,900 ------------ 255,596 ------------ DIVERSIFIED METALS & MINING--0.5% CONSOL Energy, Inc. 4,500 77,760 Freeport-McMoRan Copper & Gold, Inc. (a) 6,300 105,714 ------------ 183,474 ------------ STEEL--0.0% Nucor Corp. 300 12,390 ------------ TELECOMMUNICATION SERVICES--1.9% INTEGRATED TELECOMMUNICATION SERVICES--1.6% Alltel Corp. 5,200 265,200 Sprint Corp. (FON Group) 5,000 72,400 Verizon Communications, Inc. 5,000 193,750 ------------ 531,350 ------------ WIRELESS TELECOMMUNICATION SERVICES--0.3% AT&T Wireless Services, Inc. (a) 19,500 110,175 ------------
See Notes to Investment Portfolio. 84
SHARES VALUE ------------ ------------ UTILITIES--1.3% ELECTRIC UTILITIES--1.2% Edison International (a) 2,700 $ 31,995 FirstEnergy Corp. 6,500 214,305 PG&E Corp. (a) 11,200 155,680 ------------ 401,980 ------------ MULTI-UTILITIES & UNREGULATED POWER--0.1% Duke Energy Corp. 2,600 50,804 ------------ TOTAL COMMON STOCKS (cost of $44,559,357) 33,460,820 ------------ PAR ------------ CONVERTIBLE BONDS--0.5% INDUSTRIALS--0.3% METAL & MINING--0.3% Freeport-McMoRan Copper & Gold, Inc., 8.250%, 01/31/2006 $ 76,000 107,825 ------------ INFORMATION TECHNOLOGY--0.2% SOFTWARE & SERVICES--0.0% APPLICATION SOFTWARE--0.0% MicroStrategy, Inc., 7.500%, 06/24/2007 2,900 1,160 ------------ TECHNOLOGY HARDWARE & EQUIPMENT--0.2% SEMICONDUCTOR--0.1% Amkor Technology, Inc., 5.750%, 06/1/2006 37,000 21,183 ------------ TELECOMMUNICATIONS EQUIPMENT--0.1% Corning, Inc., 3.500%, 11/1/2008 51,000 35,190 ------------ UTILITIES--0.0% GAS UTILITIES--0.0% El Paso Corp., (b) 02/28/2021 28,000 8,680 ------------ TOTAL CONVERTIBLE BONDS (cost of $193,445) 174,038 ------------ SHARES ------------ PREFERRED STOCK--0.3% MEDIA--0.3% MOVIES & ENTERTAINMENT--0.3% News Corp. Ltd., ADR (cost of $161,823) 5,000 113,250 ------------ PAR VALUE ------------ ------------ SHORT-TERM OBLIGATION--2.9% Repurchase agreement with State Street Bank & Trust Co., dated 12/31/02, due 01/02/03 at 1.180%, collateralized by U.S. Treasury Notes and Student Loan Marketing Association Note with various maturities to 2028, market value $1,017,346 (repurchase proceeds $984,065) (cost of $984,000) $ 984,000 $ 984,000 ------------ TOTAL INVESTMENTS--101.4% (cost of $45,898,625) (c) 34,732,108 ------------ OTHER ASSETS & LIABILITIES, NET--(1.4)% (482,275) ------------ NET ASSETS--100.0% $ 34,249,833 ============
NOTES TO INVESTMENT PORTFOLIO: (a) Non-income producing. (b) Zero-coupon bond. (c) Cost for federal income tax purposes is $46,772,539. The difference between cost for generally accepted accounting principles and cost on a tax basis is related to deferral of losses on wash sales. Realized losses have been deferred for tax purposes and cost adjusted accordingly. ACRONYM NAME ------- ---- ADR American Depositary Receipt See Notes to Financial Statements. 85 STATEMENT OF ASSETS AND LIABILITIES Liberty All-Star Equity Fund, Variable Series/December 31, 2002 ASSETS: Investments, at cost $ 45,898,625 ------------- Investments, at value $ 34,732,108 Cash 18,603 Receivable for: Investments sold 165,625 Fund shares sold 298 Interest 3,147 Dividends 38,796 Deferred Trustees' compensation plan 3,019 ------------- TOTAL ASSETS 34,961,596 ------------- LIABILITIES: Expense reimbursement due to Manager/Distributor 49,168 Payable for: Investments purchased 152,404 Fund shares repurchased 442,907 Management fee 25,791 Transfer agent fee 625 Pricing and bookkeeping fees 845 Trustees' fee 502 Audit fee 20,395 Deferred Trustees' fee 3,019 Other liabilities 16,107 ------------- TOTAL LIABILITIES 711,763 ------------- NET ASSETS $ 34,249,833 ============= COMPOSITION OF NET ASSETS: Paid-in capital $ 51,438,851 Overdistributed net investment income (3,895) Accumulated net realized loss (6,018,601) Net unrealized depreciation on: Investments (11,166,517) Foreign currency translations (5) ------------- Net Assets $ 34,249,833 ============= CLASS A: Net assets $ 31,338,681 Shares outstanding 4,030,868 ============= Net asset value per share $ 7.77 ============= CLASS B: Net assets $ 2,911,152 Shares outstanding 374,264 ------------- Net asset value per share $ 7.78 =============
See Notes to Financial Statements. 86 STATEMENT OF OPERATIONS Liberty All-Star Equity Fund, Variable Series For the Year Ended December 31, 2002 INVESTMENT INCOME: Dividends $ 474,314 Interest 29,597 ------------- Total Investment Income (net of foreign taxes withheld of $2,091) 503,911 ------------- EXPENSES: Management fee 352,871 Distribution fee--Class B 9,143 Pricing and bookkeeping fees 17,536 Transfer agent fee 7,500 Trustees' fee 7,906 Custody fee 45,772 Other expenses 26,871 ------------- Total Expenses 467,599 Fees and expenses waived or reimbursed by Manager (17,866) Fees reimbursed by Distributor--Class B (9,143) Custody earnings credit (259) ------------- Net Expenses 440,331 ------------- Net Investment Income 63,580 ------------- NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS AND FOREIGN CURRENCY: Net realized loss on investments (4,338,083) ------------- Net change in unrealized appreciation/depreciation on: Investments (9,538,013) Foreign currency translations (5) ------------- Net change in unrealized appreciation/depreciation (9,538,018) ------------- Net Loss (13,876,101) ------------- Net Decrease in Net Assets from Operations $ (13,812,521) =============
See Notes to Financial Statements. 87 STATEMENT OF CHANGES IN NET ASSETS Liberty All-Star Equity Fund, Variable Series / December 31, 2002
YEAR ENDED DECEMBER 31, ----------------------------- INCREASE (DECREASE) IN NET ASSETS: 2002 2001 ---------------------------------- ------------- ------------- OPERATIONS: Net investment income $ 63,580 $ 159,795 Net realized loss on investments (4,338,083) (1,039,281) Net change in unrealized appreciation/depreciation on investments and foreign currency translations (9,538,018) (8,197,092) ------------- ------------- Net Decrease from Operations (13,812,521) (9,076,578) ------------- ------------- Distributions Declared to Shareholders: From net investment income: Class A (65,711) (150,621) Class B (6,028) (12,430) From net realized gains: Class A -- (1,159,442) Class B -- (92,581) ------------- ------------- Total Distributions Declared to Shareholders (71,739) (1,415,074) ------------- ------------- SHARE TRANSACTIONS: Class A: Subscriptions 1,891,429 6,121,638 Distributions reinvested 65,711 1,310,063 Redemptions (10,155,230) (14,572,125) ------------- ------------- Net Decrease (8,198,090) (7,140,424) ------------- ------------- Class B: Subscriptions 665,510 3,318,243 Distributions reinvested 6,028 105,011 Redemptions (965,793) (1,140,788) ------------- ------------- Net Increase (Decrease) (294,255) 2,282,466 ------------- ------------- Net Decrease from Share Transactions (8,492,345) (4,857,958) ------------- ------------- Total Decrease in Net Assets (22,376,605) (15,349,610) NET ASSETS: Beginning of period 56,626,438 71,976,048 ------------- ------------- End of period (including overdistributed net investment income of $(3,895) and $(3,468), respectively) $ 34,249,833 $ 56,626,438 ============= ============= CHANGES IN SHARES: Class A: Subscriptions 233,321 582,000 Issued for distributions reinvested 8,478 140,937 Redemptions (1,168,100) (1,337,848) ------------- ------------- Net Decrease (926,301) (614,911) ------------- ------------- Class B: Subscriptions 70,849 290,783 Issued for distributions reinvested 777 11,303 Redemptions (113,272) (105,700) ------------- ------------- Net Increase (Decrease) (41,646) 196,386 ------------- -------------
See Notes to Financial Statements. 88 NOTES TO FINANCIAL STATEMENTS Liberty All-Star Equity Fund, Variable Series / December 31, 2002 NOTE 1. ORGANIZATION AND ACCOUNTING POLICIES ORGANIZATION--Liberty All-Star Equity Fund, Variable Series (the "Fund"), a series of Liberty Variable Investment Trust (the "Trust"), is a diversified portfolio of a Massachusetts business trust, registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The Fund's investment goal is to seek total investment return, comprised of long-term capital appreciation and current income, through investments primarily in a diversified portfolio of equity securities. The Fund's capitalization consists of an unlimited number of shares of beneficial interest without par value that represent a separate series of the Trust. The Fund offers two classes of shares: Class A and Class B. Each share of a class represents an equal proportionate beneficial interest in that share class and, when issued and outstanding, is fully paid and nonassessable. Shareholders would be entitled to share proportionally in the net assets of their share class available for distribution to shareholders upon liquidation of the Fund. Shares of the Fund are available and are being marketed exclusively as a pooled funding vehicle for variable annuity contracts ("VA contracts") and Variable Life Insurance Policies ("VLI Policies") offered by the separate accounts of certain life insurance companies ("Participating Insurance Companies"). The Participating Insurance Companies and their separate accounts own all the shares of the Fund. Liberty Advisory Services Corp. (the "Manager") ("LASC") provides investment management, sub-advisory and advisory services to the Fund pursuant to its Management Agreement with the Fund. LASC has appointed Liberty Asset Management Company ("LAMCO"), an affiliate of LASC, as Sub-Advisor to the Fund. LASC has delegated various administrative matters to Colonial Management Associates, Inc. ("Colonial"). Colonial also provides pricing and bookkeeping services to the Fund. Liberty Funds Distributor, Inc. ("LFD"), an affiliate of the Manager, serves as the principal underwriter of the Fund. The Manager, Colonial, LAMCO and LFD are wholly-owned indirect subsidiaries of FleetBoston Financial Corporation ("FleetBoston"). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. SECURITY VALUATION AND TRANSACTIONS--Debt securities generally are valued by a pricing service based upon market transactions for normal, institutional-size trading units of similar securities. When management deems it appropriate, an over-the-counter or exchange bid quotation is used. Equity securities generally are valued at the last sale price or, in the case of unlisted or listed securities for which there were no sales during the day, at the current quoted bid price. Short-term obligations with a maturity of 60 days or less are valued at amortized cost. 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. 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. DETERMINATION OF CLASS NET ASSET VALUES AND FINANCIAL HIGHLIGHTS--All income, expenses (other than the Class B distribution fee), 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. The per share data was calculated using average shares outstanding during the period. In addition, Class B net investment income per share data and ratios reflect the distribution fee applicable to Class B shares only. 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. DISTRIBUTIONS TO SHAREHOLDERS--The Fund intends to distribute as income dividends or capital gains distributions, at least annually, substantially all of its net investment income and net profits realized from the sale of investments. All dividends and distributions are reinvested in additional shares of the Fund at net asset value as of the record date of the distribution. Income and capital gain distributions are determined in accordance with federal income tax regulations. FOREIGN CURRENCY TRANSACTIONS--Net realized and unrealized gains (losses) on foreign currency transactions includes gains (losses) arising from the fluctuations in exchange rates between trade and settlement dates on securities transactions, gains (losses) arising from the disposition of foreign currency, and currency gains (losses) Liberty All-Star Equity Fund, Variable Series / December 31, 2002between the accrual and payment dates on dividends, interest income and foreign withholding taxes. 89 The Fund does not distinguish that portion of gains (losses) on investments which is due to changes in foreign exchange rates from that which is due to changes in market prices of the investments. Such fluctuations are included with the net realized and unrealized gains (losses) on investments. OTHER--Interest income is recorded on the accrual basis. Corporate actions and dividend income are recorded on the ex-date (except for certain foreign securities which are recorded as soon after ex-date as the Fund becomes aware of such), net of non-reclaimable tax withholdings. Where a high level of uncertainty as to collection exists, income on securities is recorded net of all tax withholdings with any rebates recorded when received. The Fund's custodian takes possession through the federal book-entry system of securities collateralizing repurchase agreements. Collateral is marked-to-market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund. The Fund may experience costs and delays in liquidating the collateral if the issuer defaults or enters bankruptcy. NOTE 2. FEDERAL TAX INFORMATION Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from generally accepted accounting principles. These differences are primarily due to differing treatments for deferral of losses from wash sales, post-October losses, capital loss carryforwards 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 December 31, 2002, permanent items identified and reclassified among the components of net assets are as follows:
OVERDISTRIBUTED ACCUMULATED NET INVESTMENT NET REALIZED PAID-IN INCOME LOSS CAPITAL --------------- ------------ --------- $ 7,732 $ 490 $ (8,222)
Net investment income, net realized gains (losses) and net assets were not affected by this reclassification. The tax character of distributions paid during 2002 and 2001 was as follows:
2002 2001 --------- ------------ Distributions paid from: Ordinary income $ 71,739 $ 853,363 Long-term capital gains -- 561,711 --------- ------------ $ 71,739 $ 1,415,074 ========= ============
As of December 31, 2002, the components of distributable earnings on a tax basis were as follows:
UNREALIZED DEPRECIATION* -------------- $ (12,040,436)
* The difference between book-basis and tax-basis unrealized depreciation is attributable primarily to the tax deferral of losses on wash sales and the realization for tax purposes of unrealized gains on certain forward foreign currency contracts. The following capital loss carryforwards are available to reduce taxable income arising from future net realized gains on investments, if any, to the extent permitted by the Internal Revenue Code:
YEAR OF CAPITAL LOSS EXPIRATION CARRYFORWARD ---------- ------------ 2009 $ 524,787 2010 3,157,493 ------------ $ 3,682,280
Under current tax rules, certain capital losses realized after October 31 may be deferred and treated as occurring on the first day of the following fiscal year. As of December 31, 2002, for federal income tax purposes, post October losses of $1,462,407 were deferred to January 1, 2003. NOTE 3. FEES AND COMPENSATION PAID TO AFFILIATES MANAGEMENT AND SUB-ADVISORY FEES--The Manager receives a monthly fee equal to 0.80% annually of the Fund's average daily net assets. The Manager, out of the management fee it receives, pays LAMCO a monthly sub-advisory fee equal to 0.60% annually of the Fund's average daily net assets. PRICING AND BOOKKEEPING FEES--Colonial is responsible for providing pricing and bookkeeping services to the Fund under a Pricing and Bookkeeping Agreement. Under a separate agreement (the "Outsourcing Agreement"), Colonial has delegated those functions to State Street Bank & Trust Company ("State Street"). Colonial pays fees to State Street under the Outsourcing Agreement. Under its pricing and bookkeeping agreement with the Fund, Colonial 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 December 31, 2002, the annual net asset based fee rate was 0.014%. The Fund also pays out-of-pocket costs for pricing services. 90 TRANSFER AGENT FEE--Liberty Funds Services, Inc. (the "Transfer Agent"), an affiliate of the Manager, provides shareholder services for an annual rate of $7,500. DISTRIBUTION FEE--The Fund has adopted a 12b-1 plan, which requires it to pay LFD a monthly distribution fee equal to 0.25% annually of Class B average daily net assets as of the 20th of each month. EXPENSE LIMITS--The Manager and LFD have voluntarily agreed to reimburse all expenses, including management fees and distribution fees, but excluding interest, taxes, brokerage and extraordinary expenses incurred by the Fund in excess of 1.00% annually of the Fund's average daily net assets. LFD will first reimburse the Class B distribution fee up to 0.25% annually to reach the 1.00% limit on Class B expenses. If additional reimbursement is needed to meet the limit for each class, the Manager will then reimburse other expenses to the extent necessary. If additional reimbursement is still needed to reach the expense limit, the Manager will then waive a portion of its management fee to reach the expense limit. This arrangement may be terminated or modified by the Manager or LFD at any time. OTHER--The Fund pays no compensation to its officers, all of whom are employees of Colonial 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 $259 of custody fees were reduced by balance credits for the year ended December 31, 2002. The Fund could have invested a portion of the assets utilized in connection with the expense offset arrangement in an income-producing asset if it had not entered into such an agreement. NOTE 4. PORTFOLIO INFORMATION INVESTMENT ACTIVITY--For the year ended December 31, 2002, purchases and sales of investments, other than short-term obligations, were $36,458,670 and $44,800,388, respectively. Unrealized appreciation (depreciation) at December 31, 2002, based on cost of investments for federal income tax purposes, was: Gross unrealized appreciation $ 2,346,404 Gross unrealized depreciation (14,386,835) ------------- Net unrealized depreciation $ (12,040,431) =============
NOTE 5. OTHER RELATED PARTY TRANSACTIONS For the year ended December 31, 2002, the Fund used Fleet Securities Inc., a wholly-owned subsidiary of Colonial, as a broker. Total commissions paid to Fleet Securities Inc. during the year were $1,514. 91 FINANCIAL HIGHLIGHTS Liberty All-Star Equity Fund, Variable Series--Class B Shares Selected data for a share outstanding throughout each period is as follows:
YEAR ENDED PERIOD DECEMBER 31, ENDED ----------------------- DECEMBER 31, 2002 2001 2000 (a) ---------- ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.53 $ 12.42 $ 12.97 ---------- ---------- ---------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (b) 0.01 0.03 0.05 Net realized and unrealized gain (loss) on investments and foreign currency (2.74) (1.66) 0.24 ---------- ---------- ---------- Total from Investment Operations (2.73) (1.63) 0.29 ---------- ---------- ---------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.02) (0.03) (0.05) From net realized gains -- (0.23) (0.79) ---------- ---------- ---------- Total Distributions Declared to Shareholders (0.02) (0.26) (0.84) ---------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 7.78 $ 10.53 $ 12.42 ========== ========== ========== Total return (c)(d)(e) (25.96)% (12.82)% 2.17%(f) RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA: Expenses (g) 1.00% 1.00% 1.00%(h) Net investment income (g) 0.14% 0.26% 0.63%(h) Waiver/reimbursement 0.29% 0.25% 0.45%(h) Portfolio turnover rate 84% 62% 97% Net assets, end of period (000's) $ 2,911 $ 4,382 $ 2,727
(a) For the peroid from commencement of operations on June 1, 2000 to December 31, 2000 (b) Per share data was calculated using average shares outstanding during the period. (c) Total return at net asset value assuming all distributions reinvested. (d) Had the Manager and/or Distributor not waived or reimbursed a portion of expenses, total return would have been reduced. (e) Total return figure does not include any insurance company charges associated with a variable annuity. If included, total return would be reduced. (f) Not annualized. (g) The benefits derived from custody credits and directed brokerage arrangements, if applicable, had an impact of less than 0.01%. (h) Annualized. 92 REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of Liberty Variable Investment Trust and the Class B Shareholders of Liberty All-Star Equity Fund, Variable Series In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio, and the related statements of operations and of changes in net assets and the Class B financial highlights present fairly, in all material respects, the financial position of Liberty All-Star Equity Fund, Variable Series (the "Fund") (a series of Liberty Variable Investment Trust) at December 31, 2002, and the results of its operations, the changes in its net assets and the Class B financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and the Class B financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2002 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts February 12, 2003 93 UNAUDITED INFORMATION FEDERAL INCOME TAX INFORMATION 100% of the ordinary income distributed by the Fund, for the year ended December 31, 2002, qualifies for the corporate dividends received deduction. 94 PORTFOLIO MANAGER'S DISCUSSION Liberty Newport Japan Opportunities Fund, Variable Series / December 31, 2002 Liberty Newport Japan Opportunities Fund, Variable Series seeks capital appreciation. The fund's portfolio managers are David Smith and Jamie Chui. Mr. Smith is a senior vice president of Newport Fund Management, Inc. (Newport) and its immediate parent, Newport Pacific Management, Inc. Ms. Chui is a vice president of Newport and Newport Pacific. Investors in Japan faced a challenging investment environment during the fiscal year. Japan not only struggled with problems that have plagued the country for more than a decade--bad bank loans and the absence of meaningful government reform--but the country was also affected by the worldwide economic slowdown. Japan's economy is highly dependent on exports, particularly to the United States where economic growth was weak. In this environment, many Japanese companies downgraded their earnings estimates and offered little information as to when their earnings might pick up. On the political front, the Japanese government announced a number of tough reform measures, but these tended to become embroiled in politics. However, the actual reforms ended up as watered down versions of the original proposals because of political maneuvering and have not been effective. THE FUND BENEFITED FROM GOOD STOCK SELECTION In general, we favored companies with solid financial profiles and good prospects for earnings growth. Although our primary focus is on selecting individual stocks, several themes ran through the portfolio for the year. For example, we invested in several companies that were restructuring to cut costs. Many of these companies had little revenue growth, but their cost-cutting measures contributed to earnings. In this vein, we added to the fund's positions in Japan Telecom; KDDI, a diversified telecommunications company, Funai Electronics, a consumer electronics company; and Tokyo Gas (1.2%, 2.1%, 2.2% and 1.5% of net assets, respectively). The high level of restructuring activity within Japanese companies also resulted in an increase in merger and acquisition activity and we took advantage of that trend by investing in F.C.C. Company (1.2% of net assets), an auto parts company that benefited from consolidation in the industry. And, we invested in stocks that tend to do well in a poor economic environment, such as Kao (4.1% of net assets), a personal care products company that owns Biore and Jergens. CONSUMER FINANCE COMPANIES HELD BACK RESULTS We held a significant position in the consumer finance area during the period. Because it is difficult for Japanese consumers to obtain loans from banks, we believed consumer finance companies would fill a void and would be a good niche market. Over the fiscal year, weak loan demand, an increasing number of bankruptcies and loan defaults took their toll on consumer finance companies. As a result, the presence of these stocks in the portfolio detracted from performance, even though we reduced their positions. The fund's lack of exposure to commodity cyclical stocks also detracted from performance, as commodity stocks, such as those in the rubber, metals, oil and coal industries, had relatively strong performance during the period. Despite its internal difficulties, many high-quality Japanese companies continued to be competitive in the global market. Honda, Toyota and Canon (2.1%, 2.0% and 3.5% of net assets, respectively) are just some of the well-established Japanese companies that have been industry leaders and that we believe should do well in the future. ---------- The Board of Trustees that oversees the fund has decided to terminate the fund. The effective date of termination for the fund will be February 21, 2003. If you have any questions about this termination, please contact your insurance company. Economic and market conditions can frequently change. There is no assurance that the trends described in this report will continue or commence. There are also specific risks involved when investing in foreign stocks, such as currency exchange rate fluctuations, economic change, instability of emerging countries and political developments. In addition, concentration of investments in a single region or country may result in greater volatility. Holdings are disclosed as of December 31, 2002, and are subject to change. 95 PERFORMANCE INFORMATION Liberty Newport Japan Opportunities Fund, Variable Series / December 31, 2002 AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 2002 (%)
1-YEAR LIFE --------------------------------------------------------- Class B (5/30/00) -13.61 -28.94 MSCI Japan Index(1) -10.28 -22.72
Inception date of share class is in parentheses. [CHART] VALUE OF A $10,000 INVESTMENT, 5/30/00 - 12/31/02 CLASS B: $4,125
CLASS B SHARES MSCI JAPAN INDEX 5/28/00 $ 10,000 5/31/00 $ 10,008 $ 10,000 6/30/00 $ 10,458 $ 10,687 7/31/00 $ 9,041 $ 9,456 8/31/00 $ 9,925 $ 10,068 9/30/00 $ 9,491 $ 9,567 10/31/00 $ 8,232 $ 9,012 11/30/00 $ 7,791 $ 8,638 12/31/00 $ 7,033 $ 8,113 1/31/01 $ 6,958 $ 8,017 2/28/01 $ 6,191 $ 7,656 3/31/01 $ 6,033 $ 7,428 4/30/01 $ 6,399 $ 7,933 5/31/01 $ 6,574 $ 7,914 6/30/01 $ 6,057 $ 7,442 7/31/01 $ 5,466 $ 6,888 8/31/01 $ 5,182 $ 6,716 9/30/01 $ 4,882 $ 6,088 10/31/01 $ 5,065 $ 6,076 11/30/01 $ 5,099 $ 6,142 12/31/01 $ 4,774 $ 5,727 1/31/02 $ 4,332 $ 5,279 2/28/02 $ 4,399 $ 5,498 3/31/02 $ 4,616 $ 5,945 4/30/02 $ 4,882 $ 6,152 5/31/02 $ 5,166 $ 6,535 6/30/02 $ 4,974 $ 6,194 7/31/02 $ 4,532 $ 5,764 8/31/02 $ 4,491 $ 5,703 9/30/02 $ 4,240 $ 5,448 10/31/02 $ 4,074 $ 5,069 11/30/02 $ 4,207 $ 5,274 12/31/02 $ 4,125 $ 5,138
NET ASSET VALUE PER SHARE ($) 12/31/01 12/31/02 --------------------------------------------------------------- Class B 5.73 4.95
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 SHARES. Total return performance includes changes in share price and reinvestment of all distributions. The MSCI (Morgan Stanley Capital International) Japan Index is an unmanaged index that tracks the performance of Japanese stocks. Indexes are not investments, do not incur fees or expenses and are not professionally managed. It is not possible to invest directly in an index. Securities in the fund may not match those in an index. MUTUAL FUND PERFORMANCE CHANGES OVER TIME. CURRENT RETURNS FOR THE FUND MAY BE DIFFERENT THAN THAT SHOWN. Performance numbers reflect all fund expenses, but do not include any insurance charges imposed by your insurance company's separate accounts. If performance included the effect of these additional charges, it would be lower. (1) Index performance is from May 31, 2000. 96 INVESTMENT PORTFOLIO Liberty Newport Japan Opportunities Fund, Variable Series / December 31, 2002
SHARES VALUE ----------- ----------- COMMON STOCKS--93.3% CONSUMER DISCRETIONARY--17.9% AUTOMOBILES & COMPONENTS--5.3% AUTOMOBILE MANUFACTURERS--4.1% Honda Motor Co., Ltd. 600 $ 22,179 Toyota Motor Corp. 800 21,489 ----------- 43,668 ----------- AUTO PARTS & EQUIPMENT--1.2% F.C.C. Co., Ltd. 600 12,681 ----------- CONSUMER DURABLES & APPAREL--3.1% CONSUMER ELECTRONICS--3.1% Sony Corp. 800 33,412 ----------- HOTELS, RESTAURANTS & LEISURE--1.5% RESTAURANTS--1.5% Plenus Co., Ltd. 300 10,483 Saint Marc Co., Ltd. 200 5,355 ----------- 15,838 ----------- RETAILING--8.0% APPAREL RETAIL--2.7% Marui Co., Ltd. 1,000 9,784 Shimamura Co., Ltd. 300 19,097 ----------- 28,881 ----------- COMPUTER & ELECTRONICS RETAIL--3.6% Yamada Denki Co., Ltd. 1,800 37,967 ----------- GENERAL MERCHANDISE STORES--1.7% Don Quijote Co., Ltd. 200 18,340 ----------- CONSUMER STAPLES--12.6% FOOD & DRUG RETAILING--8.5% DRUG RETAIL--1.0% Sugi Pharmacy Co., Ltd. 300 11,064 ----------- FOOD RETAIL--7.5% C Two-Network Co., Ltd. 600 12,706 Katokichi Co., Ltd. 900 13,489 Ito En, Ltd. 400 13,540 Seven-Eleven Japan Co., Ltd. 1,000 30,482 Yaoko Co., Ltd. 700 9,313 ----------- 79,530 ----------- HOUSEHOLD & PERSONAL PRODUCTS--4.1% HOUSEHOLD PRODUCTS--4.1% Kao Corp. 2,000 43,870 ----------- ENERGY--1.5% OIL & GAS REFINING & MARKETING--1.5% Tokyo Gas Co., Ltd. 5,000 15,662 ----------- FINANCIALS--3.6% DIVERSIFIED FINANCIALS--1.7% CONSUMER FINANCE--1.7% Aeon Credit Service Co., Ltd. 300 10,888 Aiful Corp. 200 7,511 ----------- 18,399 ----------- REAL ESTATE--1.9% REAL ESTATE MANAGEMENT & DEVELOPMENT--1.9% Leopalace 21 Corp. 1,000 $ 4,446 Mitsubishi Estate Co. 2,000 15,224 ----------- 19,670 ----------- HEALTH CARE--12.0% HEALTH CARE EQUIPMENT & SERVICES--3.8% HEALTH CARE EQUIPMENT--3.8% Hogy Medical Co., Ltd. 200 8,252 Nipro Corp. 1,000 15,999 Olympus Optical Co., Ltd. 1,000 16,285 ----------- 40,536 ----------- PHARMACEUTICALS & BIOTECHNOLOGY--8.2% PHARMACEUTICALS--8.2% Fujisawa Pharmaceutical Co., Ltd 2,000 45,722 Takeda Chemical Industries Ltd. 1,000 41,765 ----------- 87,487 ----------- INDUSTRIALS--12.6% CAPITAL GOODS--2.4% INDUSTRIAL MACHINERY--2.4% Fanuc Ltd. 200 8,841 SMC Corp. 100 9,380 Union Tool Co. 300 7,604 ----------- 25,825 ----------- COMMERCIAL SERVICES & SUPPLIES--6.6% DIVERSIFIED COMMERCIAL SERVICES--6.6% Nichii Gakkan Co. 400 20,680 Park24 Co., Ltd. 1,000 15,662 Secom Co., Ltd. 1,000 34,271 ----------- 70,613 ----------- TRANSPORTATION--3.6% AIR FREIGHT & COURIERS--1.2% Yamato Transport Co., Ltd. 1,000 13,052 ----------- RAILROADS--2.4% East Japan Railway Co. 5 24,798 ----------- INFORMATION TECHNOLOGY--28.8% SOFTWARE & SERVICES--2.2% APPLICATIONS SOFTWARE--2.2% Funai Electric Co., Ltd. 200 23,375 ----------- TECHNOLOGY HARDWARE & EQUIPMENT--26.6% ELECTRONIC EQUIPMENT & INTRUMENTS--12.1% Hirose Electric Co., Ltd. 400 30,515 Hoya Corp. 200 13,995 Keyence Corp. 200 34,776 Mabuchi Motor Co. 100 9,195 Nidec Corp. 200 12,462 Nitto Denko Corp. 1,000 28,461 ----------- 129,404 -----------
See Notes to Investment Portfolio. 97
SHARES VALUE ----------- ----------- NETWORKING EQUIPMENT--1.6% Net One Systems Co., Ltd. 4 $ 17,009 ----------- OFFICE ELECTRONICS--8.1% Canon, Inc. 1,000 37,639 Ricoh Co., Ltd. 3,000 49,183 ----------- 86,822 ----------- SEMICONDUCTORS--3.6% Rohm Co., Ltd. 300 38,169 ----------- TELECOMMUNICATIONS EQUIPMENT--1.2% Japan Telecom Co., Ltd. 4 12,395 ----------- MANUFACTURING--2.2% CHEMICALS - 2.2% Shin-Etsu Chemical Co., Ltd. 700 22,929 ----------- TELECOMMUNICATION SERVICES--2.1% WIRELESS TELECOMMUNICATION SERVICES--2.1% KDDI Corp. 7 22,693 ----------- TOTAL COMMON STOCKS--93.3% (cost of $1,407,075) (a) 994,089 ----------- OTHER ASSETS & LIABILITIES, NET--6.7% 71,337 ----------- NET ASSETS--100.0% $ 1,065,426 ===========
NOTES TO INVESTMENT PORTFOLIO: (a) Cost for both financial statement and federal income tax purposes is the same. See Notes to Financial Statements. 98 STATEMENT OF ASSETS AND LIABILITIES Liberty Newport Japan Opportunities Fund, Variable Series / December 31, 2002 ASSETS: Investments, at cost $ 1,407,075 ----------- Investments, at value $ 994,089 Cash 86,882 Receivable for: Investments sold 3,282 Dividends 290 Expense reimbursement due from Manager/Distributor 5,087 Deferred Trustees' compensation plan 630 ----------- TOTAL ASSETS 1,090,260 ----------- LIABILITIES: Payable for: Fund shares repurchased 427 Management fee 1,083 Transfer agent fee 625 Pricing and bookkeeping fees 880 Trustees' fee 101 Audit fee 16,650 Deferred Trustees' fee 630 Other liabilities 4,438 ----------- TOTAL LIABILITIES 24,834 ----------- NET ASSETS $ 1,065,426 =========== COMPOSITION OF NET ASSETS: Paid-in capital $ 2,504,778 Accumulated net investment loss (1,253) Accumulated net realized loss (1,025,181) Net unrealized appreciation(depreciation) on: Investments (412,986) Foreign currency translations 68 ----------- NET ASSETS $ 1,065,426 =========== CLASS A: Net assets $ 41,304 Shares outstanding 8,333 =========== Net asset value per share $ 4.96 =========== CLASS B: Net assets $ 1,024,122 Shares outstanding 206,851 =========== Net asset value per share $ 4.95 ===========
See Notes to Financial Statements. 99 STATEMENT OF OPERATIONS Liberty Newport Japan Opportunities Fund, Variable Series For the Year Ended December 31, 2002 INVESTMENT INCOME: Dividends $ 4,888 Interest 2,189 ----------- Total Investment Income (net of foreign taxes withheld of $863) 7,077 ----------- EXPENSES: Management fee 13,964 Distribution fee--Class B 2,796 Pricing and bookkeeping fees 10,674 Transfer agent fee 7,500 Trustees' fee 5,800 Custody fee 6,870 Audit fee 15,125 Other expenses 4,829 ----------- Total Expenses 67,558 Fees and expenses waived or reimbursed by Manager (43,184) Fees reimbursed by Distributor--Class B (2,796) Custody earnings credit (54) ----------- Net Expenses 21,524 ----------- Net Investment Loss (14,447) ----------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, AND FOREIGN CURRENCY: Net realized loss on: Investments (459,796) Foreign currency transactions (1,032) ----------- Net realized loss (460,828) ----------- Net change in unrealized appreciation/depreciation on: Investments 308,625 Foreign currency translations 88 ----------- Net change in unrealized appreciation/depreciation 308,713 ----------- Net Loss (152,115) ----------- Net Decrease in Net Assets from Operations $ (166,562) ===========
See Notes to Financial Statements. 100 STATEMENTS OF CHANGES IN NET ASSETS Liberty Newport Japan Opportunities Fund, Variable Series
YEAR ENDED DECEMBER 31, -------------------------- INCREASE (DECREASE) IN NET ASSETS: 2002 2001 ---------------------------------- ----------- ----------- OPERATIONS: Net investment loss $ (14,447) $ (15,266) Net realized loss on investments and foreign currency transactions (460,828) (463,128) Net change in unrealized appreciation/depreciation on investments and foreign currency translations 308,713 (110,782) ----------- ----------- Net Decrease from Operations (166,562) (589,176) ----------- ----------- SHARE TRANSACTIONS: Class B: Subscriptions 14,071 511,014 Redemptions (14,289) (570,946) ----------- ----------- Net Decrease from Share Transactions (218) (59,932) ----------- ----------- Total Decrease in Net Assets (166,780) (649,108) ----------- ----------- NET ASSETS: Beginning of period 1,232,206 1,881,314 ----------- ----------- End of period (including accumulated net investment loss of $(1,253) and $(1,477), respectively) $ 1,065,426 $ 1,232,206 =========== =========== CHANGES IN SHARES: Class B: Subscriptions 2,915 61,941 Redemptions (2,863) (69,476) ----------- ----------- Net Increase (Decrease) 52 (7,535) ----------- -----------
See Notes to Financial Statements. 101 NOTES TO FINANCIAL STATEMENTS Liberty Newport Japan Opportunities Fund, Variable Series / December 31, 2002 NOTE 1. ORGANIZATION AND ACCOUNTING POLICIES ORGANIZATION--Liberty Newport Japan Opportunities Fund, Variable Series (the "Fund"), a series of Liberty Variable Investment Trust (the "Trust"), is a diversified portfolio of a Massachusetts business trust, registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The Fund's investment goal is to seek capital appreciation. The Fund's capitalization consists of an unlimited number of shares of beneficial interest without par value that represent a separate series of the Trust. The Fund offers two classes of shares: Class A and Class B. Each share of a class represents an equal proportionate beneficial interest in that share class and, when issued and outstanding, is fully paid and nonassessable. Shareholders would be entitled to share proportionally in the net assets of their share class available for distribution to shareholders upon liquidation of the Fund. Shares of the Fund are available and are being marketed exclusively as a pooled funding vehicle for variable annuity contracts ("VA contracts") and Variable Life Insurance Policies ("VLI Policies") offered by the separate accounts of certain life insurance companies ("Participating Insurance Companies"). The Participating Insurance Companies and their separate accounts own all the shares of the Fund. Liberty Advisory Services Corp. (the "Manager") ("LASC") provides investment management and advisory services to the Fund pursuant to its Management Agreement with the Fund. LASC has appointed Newport Fund Management, Inc. ("Newport"), an affiliate of LASC, as Sub-Advisor to the Fund. LASC has delegated various administrative matters to Colonial Management Associates, Inc. ("Colonial"). Colonial also provides pricing and bookkeeping services to the Fund. Liberty Funds Distributor, Inc. ("LFD"), an affiliate of the Manager, serves as the principal underwriter of the Fund. The Manager, Colonial, Newport and LFD are wholly-owned indirect subsidiaries of FleetBoston Financial Corporation ("FleetBoston"). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. SECURITY VALUATION AND TRANSACTIONS--Equity securities generally are valued at the last sale price or, in the case of unlisted or listed securities for which there were no sales during the day, at the current quoted bid price. Forward currency contracts are valued based on the weighted value of exchange-traded contracts with similar durations. Short-term obligations with a maturity of 60 days or less are valued at amortized cost. The values of all assets and liabilities quoted in foreign currencies are translated into U.S. dollars at that day's exchange rates. 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. Generally, trading in foreign securities is substantially completed each day at various times prior to the close of the New York Stock Exchange ("NYSE"). The values of such securities used in computing the net asset value of the Fund's shares are determined as of such times. Foreign currency exchange rates are also generally determined prior to the close of the NYSE. Occasionally, events affecting the values of such securities and such exchange rates may occur between the times at which they are determined and the close of the customary trading session of the NYSE which would not be reflected in the computation of the Fund's net asset value. If events materially affecting the value of such securities and such exchange rates occur during such period, then these securities will be valued at their fair value as determined in good faith by or under the supervision of the Board of Trustees. 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. DETERMINATION OF CLASS NET ASSET VALUES AND FINANCIAL HIGHLIGHTS--All income, expenses (other than the Class B distribution fee), 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. The per share data was calculated using average shares outstanding during the period. In addition, Class B net investment income per share data and ratios reflect the distribution fee applicable to Class B shares only. 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. DISTRIBUTIONS TO SHAREHOLDERS--The Fund intends to distribute as income dividends or capital gains distributions, 102 at least annually, substantially all of its net investment income and net profits realized from the sale of investments. All dividends and distributions are reinvested in additional shares of the Fund at net asset value as of the record date of the distribution. Income and capital gain distributions are determined in accordance with federal income tax regulations. FOREIGN CURRENCY TRANSACTIONS--Net realized and unrealized gains (losses) on foreign currency transactions includes gains (losses) arising from the fluctuations in exchange rates between trade and settlement dates on securities transactions, gains (losses) arising from the disposition of foreign currency, and currency gains (losses) between the accrual and payment dates on dividends, interest income and foreign withholding taxes. The Fund does not distinguish that portion of gains (losses) on investments which is due to changes in foreign exchange rates from that which is due to changes in market prices of the investments. Such fluctuations are included with the net realized and unrealized gains (losses) on investments. FORWARD CURRENCY CONTRACTS--The Fund may enter into forward currency contracts to purchase or sell foreign currencies at predetermined exchange rates in connection with the settlement of purchases and sales of securities. The Fund may also enter into forward currency contracts to hedge certain other foreign currency denominated assets. The contracts are used to minimize the exposure to foreign exchange rate fluctuations during the period between trade and settlement date of the contracts. All contracts are marked-to-market daily, resulting in unrealized gains (losses) which become realized at the time the forward currency contracts are closed or mature. Realized and unrealized gains (losses) arising from such transactions are included in net realized and unrealized gains (losses) on foreign currency transactions. Forward currency contracts do not eliminate fluctuations in the prices of the Fund's portfolio securities. While the maximum potential loss from such contracts is the aggregate face value in U.S. dollars at the time the contract was opened, exposure is typically limited to the change in value of the contract (in U.S. dollars) over the period it remains open. Risks may also arise if counterparties fail to perform their obligations under the contracts. OTHER--Interest income is recorded on the accrual basis. Corporate actions and dividend income are recorded on the ex-date (except for certain foreign securities which are recorded as soon after ex-date as the Fund becomes aware of such), net of non-reclaimable tax withholdings. Where a high level of uncertainty as to collection exists, income on securities is recorded net of all tax withholdings with any rebates recorded when received. The Fund's custodian takes possession through the federal book-entry system of securities collateralizing repurchase agreements. Collateral is marked-to-market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund. The Fund may experience costs and delays in liquidating the collateral if the issuer defaults or enters bankruptcy. NOTE 2. FEDERAL TAX INFORMATION Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from generally accepted accounting principles. These differences are primarily due to differing treatments for net operating losses. 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 December 31, 2002, permanent items identified and reclassified among the components of net assets are as follows:
ACCUMULATED NET ACCUMULATED INVESTMENT LOSS NET REALIZED LOSS PAID-IN CAPITAL --------------- ----------------- --------------- $ 14,671 $ 1,031 $ (15,702)
Net investment income, net realized gains (losses) and net assets were not affected by this reclassification. As of December 31, 2002, the components of distributable earnings on a tax basis were as follows:
UNREALIZED DEPRECIATION -------------- $ (412,918)
The following capital loss carryforwards are available to reduce taxable income arising from future net realized gains on investments, if any, to the extent permitted by the Internal Revenue Code:
YEAR OF CAPITAL LOSS EXPIRATION CARRYFORWARD ---------- ------------ 2008 $ 26,592 2009 305,766 2010 582,953 --------- $ 915,311 =========
Under current tax rules, certain capital losses realized after October 31 may be deferred and treated as occurring on the first day of the following fiscal year. As of December31, 2002, for federal income tax purposes, post October losses of $110,093 were deferred to January 1, 2003. 103 NOTE 3. FEES AND COMPENSATION PAID TO AFFILIATES MANAGEMENT AND SUB-ADVISORY FEES--The Manager receives a monthly fee equal to 1.20% annually of the Fund's average daily net assets. The Manager, out of the management fee it receives, pays Newport a monthly sub-advisory fee equal to 1.00% annually of the Fund's average daily net assets. PRICING AND BOOKKEEPING FEES--Colonial is responsible for providing pricing and bookkeeping services to the Fund under a Pricing and Bookkeeping Agreement. Under a separate agreement (the "Outsourcing Agreement"), Colonial has delegated those functions to State Street Bank & Trust Company ("State Street"). Colonial pays fees to State Street under the Outsourcing Agreement. Under its pricing and bookkeeping agreement with the Fund, Colonial 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. The Fund also pays out-of-pocket costs for pricing services. TRANSFER AGENT FEE--Liberty Funds Services, Inc. (the "Transfer Agent"), an affiliate of the Manager, provides shareholder services for an annual rate of $7,500. DISTRIBUTION FEE--The Fund has adopted a 12b-1 plan, which requires it to pay LFD a monthly distribution fee equal to 0.25% annually of Class B average daily net assets as of the 20th of each month. EXPENSE LIMITS--The Manager and LFD have voluntarily agreed to reimburse all expenses, including management fees and distribution fees, but excluding interest, taxes, brokerage and extraordinary expenses incurred by the Fund in excess of 1.85% annually of the Fund's average daily net assets. LFD will first reimburse the Class B distribution fee up to 0.25% annually to reach the 1.85% limit on Class B expenses. If additional reimbursement is needed to meet the limit for each class, the Manager will then reimburse other expenses to the extent necessary. If additional reimbursement is still needed to reach the expense limit, the Manager will then waive a portion of its management fee to reach the expense limit. This arrangement may be terminated or modified by the Manager or LFD at any time OTHER--The Fund pays no compensation to its officers, all of whom are employees of Colonial 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 $54 of custody fees were reduced by balance credits for the year ended December31, 2002. The Fund could have invested a portion of the assets utilized in connection with the expense offset arrangement in an income-producing asset if it had not entered into such an agreement. NOTE 4. PORTFOLIO INFORMATION INVESTMENT ACTIVITY--For the year ended December 31, 2002, purchases and sales of investments, other than short-term obligations, were $454,766 and $379,490, respectively. Unrealized appreciation (depreciation) at December 31, 2002, based on cost of investments for federal income tax purposes, was:
Gross unrealized appreciation $ 22,819 Gross unrealized depreciation (435,805) ---------- Net unrealized depreciation $ (412,986) ==========
OTHER--There are certain additional risks involved when investing in foreign securities that are not inherent with investments in domestic securities. These risks may involve foreign currency exchange rate fluctuations, adverse political and economic developments and the possible prevention of foreign currency exchange or the imposition of other foreign governmental laws or restrictions. In addition, concentration of investments in a single region or country may result in greater volatility. NOTE 5. FUND LIQUIDATION The Board of Trustees has decided to terminate the Fund. The effective date of termination for the Fund will be February 21, 2003. 104 FINANCIAL HIGHLIGHTS Liberty Newport Japan Opportunities Fund, Variable Series--Class B Shares Selected data for a share outstanding throughout each period is as follows:
YEAR ENDED PERIOD DECEMBER 31, ENDED ------------------------- DECEMBER 31, 2002 2001 2000 (a) ---------- ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 5.73 $ 8.44 $ 12.00 ---------- ---------- ---------- INCOME FROM INVESTMENT OPERATIONS: Net investment loss (b) (0.07) (0.07) (0.07) Net realized and unrealized loss on investments and foreign currency (0.71) (2.64) (3.49) ---------- ---------- ---------- Total from Investment Operations (0.78) (2.71) (3.56) ---------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 4.95 $ 5.73 $ 8.44 ========== ========== ========== Total return (c)(d)(e) (13.61)% (32.11)% (29.67)%(f) RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA: Expenses (g) 1.85% 1.85% 1.85%(h) Net investment loss (g) (1.25)% (1.00)% (1.07)%(h) Waiver/reimbursement 3.96% 3.18% 2.90%(h) Portfolio turnover rate 36% 22% 16%(f) Net assets, end of period (000's) $ 1,024 $ 1,184 $ 1,811
(a) For the period from commencement of operations May 30, 2000 to December 31, 2000. (b) Per share data was calculated using average shares outstanding during the period. (c) Total return at net asset value assuming all distributions reinvested. (d) Had the Manager and/or Distributor not waived or reimbursed a portion of expenses, total return would have been reduced. (e) Total return figure does not include any insurance company charges associated with a variable annuity. If included, total return would be reduced. (f) Not annualized. (g) The benefits derived from custody credits and directed brokerage arrangements, if applicable, had an impact of less than 0.01%. (h) Annualized. 105 REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of Liberty Variable Investment Trust and the Class B Shareholders of Liberty Newport Japan Opportunities Fund, Variable Series In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio, and the related statements of operations and of changes in net assets and the Class B financial highlights present fairly, in all material respects, the financial position of Liberty Newport Japan Opportunities Fund, Variable Series (the "Fund") (a series of Liberty Variable Investment Trust) at December 31, 2002, and the results of its operations, the changes in its net assets and the Class B financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and the Class B financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2002 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts February 12, 2003 106 PORTFOLIO MANAGER'S DISCUSSION Liberty S&P 500 Index Fund, Variable Series / December 31, 2002 Liberty S&P 500 Index Fund, Variable Series seeks capital appreciation by matching the performance of a benchmark index that measures the investment returns of stocks of large US companies. Tom O'Brien, a principal of SSgA Funds Management, Inc., is the portfolio manager of the fund. The S&P 500 Index fell 22.09% for the 12-month period ended December 31, 2002, its worst year since 1974 and its third consecutive year of loss. Such an event has not been seen since 1939-1941 amid the turmoil of World War II. Overall, concerns about the economy, war with Iraq and nuclear proliferation in North Korea added to the uncertainty that dominated 2002. These issues could continue to weigh on the markets until they are resolved. Large-cap stocks, as measured by the S&P 500 Index, underperformed mid-cap and small-cap stocks by over seven percentage points in 2002. The S&P MidCap 400 Index returned negative 14.51% and the S&P SmallCap 600 Index returned negative 14.63%. Value stocks edged out growth stocks in 2002, with the S&P 500/Barra Value Index returning negative 20.86% and S&P 500/Barra Growth Index returning negative 23.59%. SECTOR DISAPPOINTMENTS All ten economic sectors posted losses for the fiscal year. All but two of these losses were in double digits. Telecommunications and technology were the worst performers in 2002, with declines of over 34% and 37%, respectively. And because technology stocks have a fairly large weighting in the index, they were responsible for 6% of the negative 22.09% loss in the S&P 500 for 2002. The second biggest detractor was the consumer discretionary sector. The sector with the largest weighting in the index--financials--was also one of the best performers. Financial stocks accounted for about 20% of the S&P 500 and declined only 2.8% for the year. The largest individual contributor to the S&P 500's decline in 2002 was General Electric (2.9% of net assets). The stock, which has a substantial weight in the index, declined 39% and subtracted 1.4% from the index's return. Other stocks that had a significant impact on the S&P's performance in 2002 included Intel (down 50%), AOL Time Warner (down 59%) and Tyco (down 71%) (1.2%, 0.7% and 0.4% of net assets, respectively). These stocks constituted 0.95%, 0.74% and 0.82%, respectively, of the index's negative return in 2002. FOCUS ON COST-EFFECTIVE EXECUTION Our focus on cost-effective trade execution is the hallmark of our management style. Unlike actively managed funds where the portfolio managers spend time researching which stocks to include or exclude from a fund, we concentrate on trading in a low-cost manner when buying the stocks listed in the S&P 500 Index. We manage the fund with a full replication investment strategy. This approach means that the fund generally holds each of the 500 securities included in the S&P 500 Index in approximately the same weighting as the company's representation in the index. A full replication strategy tends to match the performance of the index more closely than other methods. Of course, the fund's return can diverge from the index: the fund incurs trading costs associated with seeking to maintain the appropriate weight of each security in the index. In addition, the fund may be required to sell securities to meet redemption demand or buy securities to invest new monies that come into the fund. ---------- Economic and market conditions can frequently change. There is no assurance that the trends described here will continue or commence. The primary risks involved with investing in the fund include equity risk, market risk and tracking error risk. Unlike the S&P 500 Index, the fund incurs administrative expenses and transaction costs in trading stocks. The composition of the S&P 500 Index and the stocks held by the fund may occasionally diverge. Holdings are disclosed as of December 31, 2002, and are subject to change. 107 PERFORMANCE INFORMATION Liberty S&P 500 Index Fund, Variable Series / December 31, 2002 AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 2002 (%)
1-YEAR LIFE --------------------------------------- Class B (5/30/00) -22.75 -15.65 S&P 500 Index(1) -22.09 -15.76
Inception date of share class is in parentheses. [CHART] VALUE OF A $10,000 INVESTMENT, 5/30/00 - 12/31/02 CLASS B: $6,432
CLASS B SHARES S&P 500 INDEX 5/30/00 $ 10,000 $ 10,000 6/29/00 $ 10,225 $ 10,246 7/29/00 $ 10,084 $ 10,086 8/29/00 $ 10,725 $ 10,713 9/29/00 $ 10,217 $ 10,147 10/29/00 $ 9,859 $ 10,104 11/29/00 $ 9,593 $ 9,308 12/29/00 $ 9,464 $ 9,354 1/29/01 $ 9,790 $ 9,686 3/1/01 $ 8,936 $ 8,803 4/1/01 $ 8,351 $ 8,246 5/1/01 $ 9,113 $ 8,886 6/1/01 $ 9,079 $ 8,946 7/1/01 $ 8,828 $ 8,728 8/1/01 $ 8,770 $ 8,643 9/1/01 $ 8,184 $ 8,102 10/1/01 $ 7,515 $ 7,449 11/1/01 $ 7,849 $ 7,591 12/1/01 $ 8,259 $ 8,173 1/1/02 $ 8,322 $ 8,245 2/1/02 $ 8,137 $ 8,125 3/1/02 $ 8,213 $ 7,968 4/1/02 $ 8,322 $ 8,267 5/1/02 $ 7,884 $ 7,766 6/1/02 $ 7,758 $ 7,710 7/1/02 $ 7,051 $ 7,161 8/1/02 $ 6,437 $ 6,603 9/1/02 $ 6,673 $ 6,646 10/1/02 $ 6,176 $ 5,924 11/1/02 $ 6,571 $ 6,445 12/1/02 $ 6,841 $ 6,824 12/31/02 $ 6,432 $ 6,422
NET ASSET VALUE PER SHARE ($) 12/31/01 12/31/02 -------------------------------------------------------- Class B 9.89 7.57
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 SHARES. Total return performance includes changes in share price and reinvestment of all distributions. The S&P (Standard & Poor's) 500 Index is an unmanaged index that tracks the performance of 500 widely held, large-capitalization US stocks. Indexes are not investments, do not incur fees or expenses and are not professionally managed. It is not possible to invest directly in an index. Securities in the fund may not match those in the index. MUTUAL FUND PERFORMANCE CHANGES OVER TIME. CURRENT RETURNS FOR THE FUND MAY BE DIFFERENT THAN THAT SHOWN. Performance numbers reflect all fund expenses, but do not include any insurance charges imposed by your insurance company's separate accounts. If performance included the effect of these additional charges, it would be lower. (1) Index performance is from May 31, 2000. 108 INVESTMENT PORTFOLIO Liberty S&P 500 Index Fund, Variable Series / December 31, 2002
SHARES VALUE ------------ ------------ COMMON STOCKS--97.8% CONSUMER DISCRETIONARY--13.1 % AUTO PARTS & EQUIPMENT--0.2% Dana Corp. 473 $ 5,562 Delphi Automotive Systems Corp. 1,895 15,255 Johnson Controls, Inc. 304 24,372 Visteon Corp. 346 2,408 ------------ 47,597 ------------ AUTOMOBILE MANUFACTURERS--0.4 % Ford Motor Co. 6,312 58,702 General Motors Corp. 1,937 71,398 ------------ 130,100 ------------ MOTORCYCLE MANUFACTURERS--0.2 % Harley-Davidson, Inc. 1,030 47,586 ------------ TIRES & RUBBER--0.0% Cooper Tire & Rubber Co. 200 3,068 Goodyear Tire & Rubber Co. 531 3,616 ------------ 6,684 ------------ CONSUMER DURABLES & APPAREL--1.1% APPAREL & ACCESSORIES--0.1% Jones Apparel Group, Inc. 439 15,558 Liz Claiborne, Inc. 414 12,275 VF Corp. 434 15,646 ------------ 43,479 ------------ FOOTWEAR--0.2% Nike Inc., Class B 930 41,357 Reebok International Ltd. 260 7,644 ------------ 49,001 ------------ HOMEBUILDING--0.1% Centex Corp. 214 10,743 KB Home Corp. 150 6,428 Pulte Home Corp. 223 10,675 ------------ 27,846 ------------ HOUSE FURNISHINGS--0.1% Leggett & Platt, Inc. 716 16,067 ------------ HOUSEHOLD APPLIANCES--0.2% Black & Decker Corp. 278 11,923 Maytag Corp. 251 7,154 Snap-On, Inc. 250 7,028 Stanley Works 358 12,380 Whirlpool Corp. 216 11,280 ------------ 49,765 ------------ HOUSEWARES & SPECIALTIES--0.2% American Greetings Corp., Class A 257 4,061 Fortune Brands, Inc. 496 23,069 Newell Rubbermaid, Inc. 950 28,814 Tupperware Corp. 150 2,262 ------------ 58,206 ------------ LEISURE PRODUCTS--0.1% Brunswick Corp. 281 5,581 Hasbro, Inc. 537 6,202 Mattel, Inc. 1,565 29,970 ------------ 41,753 ------------ PHOTOGRAPHIC EQUIPMENT--0.1% Eastman Kodak Co. 1,062 $ 37,212 ------------ HOTELS, RESTAURANTS & LEISURE--1.0% CASINOS & GAMING--0.1% Harrah's Entertainment, Inc. (a) 443 17,543 International Game Technology, Inc. (a) 287 21,789 ------------ 39,332 ------------ HOTELS--0.4% Carnival Corp. 2,008 50,100 Hilton Hotels Corp. 1,361 17,298 Marriott International, Inc., Class A 845 27,775 Starwood Hotels & Resorts Worldwide, Inc. 669 15,882 ------------ 111,055 ------------ RESTAURANTS--0.5% Darden Restaurants, Inc. 571 11,677 McDonald's Corp. 4,469 71,862 Starbucks Corp. (a) 1,341 27,330 Wendy's International, Inc. 447 12,100 Yum! Brand, Inc. 978 23,687 ------------ 146,656 ------------ MEDIA--4.0% ADVERTISING--0.2% Interpublic Group of Cos., Inc. 1,309 18,431 Omnicom Group, Inc. 655 42,313 TMP Worldwide, Inc. 400 4,524 ------------ 65,268 ------------ BROADCASTING & CABLE--1.0% Clear Channel Communications, Inc. (a) 2,182 81,367 Comcast Corp., Special Class A 8,062 190,021 Univision Communications, Class A (a) 765 18,743 ------------ 290,131 ------------ MOVIES & ENTERTAINMENT--2.0% AOL Time Warner, Inc. (a) 15,611 204,504 The Walt Disney Co. 7,153 116,665 Viacom, Inc., Class B (a) 6,147 250,552 ------------ 571,721 ------------ PUBLISHING & PRINTING--0.8% Dow Jones & Co., Inc. 285 12,321 Gannett Co., Inc. 924 66,343 Knight-Ridder, Inc. 280 17,710 McGraw-Hill Cos., Inc. 677 40,918 Meredith Corp. 157 6,454 New York Times Co., Class A 501 22,911 Tribune Co. 1,085 49,324 ------------ 215,981 ------------ RETAILING--6.2% APPAREL RETAIL--0.4% TJX Cos., Inc. 1,806 35,253 The Gap, Inc. 3,052 47,367 The Limited, Inc. 1,880 26,188 ------------ 108,808 ------------
See Notes to Investment Portfolio. 109
SHARES VALUE ------------ ------------ COMPUTER & ELECTRONICS RETAIL--0.4% Best Buy Co., Inc. (a) 1,130 $ 27,290 Circuit City Stores, Inc. 672 4,986 eBay, Inc. (a) 1,066 72,296 RadioShack Corp. 605 11,338 ------------ 115,910 ------------ DEPARTMENT STORES--0.6% American Standard Cos., Inc 250 17,785 Dillard Department Stores, Inc. 322 5,107 Federated Department Stores, Inc. (a) 720 20,707 J. C. Penney Co., Inc. 881 20,272 Kohl's Corp. (a) 1,164 65,126 May Department Stores Co. 992 22,796 Nordstrom, Inc. 410 7,778 Sears, Roebuck & Co. 1,130 27,064 ------------ 186,635 ------------ GENERAL MERCHANDISE STORES--3.3% Big Lots, Inc. (a) 401 5,305 Costco Wholesale Corp. (a) 1,550 43,493 Dollar General Corp. 1,070 12,786 Family Dollar Stores, Inc. 582 18,164 Target Corp. 3,197 95,910 Wal-Mart Stores, Inc. 15,367 776,187 ------------ 951,845 ------------ HOME IMPROVEMENT RETAIL--1.1% Home Depot, Inc. 8,081 193,621 Lowe's Companies, Inc. 2,728 102,300 Sherwin Williams Co. 518 14,634 ------------ 310,555 ------------ SPECIALTY STORES--0.4% AutoZone, Inc. (a) 350 24,728 Bed Bath & Beyond, Inc. (a) 1,023 35,324 Office Depot, Inc. (a) 1,012 14,937 Staples, Inc. (a) 1,683 30,799 Tiffany & Co. (a) 503 12,027 Toys R Us, Inc. (a) 662 6,620 ------------ 124,435 ------------ CONSUMER STAPLES--9.5% FOOD & DRUG RETAILING--1.2% DRUG RETAIL--0.5% CVS Corp. 1,394 34,808 Walgreen Co. 3,560 103,916 ------------ 138,724 ------------ FOOD DISTRIBUTORS--0.3% Supervalu, Inc. 412 6,802 Sysco Corp. 2,265 67,474 ------------ 74,276 ------------ FOOD RETAIL--0.4% Albertson's, Inc. 1,391 30,964 Kroger Corp. (a) 2,654 41,004 Safeway, Inc. (a) 1,562 36,488 Winn-Dixie Stores, Inc. 458 6,998 ------------ 115,454 ------------ FOOD, BEVERAGES & TOBACCO--5.6% AGRICULTURAL PRODUCTS--0.2% Archer Daniels Midland Co. 2,345 $ 29,078 Monsanto Co. 855 16,459 ------------ 45,537 ------------ BREWERS--0.6% Adolph Coors Co., Class B 129 7,901 Anheuser Busch Cos., Inc. 2,988 144,619 Brown-Forman Corp., Class B 231 15,098 ------------ 167,618 ------------ PACKAGED FOODS--1.3% Campbell Soup Co. 1,406 32,999 ConAgra Foods, Inc. 1,893 47,344 Del Monte Foods Co. (a) 1 6 General Mills, Inc. 1,298 60,941 Heinz (H.J.) Co. 1,240 40,759 Hershey Foods Corp. 460 31,022 Kellogg Co. 1,444 49,486 Sara Lee Corp. 2,750 61,903 Wm. Wrigley Jr. Co. 794 43,575 ------------ 368,035 ------------ SOFT DRINKS--2.4% Coca Cola Co. 8,598 376,764 Coca-Cola Enterprises, Inc. 1,510 32,797 PepsiCo, Inc. 6,026 254,418 The Pepsi Bottling Group, Inc. 1,032 26,522 ------------ 690,501 ------------ TOBACCO--1.1% Philip Morris Companies, Inc. 7,214 292,383 R.J. Reynolds Tobacco Holdings, Inc. 300 12,633 UST, Inc. 638 21,328 ------------ 326,344 ------------ HOUSEHOLD & PERSONAL PRODUCTS--2.7% HOUSEHOLD PRODUCTS--2.1% Clorox Co. 806 33,248 Colgate-Palmolive Co. 1,891 99,145 Kimberly Clark Corp. 1,782 84,592 Procter & Gamble Co. 4,512 387,761 ------------ 604,746 ------------ PERSONAL PRODUCTS--0.6% Alberto Culver Co., Class B 178 8,971 Avon Products, Inc. 829 44,658 The Gillette Co. 3,681 111,755 ------------ 165,384 ------------ ENERGY--5.9% INTEGRATED OIL & GAS--4.4% Amerada Hess Corp. 296 16,295 ChevronTexaco Corp. 3,727 247,771 Conoco, Inc., Class B 2,329 112,700 Exxon Mobil Corp. 23,425 818,470 Marathon Oil Corp. 1,115 23,738 Occidental Petroleum Corp. 1,300 36,985 ------------ 1,255,959 ------------
See Notes to Investment Portfolio. 110
SHARES VALUE ------------ ------------ OIL & GAS DRILLING--0.2% Nabors Industries, Inc. (a) 487 $ 17,176 Noble Drilling Corp. (a) 455 15,993 Rowan Companies, Inc. (a) 340 7,718 Transocean Sedco Forex, Inc. 1,137 26,378 ------------ 67,265 ------------ OIL & GAS EQUIPMENT & SERVICES--0.6% BJ Services 600 19,386 Baker Hughes, Inc. 1,187 38,210 Halliburton Co. 1,455 27,223 Schlumberger Ltd. 2,005 84,390 ------------ 169,209 ------------ OIL & GAS EXPLORATION & PRODUCTS--0.6% Anadarko Petroleum Corp. 876 41,960 Apache Corp. 486 27,697 Burlington Resources, Inc. 735 31,348 Devon Energy Corp. 553 25,383 EOG Resources, Inc. 392 15,649 Kerr McGee Corp. 339 15,018 Unocal Corp. 914 27,950 ------------ 185,005 ------------ OIL & GAS REFINING & MARKETING--0.1% Ashland Oil, Inc. 293 8,359 Sunoco, Inc. 319 10,584 ------------ 18,943 ------------ FINANCIALS--19.8% BANKS--7.5% AmSouth Bancorporation 1,193 22,906 BB&T Corp. 1,669 61,736 Bank One Corp. 4,031 147,333 Bank of America Corp. 5,199 361,694 Bank of New York Co., Inc. 2,475 59,301 Charter One Financial, Inc. 831 23,875 Comerica, Inc. 622 26,895 Fifth Third Bancorp 1,998 116,983 FleetBoston Financial Corp. 3,612 87,772 Golden West Financial Corp. 541 38,849 Huntington Bancshares, Inc. 861 16,109 KeyCorp 1,508 37,911 Mellon Financial Corp. 1,473 38,460 National City Corp. 2,119 57,891 North Fork Bancorporation, Inc. 547 18,456 Northern Trust Corp. 829 29,056 PNC Financial Services Group 991 41,523 Principal Financial Group, Inc. 1,200 36,156 Prudential Financial, Inc. 1,984 62,972 Regions Financial Corp. 784 26,154 SouthTrust Corp. 1,218 30,267 SunTrust Banks, Inc. 996 56,692 Synovus Financial Corp. 985 19,109 U.S. Bancorp 6,674 141,622 Union Planters Corp. 709 19,951 Wachovia Corp. 4,696 171,122 Washington Mutual, Inc. 3,329 114,950 Wells Fargo & Co. 5,921 $ 277,517 Zions Bancorporation 373 14,677 ------------ 2,157,939 ------------ DIVERSIFIED FINANCIALS--7.5% CONSUMER FINANCE--0.6% Capital One Financial Corp. 738 21,933 Countrywide Credit Industries, Inc. 447 23,088 Household International, Inc. 1,682 46,776 MBNA Corp. 4,433 84,306 Providian Financial Corp. 909 5,899 ------------ 182,002 ------------ DIVERSIFIED FINANCIAL SERVICES--6.9% Ambac Financial Group, Inc. 353 19,853 American Express Co. 4,562 161,267 Bear Stearns Cos., Inc. 351 20,849 Citigroup, Inc. 17,832 627,508 Fannie Mae 3,473 223,418 First Tennessee National Corp. 500 17,970 Franklin Resources, Inc. 909 30,979 Freddie Mac 2,434 143,728 Goldman Sachs Group, Inc. 1,656 112,774 Janus Capital Group, Inc. 700 9,149 J.P. Morgan Chase & Co. 6,945 166,680 Lehman Brothers Holdings, Inc. 847 45,137 Marshall & Ilsley Corp 754 20,645 Merrill Lynch & Co., Inc. 2,976 112,939 Moody's Corp. 513 21,182 Morgan Stanley Dean Witter & Co. 3,763 150,219 Schwab (Charles) Corp. 4,655 50,507 State Street Corp. 1,157 45,123 T. Rowe Price Group, Inc. 462 12,603 ------------ 1,992,530 ------------ INSURANCE--4.5% INSURANCE BROKERS--0.4% Aon Corp. 1,019 19,249 Marsh & McLennan Companies, Inc. 1,848 85,396 ------------ 104,645 ------------ LIFE & HEALTH INSURANCE--0.8% AFLAC, Inc. 1,780 53,614 Jefferson-Pilot Corp. 491 18,712 John Hancock Financial Services, Inc. 1,056 29,462 Lincoln National Corp. 617 19,485 MetLife, Inc. 2,454 66,356 Torchmark Corp. 473 17,279 UnumProvident Corp. 790 13,857 ------------ 218,765 ------------ MULTI-LINE INSURANCE--2.1% American International Group, Inc. 9,086 525,625 Hartford Financial Services Group, Inc. 864 39,252 Loews Corp. 616 27,387 MBIA, Inc. 500 21,930 ------------ 614,194 ------------
See Notes to Investment Portfolio. 111
SHARES VALUE ------------ ------------ PROPERTY & CASUALTY INSURANCE--1.2% Ace Ltd. 942 $ 27,638 Allstate Corp. 2,431 89,923 Chubb Corp. 606 31,633 Cincinnati Financial Corp. 539 20,239 MGIC Investment Corp. 359 14,827 SAFECO Corp. 534 18,514 St. Paul Companies, Inc. 754 25,674 The Progressive Corp. 769 38,165 Travelers Property Casualty Corp., Class B (a) 3,456 50,630 XL Capital Ltd., Class A 474 36,617 ------------ 353,860 ------------ REAL ESTATE--0.3% REAL ESTATE INVESTMENT TRUST--0.3% Equity Office Properties Trust 1,481 36,995 Equity Residential Properties Trust 972 23,892 Simon Property Group, Inc. 677 23,065 ------------ 83,952 ------------ HEALTH CARE--14.5% HEALTH CARE DISTRIBUTORS & SERVICES--0.6% AmerisourceBergen Corp. 375 20,366 Cardinal Health, Inc. 1,556 92,100 McKesson Corp. 1,049 28,354 Quest Diagnostics, Inc. (a) 338 19,232 Quintiles Transnational Corp. (a) 396 4,792 ------------ 164,844 ------------ HEALTH CARE EQUIPMENT--1.8% Applera Corp.--Applied Biosystems Group 691 12,120 Bard (C.R.), Inc. 172 9,976 Baxter International, Inc. 2,055 57,540 Becton, Dickinson & Co. 913 28,020 Biomet, Inc. 917 26,281 Boston Scientific Corp. (a) 1,430 60,804 Guidant Corp. 1,073 33,102 Medtronic Inc. 4,261 194,302 St. Jude Medical, Inc. 648 25,739 Stryker Corp. 697 46,783 Zimmer Holdings, Inc. (a) 694 28,815 ------------ 523,482 ------------ HEALTH CARE FACILITIES--0.4% HCA, Inc. 1,792 74,368 Health Management Associates, Inc. (a) 805 14,410 HealthSouth Corp. (a) 1,217 5,111 Manor Care, Inc. (a) 358 6,662 Tenet Healthcare Corp. (a) 1,680 27,552 ------------ 128,103 ------------ HEALTH CARE SUPPLIES--0.0% Bausch & Lomb, Inc. 179 6,444 ------------ MANAGED HEALTH CARE--0.7% Aetna, Inc. (a) 520 21,382 Anthem, Inc. (a) 479 30,129 CIGNA Corp. 459 $ 18,874 Humana, Inc. 550 5,500 United Healthcare Corp. 1,047 87,425 Wellpoint Health Networks, Inc. 510 36,292 ------------ 199,602 ------------ PHARMACEUTICALS & BIOTECHNOLOGY--11.0% BIOTECHNOLOGY--1.1% Amgen, Inc. 4,493 217,192 Biogen, Inc. (a) 493 19,750 Chiron Corp. (a) 687 25,831 Genzyme Corp. (a) 766 22,651 MedImmune, Inc. (a) 837 22,741 ------------ 308,165 ------------ PHARMACEUTICALS--9.9% Abbott Laboratories 5,457 218,280 Allergan, Inc. 461 26,563 Bristol-Myers Squibb Co. 6,745 156,147 Eli Lilly & Co. 3,920 248,920 Forest Laboratories, Inc. (a) 635 62,370 Johnson & Johnson 10,346 555,684 King Pharmaceuticals, Inc. (a) 854 14,680 Merck & Co., Inc. 7,797 441,388 Pfizer, Inc. 21,458 655,971 Pharmacia Corp. 4,517 188,811 Schering-Plough Corp. 5,051 112,132 Watson Pharmaceuticals, Inc. (a) 362 10,234 Wyeth 4,650 173,910 ------------ 2,865,090 ------------ INDUSTRIALS--11.0% CAPITAL GOODS--7.2% AEROSPACE & DEFENSE--2.0% Boeing Co. 2,892 95,407 General Dynamics Corp. 687 54,527 Goodrich (B.F.) Co. 385 7,053 Honeywell International, Inc. 2,833 67,992 Lockheed Martin Corp. 1,571 90,725 Northrop Grumman Corp. 622 60,347 Raytheon Co. 1,415 43,511 Rockwell Collins, Inc. 581 13,514 United Technologies Corp. 1,635 101,272 ------------ 534,348 ------------ BUILDING PRODUCTS--0.1% Crane Co. 250 4,983 Masco Corp. 1,749 36,816 ------------ 41,799 ------------ CONSTRUCTION & ENGINEERING--0.0% Flour Corp. 242 6,776 McDermott International, Inc. 150 657 ------------ 7,433 ------------ CONSTRUCTION & FARM MACHINERY--0.4% Caterpillar, Inc. 1,226 56,053 Cummins Inc. 107 3,010 Deere & Co. 842 38,606
See Notes to Investment Portfolio. 112
SHARES VALUE ------------ ------------ Navistar International Corp. (a) 172 $ 4,181 PACCAR, Inc. 398 18,360 ------------ 120,210 ------------ ELECTRICAL COMPONENTS & EQUIPMENT--0.4% American Power Conversion Corp. (a) 693 10,499 Cooper Industries, Inc. 299 10,899 Emerson Electric Co. 1,455 73,987 Molex, Inc. 715 16,474 Power-One, Inc. (a) 167 947 Thomas & Betts Corp. 150 2,535 ------------ 115,341 ------------ INDUSTRIAL CONGLOMERATES--3.4% General Electric Co. 34,640 843,484 Textron, Inc. 465 19,990 Tyco International Ltd. 6,866 117,271 ------------ 980,745 ------------ INDUSTRIAL MACHINERY--0.8% Danaher Corp. 520 34,164 Dover Corp. 740 21,578 Eaton Corp. 237 18,512 Illinois Tool Works, Inc. 1,073 69,595 Ingersoll Rand Co. 575 24,760 ITT Industries, Inc. 305 18,510 Pall Corp. 400 6,672 Parker-Hannifin Corp. 401 18,498 Rockwell Automation, Inc. 603 12,488 ------------ 224,777 ------------ TRADING COMPANIES & DISTRIBUTIONS--0.1% Genuine Parts Co. 660 20,328 Grainger (W.W.), Inc. 325 16,754 ------------ 37,082 ------------ COMMERCIAL SERVICES & SUPPLIES--2.1% COMMERCIAL PRINTING--0.0% R.R. Donnelley & Sons Co. 374 8,142 ------------ DATA PROCESSING SERVICES--0.9% Automatic Data Processing, Inc. 2,129 83,563 Concord EFS, Inc. (a) 1,767 27,812 First Data Corp. 2,651 93,872 Fiserv, Inc. (a) 708 24,037 Paychex, Inc. 1,300 36,270 The Sabre Group Holdings, Inc. 456 8,258 ------------ 273,812 ------------ DIVERSIFIED COMMERCIAL SERVICES--0.8% Apollo Group, Inc., Class A 672 29,568 Cendant Corp. (a) 3,542 37,120 Cintas Corp. 605 27,679 Convergys Corp. (a) 552 8,363 Deluxe Corp. 185 7,788 Equifax, Inc. 496 11,477 H&R Block, Inc. 669 26,894 IMS Health, Inc. 949 15,184 SLM Corp. 537 55,773 ------------ 219,846 ------------ EMPLOYMENT SERVICES--0.0% Robert Half International, Inc. (a) 600 $ 9,666 ------------ ENVIRONMENTAL SERVICES--0.2% Allied Waste Industries, Inc. (a) 578 5,780 Waste Management, Inc. 2,084 47,765 ------------ 53,545 ------------ OFFICE SERVICES & SUPPLIES--0.2% Avery Dennison Corp. 381 23,271 Pitney Bowes, Inc. 790 25,801 ------------ 49,072 ------------ TRANSPORTATION--1.7% AIR FREIGHT & COURIERS--1.0% FedEx Corp. (a) 1,053 57,094 United Parcel Service, Inc., Class B 3,897 245,823 ------------ 302,917 ------------ AIRLINES--0.2% AMR Corp. (a) 429 2,831 Delta Air Lines, Inc. 400 4,840 Southwest Airlines Co. 2,606 36,223 ------------ 43,894 ------------ RAILROADS--0.5% Burlington Northern Santa Fe Corp. 1,326 34,489 CSX Corp. 769 21,770 Norfolk Southern Corp. 1,330 26,587 Union Pacific Corp. 862 51,608 ------------ 134,454 ------------ TRUCKING--0.0% Ryder System, Inc. 173 3,882 ------------ INFORMATION TECHNOLOGY--14.4% SOFTWARE & SERVICES--5.1% APPLICATIONS SOFTWARE--0.3% Autodesk, Inc. 400 5,720 Citrix Systems, Inc. (a) 550 6,776 Compuware Corp. (a) 1,163 5,582 Intuit, Inc. (a) 700 32,844 Mercury Interactive Corp. (a) 307 9,103 Parametric Technology Co. (a) 691 1,741 PeopleSoft, Inc. (a) 1,081 19,782 Siebel Systems, Inc. (a) 1,541 11,527 ------------ 93,075 ------------ INFORMATION TECHNOLOGY CONSULTING & SERVICES--0.3% Computer Sciences Corp. (a) 576 19,843 Electronic Data Systems Corp. 1,691 31,165 SunGard Data Systems, Inc. (a) 992 23,372 Unisys Corp. (a) 1,137 11,256 ------------ 85,636 ------------ INTERNET SOFTWARE & SERVICES--0.1% Yahoo!, Inc. (a) 2,020 33,027 ------------ SYSTEMS SOFTWARE--4.4% Adobe Systems, Inc. 833 20,659 BMC Software, Inc. (a) 762 13,038 Computer Associates International, Inc. 1,926 26,001
See Notes to Investment Portfolio. 113
SHARES VALUE ------------ ------------ Electronic Arts, Inc. (a) 479 $ 23,840 Microsoft Corp. (a) 18,609 962,085 Novell, Inc. (a) 1,136 3,794 Oracle Corp. (a) 18,637 201,280 Rational Software Corp. 600 6,234 Veritas Software Corp. (a) 1,402 21,899 ------------ 1,278,830 ------------ TECHNOLOGY HARDWARE & EQUIPMENT--9.3% COMPUTER HARDWARE--3.3% Apple Computer, Inc. 1,199 17,182 Dell Computer Corp. (a) 8,992 240,446 Gateway, Inc. (a) 845 2,653 Hewlett-Packard Co. 10,571 183,506 International Business Machines Corp. 5,868 454,770 NCR Corp. (a) 380 9,021 Sun Microsystems, Inc. (a) 11,319 35,202 ------------ 942,780 ------------ COMPUTER STORAGE & PERIPHERALS--0.3% EMC Corp. (a) 7,787 47,812 Lexmark International Group, Inc. (a) 427 25,834 Network Appliance, Inc. (a) 1,184 11,840 ------------ 85,486 ------------ ELECTRONIC EQUIPMENT & INSTRUMENTS--0.3% Agilent Technologies, Inc. (a) 1,562 28,054 Jabil Circuit, Inc. (a) 699 12,526 Millipore Corp. 141 4,794 PerkinElmer, Inc. 348 2,871 Sanmina Corp. (a) 1,543 6,928 Solectron Corp. (a) 2,986 10,600 Symbol Technologies, Inc. 673 5,532 Tektronix, Inc. 287 5,221 Thermo Electron Corp. (a) 545 10,965 Waters Corp. (a) 451 9,823 ------------ 97,314 ------------ NETWORKING EQUIPMENT--1.2% Avaya, Inc. (a) 1,133 2,776 Cisco Systems, Inc. (a) 25,101 328,823 ------------ 331,599 ------------ OFFICE ELECTRONICS--0.1% Xerox Corp. 2,516 20,254 ------------ SEMICONDUCTOR EQUIPMENT--0.4% Applied Materials, Inc. (a) 5,677 73,971 KLA Instruments Corp. (a) 632 22,354 Novellus Systems, Inc. (a) 481 13,506 Teradyne, Inc. (a) 620 8,066 ------------ 117,897 ------------ SEMICONDUCTORS--2.3% Advanced Micro Devices, Inc. 1,047 6,764 Altera Corp. (a) 1,344 16,572 Analog Devices, Inc. (a) 1,270 30,315 Applied Micro Circuits Corp. (a) 800 2,952 Broadcom Corp., Class A (a) 900 13,554 Intel Corp. 23,090 359,511 LSI Logic Corp. (a) 1,132 29,115 Linear Technology Corp. 1,219 $ 7,034 Maxim Integrated Products, Inc. (a) 1,105 36,509 Micron Technology, Inc. 2,124 20,688 National semiconductor Corp. (a) 608 9,126 NVIDIA Corp. (a) 483 5,559 PMC-Sierra, Inc. (a) 487 2,708 QLogic Corp. (a) 369 12,734 Texas Instruments, Inc. (a) 5,969 89,595 Xilinx, Inc. (a) 1,127 23,216 ------------ 665,952 ------------ TELECOMMUNICATIONS EQUIPMENT--1.4% 3M Co. 1,358 167,441 ADC Telecommunications, Inc. (a) 2,373 4,960 Andrew Corp. (a) 250 2,570 CIENA Corp. 1,400 7,196 Comverse Technology, Inc. (a) 577 5,782 Corning, Inc. 4,073 13,482 JDS Uniphase Corp. (a) 4,801 11,858 Lucent Technologies, Inc. 11,992 15,110 Motorola, Inc. 8,097 70,039 Qualcomm, Inc. (a) 2,776 101,019 Scientific Atlanta, Inc. 478 5,669 Tellabs, Inc. (a) 1,419 10,316 ------------ 415,442 ------------ MATERIALS--2.8% CHEMICALS--1.6% DIVERSIFIED CHEMICALS--0.9% Dow Chemical Co. 3,140 93,258 DuPont (E.I.) de Nemours & Co. 3,473 147,255 Eastman Chemical Co. 267 9,818 Engelhard Corp. 484 10,817 Hercules, Inc. 383 3,370 ------------ 264,518 ------------ INDUSTRIAL GASES--0.2% Air Products & Chemicals, Inc. 770 32,918 Praxair, Inc. 558 32,236 ------------ 65,154 ------------ SPECIALTY CHEMICALS--0.4% Ecolab, Inc. 460 22,770 Great Lakes Chemical Corp. 155 3,701 International Flavors & Fragrances, Inc. 327 11,478 PPG Industries, Inc. 602 30,190 Rohm & Haas Co. 788 25,594 Sigma-Aldrich Corp. 253 12,321 ------------ 106,054 ------------ CONSTRUCTION MATERIALS--0.1% Vulcan Materials Co. 347 13,013 ------------ CONTAINERS & PACKAGING--0.2% METAL & GLASS CONTAINERS--0.1% Ball Corp. 190 9,726 Pactiv Corp. (a) 521 11,389 ------------ 21,115 ------------
See Notes to Investment Portfolio. 114
SHARES VALUE ------------ ------------ PAPER & PLASTIC PACKAGING--0.1% Bemis Company, Inc. 198 $ 9,827 Sealed Air Corp. 290 10,817 Temple Inland, Inc. 168 7,528 ------------ 28,172 ------------ METALS & MINING--0.5% ALUMINUM--0.2% Alcoa, Inc. 2,941 66,996 ------------ DIVERSIFIED METALS & MINING--0.1% Freeport-McMoRan Copper & Gold, Inc., Class B 480 8,054 Phelps Dodge Corp. 314 9,938 ------------ 17,992 ------------ GOLD--0.1% Newmont Mining Corp. 1,425 41,368 ------------ STEEL--0.1% Allegheny Technologies, Inc. 282 1,757 Nucor Corp. 246 10,160 United States Steel Corp. 281 3,687 Worthington Industries, Inc. 301 4,587 ------------ 20,191 ------------ PAPER & FOREST PRODUCTS--0.5% FOREST PRODUCTS--0.2% Louisiana-Pacific Corp. 370 2,982 Plum Creek Timber Co. 682 16,095 Weyerhaeuser Co. 779 38,335 ------------ 57,412 ------------ PAPER PRODUCTS--0.3% Boise Cascade Corp. 250 6,305 Georgia-Pacific Corp. 809 13,073 International Paper Co. 1,636 57,211 Meadwestvaco Corp. 696 17,198 ------------ 93,787 ------------ TELECOMMUNICATION SERVICES--4.1% INTEGRATED TELECOMMUNICATION SERVICES--3.7% AT&T Corp. 2,646 69,087 Alltel Corp. 1,098 55,998 BellSouth Corp. 6,425 166,215 CenturyTel, Inc. 488 14,337 Citizens Communications Co. 900 9,495 Qwest Communications International 5,704 28,520 SBC Communications, Inc. 11,536 312,741 Sprint Corp (FON Group) 3,081 44,613 Verizon Communications, Inc. 9,502 368,203 ------------ 1,069,209 ------------ WIRELESS TELECOMMUNICATION SERVICES--0.4% AT&T Wireless Services, Inc. 9,548 53,946 Nextel Communications, Inc., Class A 3,423 39,536 Sprint Corp. (PCS Group) (a) 3,246 14,217 ------------ 107,699 ------------ UTILITIES--2.7% ELECTRIC UTILITIES--2.2% AES Corp. (a) 2,110 $ 6,372 Allegheny Energy, Inc. 367 2,775 Ameren Corp. 552 22,947 American Electric Power Co., Inc. 1,215 33,206 CMS Energy Corp. 400 3,776 Calpine Corp. (a) 1,000 3,260 CenterPoint Energy, Inc. 1,093 9,291 Cinergy Corp. 617 20,805 Consolidated Edison, Inc. 738 31,601 Constellation Energy Group 531 14,772 DTE Energy Co. 578 26,819 Dominion Resources, Inc. 1,058 58,084 Edison International 1,049 12,431 Entergy Corp. 752 34,284 Exelon Corp. 1,133 59,788 FPL Group, Inc. 616 37,040 FirstEnergy Corp. 1,079 35,575 Mirant Corp. (a) 1,228 2,321 P G & E Corp. (a) 1,323 18,390 P P & L Resources, Inc. 587 20,357 Pinnacle West Capital Corp. 312 10,636 Progress Energy, Inc. (a) 844 36,587 Public Service Enterprise Group, Inc. 750 24,075 Southern Co. 2,472 70,180 TECO Energy, Inc. 600 9,282 TXU Corp. 1,092 20,399 Xcel Energy, Inc. 1,284 14,124 ------------ 639,177 ------------ GAS UTILITIES--0.3% El Paso Corp. 1,988 13,836 KeySpan Corp. 474 16,704 Kinder Morgan, Inc. 469 19,825 NICOR, Inc. 145 4,934 NiSource, Inc. 852 17,040 Peoples Energy Corp. 186 7,189 Sempra Energy 698 16,508 ------------ 96,036 ------------ MULTI-UTILITIES--0.2% Duke Energy Corp. 3,080 60,183 Dynegy, Inc. 938 1,107 The Williams Companies, Inc. 1,383 3,734 ------------ 65,024 ------------ TOTAL COMMON STOCKS (cost of $35,833,239) 28,191,419 ------------ PAR ------------ U.S. GOVERNMENT OBLIGATION--0.2% GOVERNMENT BONDS--0.2% U. S. Treasury Bills, 1.180% 03/13/03 (cost of $69,837)(b) $ 70,000 69,837 ------------
See Notes to Investment Portfolio. 115
PAR VALUE ------------ ------------ SHORT-TERM OBLIGATION--3.1% Repurchase agreement with State Street Bank & Trust Co., dated 12/31/02, due 01/02/03 at 1.18%, collateralized by U.S. Treasury Bond maturing 8/15/17, market value $916,429 (Repurchase proceeds $892,058) (cost of $892,000) $ 892,000 $ 892,000 ------------ TOTAL INVESTMENTS--101.1% (cost of $36,795,076) (c) 29,153,256 ------------ OTHER ASSETS & LIABILITIES, NET--(1.1)% (327,029) ------------ NET ASSETS--100.0% $ 28,826,227 ============
NOTES TO INVESTMENT PORTFOLIO: (a) Non-income producing. (b) This security, or a portion thereof, with total market value of $59,850 is being used to collateralize the futures contracts shown below. (c) Cost for federal income tax purposes is $38,291,248. The difference between cost for generally accepted accounting principles and cost on a tax basis is related to deferral of losses on wash sales. Realized losses have been deferred for tax purposes and cost adjusted accordingly. Long futures contracts open on December 31, 2002:
NUMBER OF EXPIRATION UNREALIZED TYPE CONTRACTS MONTH DEPRECIATION ---- --------- ---------- ------------ S&P 500 Emini 21 March $ (25,415) =========
See Notes to Financial Statements. 116 STATEMENT OF ASSETS AND LIABILITIES Liberty S&P 500 Index Fund, Variable Series / December 31, 2002 ASSETS: Investments, at cost $ 36,795,076 ------------- Investments, at value $ 29,153,256 Cash 198 Receivable for: Interest 29 Dividends 43,794 Futures variation margin 1,574 Deferred Trustees' compensation plan 659 Other assets 1,724 ------------- TOTAL ASSETS 29,201,234 ------------- LIABILITIES: Payable for: Investments purchased 86,745 Fund shares repurchased 243,161 Management fee 10,096 Transfer agent fee 625 Pricing and bookkeeping fees 860 Trustees' fee 200 Audit fee 15,250 Reports to shareholders 11,571 Deferred Trustees' fee 659 Other liabilities 5,840 ------------- TOTAL LIABILITIES 375,007 ------------- NET ASSETS $ 28,826,227 ============= COMPOSITION OF NET ASSETS: Paid-in capital $ 39,496,313 Overdistributed net investment income (792) Accumulated net realized loss (3,002,059) Net unrealized depreciation on: Investments (7,641,820) Futures contracts (25,415) ------------- NET ASSETS $ 28,826,227 ============= CLASS A: Net assets $ 64,553 Shares outstanding 8,505 ============= Net asset value per share $ 7.59 ============= CLASS B: Net assets $ 28,761,674 Shares outstanding 3,798,207 ============= Net asset value per share $ 7.57 =============
See Notes to Financial Statements. 117 STATEMENT OF OPERATIONS Liberty S&P 500 Index Fund, Variable Series For the Year Ended December 31, 2002 INVESTMENT INCOME: Dividends $ 443,791 Interest 11,499 ------------- Total Investment Income (net of foreign taxes withheld of $1,015) 455,290 ------------- EXPENSES: Management fee 112,281 Distribution fee--Class B 69,993 Pricing and bookkeeping fees 10,967 Transfer agent fee 7,500 Trustees' fee 6,598 Custody fee 22,433 Audit fee 13,825 Other expenses 4,954 ------------- Total Expenses 248,551 Fees reimbursed by Distributor--Class B (39,037) Custody earnings credit (38) ------------- Net Expenses 209,476 ------------- Net Investment Income 245,814 ------------- NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS AND FUTURES CONTRACTS: Net realized loss on: Investments (2,153,606) Futures contracts (211,053) ------------- Net realized loss (2,364,659) ------------- Net change in unrealized appreciation/depreciation on: Investments (5,064,095) Futures contracts (34,969) ------------- Net change in unrealized appreciation/depreciation (5,099,064) ------------- Net Loss (7,463,723) ------------- Net Decrease in Net Assets from Operations $ (7,217,909) =============
See Notes to Financial Statements. 118 STATEMENT OF CHANGES IN NET ASSETS Liberty S&P 500 Index Fund, Variable Series
YEAR ENDED DECEMBER 31, ----------------------------- INCREASE (DECREASE) IN NET ASSETS: 2002 2001 ---------------------------------- ------------- ------------- OPERATIONS: Net investment income $ 245,814 $ 151,486 Net realized loss on investments and futures contracts (2,364,659) (610,743) Net change in unrealized appreciation/depreciation on investments and futures contracts (5,099,064) (1,814,723) ------------- ------------- Net Decrease from Operations (7,217,909) (2,273,980) ------------- ------------- DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income: Class A (587) (460) Class B (243,630) (160,078) Return of capital: Class A (53) -- Class B (21,942) -- ------------- ------------- Total Distributions Declared to Shareholders (266,212) (160,538) ------------- ------------- SHARE TRANSACTIONS: Class A: Distributions reinvested 640 460 ------------- ------------- Net Increase 640 460 ------------- ------------- Class B: Subscriptions 13,853,223 21,548,313 Distributions reinvested 265,572 160,078 Redemptions (6,727,578) (2,548,798) ------------- ------------- Net Increase 7,391,217 19,159,593 ------------- ------------- Net Increase from Share Transactions 7,391,857 19,160,053 ------------- ------------- Total Increase (Decrease) in Net Assets (92,264) 16,725,535 NET ASSETS: Beginning of period 28,918,491 12,192,956 ------------- ------------- End of period (including overdistributed net investment income of $(792) and $(736), respectively) $ 28,826,227 $ 28,918,491 ============= ============= CHANGES IN SHARES: Class A: Issued for distributions reinvested 85 46 ------------- ------------- Net Increase 85 46 ------------- ------------- Class B: Subscriptions 1,597,362 2,088,051 Issued for distributions reinvested 35,222 16,056 Redemptions (749,858) (258,120) ------------- ------------- Net Increase 882,726 1,845,987 ------------- -------------
See Notes to Financial Statements. 119 NOTES TO FINANCIAL STATEMENTS Liberty S&P 500 Index Fund, Variable Series / December 31, 2002 NOTE 1. ORGANIZATION AND ACCOUNTING POLICIES ORGANIZATION--Liberty S&P 500 Index Fund, Variable Series (the "Fund"), a series of Liberty Variable Investment Trust (the "Trust"), is a diversified portfolio of a Massachusetts business trust, registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The Fund's investment goal is to seek capital appreciation by matching the performance of a benchmark index that measures the investment returns of stocks of large U.S. companies. The Fund's capitalization consists of an unlimited number of shares of beneficial interest without par value that represent a separate series of the Trust. The Fund offers two classes of shares: Class A and Class B. Each share of a class represents an equal proportionate beneficial interest in that share class and, when issued and outstanding, is fully paid and nonassessable. Shareholders would be entitled to share proportionally in the net assets of their share class available for distribution to shareholders upon liquidation of the Fund. Shares of the Fund are available and are being marketed exclusively as a pooled funding vehicle for variable annuity contracts ("VA contracts") and Variable Life Insurance Policies ("VLI Policies") offered by the separate accounts of certain life insurance companies ("Participating Insurance Companies"). The Participating Insurance Companies and their separate accounts own all the shares of the Fund. Liberty Advisory Services Corp. (the "Manager") ("LASC") provides investment management and advisory services to the Fund pursuant to its Management Agreement with the Fund. Colonial Management Associates, Inc. ("Colonial") provides sub-advisory services. LASC has delegated various administrative matters to Colonial. Colonial also provides pricing and bookkeeping services to the Fund. Liberty Funds Distributor, Inc. ("LFD"), an affiliate of the Manager, serves as the principal underwriter of the Fund. The Manager, Colonial and LFD are wholly-owned indirect subsidiaries of FleetBoston Financial Corporation ("FleetBoston"). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. SECURITY VALUATION AND TRANSACTIONS--Equity securities generally are valued at the last sale price or, in the case of unlisted or listed securities for which there were no sales during the day, at the current quoted bid price. Short-term obligations with a maturity of 60 days or less are valued at amortized cost. Short-term obligations with a maturity of greater than 60 days are valued at their market yield. 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. 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. DETERMINATION OF CLASS NET ASSET VALUES AND FINANCIAL HIGHLIGHTS--All income, expenses (other than the Class B distribution fee), 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. The per share data was calculated using average shares outstanding during the period. In addition, Class B net investment income per share data and ratios reflect the distribution fee applicable to Class B shares only. 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. DISTRIBUTIONS TO SHAREHOLDERS--The Fund intends to distribute as income dividends or capital gains distributions, at least annually, substantially all of its net investment income and net profits realized from the sale of investments. All dividends and distributions are reinvested in additional shares of the Fund at net asset value as of the record date of the distribution. Income and capital gain distributions are determined in accordance with federal income tax regulations. OTHER--Interest income is recorded on the accrual basis. Corporate actions and dividend income are recorded on the ex-date. The Fund's custodian takes possession through the federal book-entry system of securities collateralizing repurchase agreements. Collateral is marked-to-market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund. The Fund may 120 experience costs and delays in liquidating the collateral if the issuer defaults or enters bankruptcy. NOTE 2. FEDERAL TAX INFORMATION Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from generally accepted accounting principles. These differences are primarily due to differing treatments for deferral of losses from wash sales, mark to market on futures contracts, post-October losses, capital loss carryforwards 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 December 31, 2002, permanent items identified and reclassified among the components of net assets are as follows:
OVERDISTRIBUTED NET INVESTMENT ACCUMULATED NET INCOME REALIZED LOSS PAID-IN CAPITAL --------------- --------------- --------------- $ (1,653) $ 1,651 $ 2
Net investment income, net realized gains (losses) and net assets were not affected by this reclassification. The tax character of distributions paid during 2002 and 2001 was as follows:
2002 2001 --------- --------- Distributions paid from: Ordinary Income $ 244,217 $ 160,538 Return of capital 21,995 -- --------- --------- $ 266,212 $ 160,538 ========= =========
As of December 31, 2002, the components of distributable earnings on a tax basis were as follows:
UNREALIZED DEPRECIATION* ------------- $ (9,163,407)
The following capital loss carryforwards are available to reduce taxable income arising from future net realized gains on investments, if any, to the extent permitted by the Internal Revenue Code:
YEAR OF CAPITAL LOSS EXPIRATION CARRYFORWARD ---------- ------------ 2008 $ 19,479 2009 243,840 2010 1,209,651 ----------- $ 1,472,970 ===========
Under current tax rules, certain capital losses realized after October 31 may be deferred and treated as occurring on the first day of the following fiscal year. As of December 31, 2002, for federal income tax purposes, post October losses of $57,959 were deferred to January 1, 2003. NOTE 3. FEES AND COMPENSATION PAID TO AFFILIATES MANAGEMENT AND SUB-ADVISORY FEES--The Manager receives a monthly fee equal to 0.40% annually of the Fund's average daily net assets. The Manager, out of the management fee it receives, pays Colonial a monthly sub-advisory fee equal to 0.20% annually of the Fund's average daily net assets. State Street Global Advisors ("SSgA") has been retained by Colonial to manage the day-to-day investment operations of the Fund. Colonial, out of the sub-advisory fee it receives, pays SSgA for services rendered. PRICING AND BOOKKEEPING FEES--Colonial is responsible for providing pricing and bookkeeping services to the Fund under a Pricing and Bookkeeping Agreement. Under a separate agreement (the "Outsourcing Agreement"), Colonial has delegated those functions to State Street Bank & Trust Company ("State Street"). Colonial pays fees to State Street under the Outsourcing Agreement. Under its pricing and bookkeeping agreement with the Fund, Colonial 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. The Fund also pays out-of-pocket costs for pricing services. TRANSFER AGENT FEE--Liberty Funds Services, Inc. (the "Transfer Agent"), an affiliate of the Manager, provides shareholder services for an annual rate of $7,500. DISTRIBUTION FEE--The Fund has adopted a 12b-1 plan, which requires it to pay LFD a monthly distribution fee equal to 0.25% annually of Class B average daily net assets as of the 20th of each month. EXPENSE LIMITS--The Manager and LFD have voluntarily agreed to reimburse all expenses, including management fees and distribution fees, but excluding interest, taxes, brokerage and extraordinary expenses incurred by the Fund in excess of 0.75% annually of the Fund's average daily net assets. LFD will first reimburse the Class B distribution fee up to 0.25% annually to reach the 0.75% limit on Class B expenses. If additional reimbursement is needed to meet the limit for each class, the Manager will then reimburse other expenses to the extent necessary. If 121 additional reimbursement is still needed to reach the expense limit, the Manager will then waive a portion of its management fee to reach the expense limit. This arrangement may be terminated or modified by the Manager or LFD at any time. OTHER--The Fund pays no compensation to its officers, all of whom are employees of Colonial 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 $38 of custody fees were reduced by balance credits for the year ended December 31, 2002. The Fund could have invested a portion of the assets utilized in connection with the expense offset arrangement in an income-producing asset if it had not entered into such an agreement. NOTE 4. PORTFOLIO INFORMATION INVESTMENT ACTIVITY--For the year ended December 31, 2002, purchases and sales of investments, other than short-term obligations, were $11,911,812 and $4,813,971, respectively. Unrealized appreciation (depreciation) at December 31, 2002, based on cost of investments for federal income tax purposes, was: Gross unrealized appreciation $ 1,205,418 Gross unrealized depreciation (10,343,410) ------------- Net unrealized depreciation $ (9,137,992) =============
OTHER--The Fund may purchase or sell futures contracts. The Fund will use these instruments to hedge against the effects of changes in the portfolio securities due to market conditions and not for trading purposes. The use of futures contracts involves certain risks which include (1) imperfect correlation between the price movement of the instruments and the underlying securities, (2) inability to close out a position due to different trading hours, or the absence of a liquid market for either the instrument or the underlying securities or (3) an inaccurate prediction by the Manager of the future direction of the market or stock price or interest rate trends. Any of these risks may involve amounts exceeding the variation margin recorded in the Fund's Statement of Assets and Liabilities at any given time. 122 FINANCIAL HIGHLIGHTS Liberty S&P 500 Index Fund, Variable Series--Class B Shares Selected data for a share outstanding throughout each period is as follows:
YEAR ENDED PERIOD DECEMBER 31, ENDED -------------------- DECEMBER 31, 2002 2001 2000 (a) -------- -------- ------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.89 $ 11.31 $ 12.00 -------- -------- -------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (b) 0.08 0.07 0.07 Net realized and unrealized loss on investments and futures contracts (2.33) (1.43) (0.70) -------- -------- -------- Total from Investment Operations (2.25) (1.36) (0.63) -------- -------- -------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.06) (0.06) (0.06) Return of capital (0.01) -- -- -------- -------- -------- Total Distributions Declared to Shareholders (0.07) (0.06) (0.06) -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 7.57 $ 9.89 $ 11.31 ======== ======== ======== Total return (c)(d)(e) (22.75)% (12.07)% (5.29)%(f) RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA: Expenses (g) 0.75% 0.75% 0.75%(h) Net investment income (g) 0.88% 0.72% 0.89%(h) Waiver/reimbursement 0.14% 0.53% 0.61%(h) Portfolio turnover rate 17% 7% 2%(f) Net assets, at end of period (000's) $ 28,762 $ 28,835 $ 12,098
(a) For the period from commencement of operations on May 30, 2000 to December 31, 2000. (b) Per share data was calculated using average shares outstanding during the period. (c) Total return at net asset value assuming all distributions reinvested. (d) Had the Manager and/or Distributor not waived or reimbursed a portion of expenses, total return would have been reduced. (e) Total return figure does not include any insurance company charges associated with a variable annuity. If included, total return would be reduced. (f) Not annualized. (g) The benefits derived from custody credits and directed brokerage arrangements, if applicable, had an impact of less than 0.01%. (h) Annualized. 123 REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of Liberty Variable Investment Trust and the Class B Shareholders of Liberty S&P 500 Index Fund, Variable Series In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio, and the related statements of operations and of changes in net assets and the Class B financial highlights present fairly, in all material respects, the financial position of Liberty S&P 500 Index Fund, Variable Series (the "Fund") (a series of Liberty Variable Investment Trust) at December 31, 2002, and the results of its operations, the changes in its net assets and the Class B financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and the Class B financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2002 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts February 12, 2003 124 PORTFOLIO MANAGER'S DISCUSSION Liberty Select Value Fund, Variable Series / December 31, 2002 Liberty Select Value Fund, Variable Series seeks long-term growth. Daniel K. Cantor and Jeffrey C. Kinzel are co-mangers of the fund. Mr. Cantor and Mr. Kinzel are senior vice presidents of Colonial Management Associates, Inc. STOCKS REMAINED UNSETTLED THROUGHOUT THE YEAR Despite a late-period rally, the stock market was buffeted by uncertainty throughout 2002. Interest rates continued to decline but failed to provide support to stock prices as corporate governance concerns, accounting scandals and the threat of war unsettled investors. The fund's performance was negative but it was significantly better than the broad market. Moreover, our bottom-up value style helped us limit losses, and the fund outperformed its Lipper mid-cap value peer group for the year. The fund benefited most from its investments in retailers, restaurants and food companies--all sectors of the market that held up relatively well during the year. The fund's investments in Brinker International, a company that operates casual dining restaurants, and Dean Foods, a leading dairy processor (1.6% and 2.1% of net assets, respectively), both did well. FINANCIALS, HEALTH CARE PROVIDED LIFT Financial services companies -- especially regional banks -- were also relatively good performers, compared to the broad market. These banks have maintained solid earnings growth despite the weak economy as a result of strong deposit growth, robust mortgage loan activity and stable credit quality. Citigroup's (1.0% of net assets) acquisition of Golden State Bancorp gave the portfolio an added boost. Furthermore, health care service providers performed well as the result of strong price increases, solid growth in new business and tight cost controls. We sold one health care holding--United Healthcare--when it appeared to be fully valued. Our relatively light exposure to sharply underperforming sectors, such as information technology, utilities and telecommunications services, helped limit their negative impact on performance. Two technology stocks that made positive contributions to the fund's performance during the period were Zebra Technologies and Affiliated Computer Services (1.6% and 1.4% of net assets, respectively). Conversely, OM Group (0.1% of net assets), a producer of metal-based specialty chemicals, did not do well. Its operational results were much worse than expected, which put significant pressure on its leveraged balance sheet. VALUE STRATEGY IN ACTION Using our value discipline, we became more aggressive as share prices declined. For example, we have been selectively buying stocks in the technology, cable and leisure sectors, as well as some economically sensitive stocks. We believe the market unduly punished some of these companies, presenting us with excellent buying opportunities. We also reduced the number of fund holdings, starting the year at 114 and ending at 97, in order to concentrate more fully on those companies we believe to have the best prospects. UNDERSTANDING RISKS We have positioned the fund to benefit from an improving economy, but our key focus is on finding well-managed companies that are attractively priced in industries where we see potential for improvement. Understanding the risks of the stocks we own has allowed us to avoid some unpleasant surprises and will continue to be a key component of our approach going forward. -------------------- Economic and market conditions can frequently change. There is no assurance that the trends described here will continue or commence. An investment in Liberty Select Value Fund, Variable Series offers the potential for long-term growth, but also involves certain risks, including stock market fluctuations due to economic and business developments. The value and returns earned on an investment in the fund may also be affected by stock market fluctuations. Mid-cap stocks can present special risks including greater price volatility than stocks of larger, more established companies. Lipper, Inc., a widely respected data provider in the industry, calculates an average total return for mutual funds with similar invesment objectives as the fund. Holdings are disclosed as of December 31, 2002, and are subject to change. 125 PERFORMANCE INFORMATION Liberty Select Value Fund, Variable Series / December 31, 2002 AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 2002 (%)
1-YEAR LIFE ----------------------------------------------- Class B (5/30/00) -11.21 0.89 S&P MidCap 400 Index(1) -14.51 -2.78
Inception date of share class is in parentheses. [CHART] VALUE OF A $10,000 INVESTMENT, 5/30/00 - 12/31/02 CLASS B: $10,233
CLASS B SHARES S&P MIDCAP 400 INDEX 5/30/2000 $ 10,000 5/31/2000 $ 10,200 $ 10,000 6/30/2000 $ 10,066 $ 10,147 7/31/2000 $ 10,333 $ 10,307 8/31/2000 $ 11,184 $ 11,459 9/30/2000 $ 10,983 $ 11,381 10/31/2000 $ 11,034 $ 10,995 11/30/2000 $ 10,309 $ 10,165 12/31/2000 $ 11,139 $ 10,942 1/31/2001 $ 11,551 $ 11,186 2/28/2001 $ 11,206 $ 10,548 3/31/2001 $ 10,961 $ 9,764 4/30/2001 $ 11,769 $ 10,841 5/31/2001 $ 12,098 $ 11,094 6/30/2001 $ 11,862 $ 11,049 7/31/2001 $ 11,962 $ 10,885 8/31/2001 $ 11,660 $ 10,529 9/30/2001 $ 10,221 $ 9,219 10/31/2001 $ 10,423 $ 9,626 11/30/2001 $ 11,062 $ 10,343 12/31/2001 $ 11,525 $ 10,876 1/31/2002 $ 11,618 $ 10,820 2/28/2002 $ 11,812 $ 10,833 3/31/2002 $ 12,361 $ 11,607 4/30/2002 $ 12,395 $ 11,553 5/31/2002 $ 12,437 $ 11,357 6/30/2002 $ 11,744 $ 10,526 7/31/2002 $ 10,908 $ 9,505 8/31/2002 $ 10,984 $ 9,553 9/30/2002 $ 9,819 $ 8,783 10/31/2002 $ 10,021 $ 9,164 11/30/2002 $ 10,603 $ 9,694 12/31/2002 $ 10,233 $ 9,296
NET ASSET VALUE PER SHARE ($) 12/31/01 12/31/02 -------------------------------------------------------- Class B 13.65 12.11
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 SHARES. Total return performance includes changes in share price and reinvestment of all distributions. The S&P (Standard & Poor's) MidCap 400 Index is an unmanaged index that tracks the performance of middle-capitalization US stocks. Indexes are not investments, do not incur fees or expenses and are not professionally managed. It is not possible to invest directly in an index. Securities in the fund may not match those in the index. MUTUAL FUND PERFORMANCE CHANGES OVER TIME. CURRENT RETURNS FOR THE FUND MAY BE DIFFERENT THAN THAT SHOWN. Performance numbers reflect all Fund expenses, but do not include any insurance charges imposed by your insurance company's separate accounts. If performance included the effect of these additional charges, it would be lower. (1) Index performance is from May 31, 2000. 126 INVESTMENT PORTFOLIO Liberty Select Value Fund, Variable Series / December 31, 2002
SHARES VALUE ---------- ---------- COMMON STOCKS--91.3% CONSUMER DISCRETIONARY--17.7% AUTOMOBILES & COMPONENTS--4.5% AUTO PARTS & EQUIPMENT--4.5% Gentex Corp. (a) 9,700 $ 306,908 Johnson Controls, Inc. 3,000 240,510 Lear Corp. (a) 11,400 379,392 Superior Industries International 5,200 215,072 ---------- 1,141,882 ---------- CONSUMER DURABLES & APPAREL--2.1% HOUSEWARES & SPECIALTIES--1.2% Newell Rubbermaid, Inc. 10,400 315,432 ---------- LEISURE PRODUCTS--0.9% Mattel, Inc. 11,400 218,310 ---------- HOTELS, RESTAURANTS & LEISURE--4.6% CASINOS & GAMING--1.7% Harrah's Entertainment, Inc. (a) 4,800 190,080 International Game Technology (a) 3,000 227,760 ---------- 417,840 ---------- LEISURE FACILITIES--0.6% Six Flags, Inc. (a) 25,300 144,463 ---------- RESTAURANTS--2.3% Brinker International, Inc. (a) 12,600 406,350 Darden Restaurants, Inc. 8,700 177,915 ---------- 584,265 ---------- MEDIA--1.7% BROADCASTING & CABLE--1.1% Comcast Corp., Special Class A (a) 7,400 167,166 Mediacom Communications Corp. (a) 12,800 112,768 ---------- 279,934 ---------- PUBLISHING & PRINTING--0.6% The New York Times Co., Class A 3,000 137,190 ---------- RETAILING--4.8% APPAREL RETAIL--2.5% Ross Stores, Inc. 3,000 127,170 TJX Companies, Inc. 26,000 507,520 ---------- 634,690 ---------- DEPARTMENT STORES--1.5% Federated Department Stores, Inc. (a) 13,500 388,260 ---------- SPECIALTY STORES--0.8% Borders Group, Inc. (a) 11,800 189,980 ---------- CONSUMER STAPLES--5.0% FOOD, BEVERAGES & TOBACCO--3.4% PACKAGED FOODS--2.4% Dean Foods Co. (a) 14,600 541,660 Hormel Foods Corp. 3,300 76,989 ---------- 618,649 ---------- SOFT DRINKS--1.0% Pepsi Bottling Group, Inc. 9,800 $ 251,860 ---------- HOUSEHOLD & PERSONAL PRODUCTS--1.6% PERSONAL PRODUCTS--1.6% Avon Products, Inc. 7,400 398,638 ---------- ENERGY--7.7% INTEGRATED OIL & GAS--2.7% Amerada Hess Corp. 6,400 352,320 ConocoPhillips 3,860 186,785 Occidental Petroleum Corp. 5,500 156,475 ---------- 695,580 ---------- OIL & GAS DRILLING--2.1% Diamond Offshore Drilling, Inc. 5,200 113,620 Noble Corp. (a) 7,400 260,110 Transocean Inc. 6,450 149,640 ---------- 523,370 ---------- OIL & GAS EQUIPMENT & SERVICES--0.9% BJ Services Co. (a) 2,400 77,544 Weatherford International, Inc. (a) 4,000 159,720 ---------- 237,264 ---------- OIL & GAS EXPLORATION & PRODUCTION--2.0% XTO Energy, Inc. 20,200 498,940 ---------- FINANCIALS--21.4% BANKS--10.9% Banknorth Group, Inc. 9,600 216,960 Charter One Financial, Inc. 6,895 198,093 City National Corp. 9,500 417,905 Cullen/Frost Bankers, Inc. 3,800 124,260 Golden West Financial Corp. 7,900 567,299 Greenpoint Financial Corp. 9,000 406,620 North Fork Bancorporation, Inc. 12,500 421,750 Sovereign Bancorp, Inc. 20,100 282,405 Webster Financial Corp. 3,400 118,320 ---------- 2,753,612 ---------- DIVERSIFIED FINANCIAL SERVICES--8.5% Ambac Financial Group, Inc. 6,550 368,372 Bear Stearns Cos., Inc. 6,400 380,160 Citigroup, Inc. 6,831 240,383 Janus Capital Group, Inc. 27,700 362,039 Lehman Brothers Holdings, Inc. 3,500 186,515 PMI Group, Inc. 9,100 273,364 Radian Group, Inc. 8,900 330,635 ---------- 2,141,468 ---------- INSURANCE--2.0% LIFE & HEALTH INSURANCE--0.5% Nationwide Financial Services, Inc., Class A 4,800 137,520 ---------- MULTI-LINE INSURANCE--0.5% Loews Corp. 3,000 133,380 ----------
See Notes to Investment Portfolio. 127
SHARES VALUE ---------- ---------- PROPERTY & CASUALTY INSURANCE--1.0% St. Paul Companies, Inc. 7,100 $ 241,755 ---------- HEALTH CARE--4.1% HEALTH CARE EQUIPMENT & SERVICES--4.1% HEALTH CARE DISTRIBUTORS & SERVICES--0.5% Patterson Dental Co. (a) 2,900 126,846 ---------- HEALTH CARE EQUIPMENT--1.1% Biomet, Inc. 10,000 286,600 ---------- HEALTH CARE FACILITIES--0.7% HCA, Inc. 4,200 174,300 ---------- MANAGED HEALTH CARE--1.8% Anthem, Inc. (a) 2,400 150,960 First Health Group Corp. (a) 7,800 189,930 Wellpoint Health Networks, Inc. (a) 1,600 113,856 ---------- 454,746 ---------- INDUSTRIALS--9.4% CAPITAL GOODS--4.6% AEROSPACE & DEFENSE--1.5% Lockheed Martin Corp. 6,500 375,375 ---------- CONSTRUCTION & FARM MACHINERY--0.9% Navistar International Corp. (a) 8,900 216,359 ---------- INDUSTRIAL MACHINERY--2.2% Dover Corp. 11,400 332,424 Ingersoll Rand Co. 5,400 232,524 ---------- 564,948 ---------- COMMERCIAL SERVICES & SUPPLIES--3.3% COMMERCIAL PRINTING--0.6% Valassis Communications, Inc. (a) 4,700 138,321 ---------- DIVERSIFIED COMMERCIAL SERVICES--1.2% Cendant Corp. (a) 20,400 213,792 Pittston Brink's Group 5,000 92,400 ---------- 306,192 ---------- EMPLOYMENT SERVICES--1.5% Manpower, Inc. 12,100 385,990 ---------- TRANSPORTATION--1.5% AIR FREIGHT & COURIERS--0.5% CNF Inc. 3,900 129,636 ---------- AIRLINES--1.0% AMR Corp. (a) 19,600 129,360 Continental Airlines, Inc., Class B (a) 15,500 112,375 ---------- 241,735 ---------- INFORMATION TECHNOLOGY--9.5% SOFTWARE & SERVICES--3.4% APPLICATION SOFTWARE--1.0% Reynolds & Reynolds Co. 10,000 254,700 ---------- INFORMATION TECHNOLOGY CONSULTING & SERVICES--2.4% Affiliated Computer Services, Inc., Class A (a) 6,900 $ 363,285 DST Systems, Inc. (a) 6,500 231,075 ---------- 594,360 ---------- TECHNOLOGY HARDWARE & EQUIPMENT--6.1% ELECTRONIC EQUIPMENT & INSTRUMENTS--3.3% Amphenol Corp. (a) 10,000 380,000 Littelfuse, Inc. (a) 7,700 129,822 Millipore Corp. 7,900 268,600 Vishay Intertechnology, Inc. (a) 5,550 62,049 ---------- 840,471 ---------- OFFICE ELECTRONICS--1.6% Zebra Technologies Corp., Class A (a) 7,200 412,560 ---------- TELECOMMUNICATIONS EQUIPMENT--1.2% Andrew Corp. (a) 28,900 297,092 ---------- MATERIALS--11.1% CHEMICALS--8.1% DIVERSIFIED CHEMICALS--3.0% Eastman Chemical Co. 8,200 301,514 Engelhard Corp. 5,700 127,395 PPG Industries, Inc. 6,700 336,005 ---------- 764,914 ---------- INDUSTRIAL GASES--1.8% Air Products & Chemicals, Inc. 5,100 218,025 Praxair, Inc. 3,800 219,526 ---------- 437,551 ---------- SPECIALTY CHEMICALS--3.3% Ecolab, Inc. 2,800 138,600 International Flavors & Fragrances, Inc. 12,900 452,790 Lubrizol Corp. 7,100 216,550 OM Group, Inc. 4,700 32,336 ---------- 840,276 ---------- CONTAINERS & PACKAGING--0.8% PAPER PACKAGING--0.8% Packaging Corp. of America (a) 11,000 200,640 ---------- PAPER & FOREST PRODUCTS--2.2% PAPER PRODUCTS--2.2% Boise Cascade Corp. 3,100 78,182 Georgia-Pacific Corp. 18,100 292,496 Meadwestvaco Corp. 7,434 183,694 ---------- 554,372 ---------- TELECOMMUNICATION SERVICES--1.4% WIRELESS TELECOMMUNICATION SERVICES--1.4% Telephone & Data Systems, Inc. 7,700 362,054 ----------
See Notes to Investment Portfolio. 128
SHARES VALUE ---------- ----------- UTILITIES--4.0% ELECTRIC UTILITIES--3.5% Entergy Corp. 4,900 $ 223,391 Exelon Corp. 1,450 76,517 PPL Corp. 4,300 149,124 Progress Energy, Inc. 7,800 338,130 TXU Corp. 4,600 85,928 ----------- 873,090 ----------- GAS UTILITIES--0.1% El Paso Corp. 2,800 19,488 ----------- MULTI-UTILITIES & UNREGULATED POWER--0.4% Energy East Corp. 5,000 110,450 ----------- TOTAL COMMON STOCKS (cost of $25,479,930) 23,047,348 ----------- PAR ---------- SHORT-TERM OBLIGATION--8.9% Repurchase agreement with State Street Bank & Trust Co., dated 12/31/02, due 01/02/03 at 1.180%, collateralized by U.S. Treasury Bond maturing 02/15/29, market value $2,292,475 (repurchase proceeds $2,246,147) (cost of $2,246,000) $ 2,246,000 2,246,000 ------------ TOTAL INVESTMENTS--100.2% (cost of $27,725,930) (b) 25,293,348 ------------ OTHER ASSETS & LIABILITIES, NET--(0.2)% (45,955) ------------ NET ASSETS--100.0% $ 25,247,393 ============
NOTES TO INVESTMENT PORTFOLIO: (a) Non-income producing. (b) Cost for federal income tax purposes is $27,774,464. The difference between cost for generally accepted accounting principles and cost on a tax basis is related to deferral of losses on wash sales. Realized losses have been deferred for tax purposes and cost adjusted accordingly. See Notes to Financial Statements. 129 STATEMENT OF ASSETS AND LIABILITIES Liberty Select Value Fund, Variable Series / December 31, 2002 ASSETS: Investments, at cost $ 27,725,930 ------------ Investments, at value $ 25,293,348 Cash 102 Receivable for: Fund shares sold 110 Interest 74 Dividends 18,792 Deferred Trustees' compensation plan 668 ------------ TOTAL ASSETS 25,313,094 ------------ LIABILITIES: Expense reimbursement due to Distributor 2,683 Payable for: Fund shares repurchased 24,803 Management fee 14,931 Transfer agent fee 625 Pricing and bookkeeping fees 905 Trustees' fee 201 Audit fee 15,250 Reports to shareholders 3,660 Deferred Trustees' fee 668 Other liabilities 1,975 ------------ TOTAL LIABILITIES 65,701 ------------ NET ASSETS $ 25,247,393 ============ COMPOSITION OF NET ASSETS: Paid-in capital $ 27,750,219 Overdistributed net investment income (1,096) Accumulated net realized loss (69,148) Net unrealized depreciation on investments (2,432,582) ------------ NET ASSETS $ 25,247,393 ============ CLASS A: Net assets $ 631,989 Shares outstanding 52,160 ============ Net asset value per share $ 12.12 ============ CLASS B: Net assets $ 24,615,404 Shares outstanding 2,033,385 ============ Net asset value per share $ 12.11 ============
See Notes to Financial Statements. 130 STATEMENT OF OPERATIONS Liberty Select Value Fund, Variable Series For the Year Ended December 31, 2002 INVESTMENT INCOME: Dividends $ 228,911 Interest 29,754 ------------ Total Investment Income 258,665 ------------ EXPENSES: Management fee 152,363 Distribution fee--Class B 53,882 Pricing and bookkeeping fees 10,953 Transfer agent fee 7,500 Trustees' fee 6,128 Custody fee 3,694 Audit fee 15,525 Other expenses 6,478 ------------ Total Expenses 256,523 Fees reimbursed by Distributor--Class B (16,369) Custody earnings credit (151) ------------ Net Expenses 240,003 ------------ Net Investment Income 18,662 ------------ NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS: Net realized loss on investments (64,635) Net change in unrealized appreciation/depreciation on investments (2,874,205) ------------ Net Loss (2,938,840) ------------ Net Decrease in Net Assets from Operations $ (2,920,178) ============
See Notes to Financial Statements. 131 STATEMENT OF CHANGES IN NET ASSETS Liberty Select Value Fund, Variable Series
YEAR ENDED DECEMBER 31, ---------------------------- INCREASE (DECREASE) IN NET ASSETS: 2002 2001 --------------------------------- ------------ ------------ OPERATIONS: Net investment income $ 18,662 $ 31,801 Net realized gain (loss) on investments (64,635) 63,084 Net change in unrealized appreciation/depreciation on investments (2,874,205) 142,927 ------------ ------------ Net Increase (Decrease) from Operations (2,920,178) 237,812 ------------ ------------ DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income: Class A (1,387) (252) Class B (20,257) (36,585) From net realized gains: Class A -- (168) Class B -- (24,390) ------------ ------------ Total Distributions Declared to Shareholders (21,644) (61,395) ------------ ------------ SHARE TRANSACTIONS: Class A: Subscriptions 546,422 -- Distributions reinvested 1,387 420 Redemptions (9,127) -- ------------ ------------ Net Increase 538,682 420 ------------ ------------ Class B: Subscriptions 14,432,250 13,483,502 Distributions reinvested 20,257 60,975 Redemptions (3,803,086) (593,645) ------------ ------------ Net Increase 10,649,421 12,950,832 ------------ ------------ Net Increase from Share Transactions 11,188,103 12,951,252 ------------ ------------ Total Increase in Net Assets 8,246,281 13,127,669 NET ASSETS: Beginning of period 17,001,112 3,873,443 ------------ ------------ End of period (including overdistributed net investment income of $(1,096) and $(730), respectively) $ 25,247,393 $ 17,001,112 ============ ============ CHANGES IN SHARES: Class A: Subscriptions 44,354 -- Issued for distributions reinvested 115 31 Redemptions (752) -- ------------ ------------ Net Increase 43,717 31 ------------ ------------ Class B: Subscriptions 1,069,404 995,608 Issued for distributions reinvested 1,685 4,473 Redemptions (275,153) (46,766) ------------ ------------ Net Increase 795,936 953,315 ------------ ------------
See Notes to Financial Statements. 132 NOTES TO FINANCIAL STATEMENTS Liberty Select Value Fund, Variable Series / December 31, 2002 NOTE 1. ORGANIZATION AND ACCOUNTING POLICIES ORGANIZATION--Liberty Select Value Fund, Variable Series (the "Fund"), a series of Liberty Variable Investment Trust (the "Trust"), is a diversified portfolio of a Massachusetts business trust, registered under the Investment Company Act of 1940, as amended, as an open-end management investment company The Fund's investment goal is to seek long-term growth. The Fund's capitalization consists of an unlimited number of shares of beneficial interest without par value that represent a separate series of the Trust. The Fund offers two classes of shares: Class A and Class B. Each share of a class represents an equal proportionate beneficial interest in that share class and, when issued and outstanding, is fully paid and nonassessable. Shareholders would be entitled to share proportionally in the net assets of their share class available for distribution to shareholders upon liquidation of the Fund. Shares of the Fund are available and are being marketed exclusively as a pooled funding vehicle for variable annuity contracts ("VA contracts") and Variable Life Insurance Policies ("VLI Policies") offered by the separate accounts of certain life insurance companies ("Participating Insurance Companies"). The Participating Insurance Companies and their separate accounts own all the shares of the Fund. Liberty Advisory Services Corp. (the "Manager") ("LASC") provides investment management and advisory services to the Fund pursuant to its Management Agreement with the Fund. Colonial Management Associates, Inc. ("Colonial") provides sub-advisory services. LASC has delegated various administrative matters to Colonial. Colonial also provides pricing and bookkeeping services to the Fund. Liberty Funds Distributor, Inc. ("LFD"), an affiliate of the Manager, serves as the principal underwriter of the Fund. The Manager, Colonial and LFD are wholly-owned indirect subsidiaries of FleetBoston Financial Corporation ("FleetBoston"). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements SECURITY VALUATION AND TRANSACTIONS--Equity securities generally are valued at the last sale price or, in the case of unlisted or listed securities for which there were no sales during the day, at the current quoted bid price. Short-term obligations with a maturity of 60 days or less are valued at amortized cost. 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. 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. DETERMINATION OF CLASS NET ASSET VALUES AND FINANCIAL HIGHLIGHTS--All income, expenses (other than the Class B distribution fee), 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. The per share data was calculated using average shares outstanding during the period. In addition, Class B net investment income per share data and ratios reflect the distribution fee applicable to Class B shares only. 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. DISTRIBUTIONS TO SHAREHOLDERS--The Fund intends to distribute as income dividends or capital gains distributions, at least annually, substantially all of its net investment income and net profits realized from the sale of investments. All dividends and distributions are reinvested in additional shares of the Fund at net asset value as of the record date of the distribution. Income and capital gain distributions are determined in accordance with federal income tax regulations. OTHER--Interest income is recorded on the accrual basis. Corporate actions and dividend income are recorded on the ex-date. The Fund's custodian takes possession through the federal book-entry system of securities collateralizing repurchase agreements. Collateral is marked-to-market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund The Fund may experience costs and delays in liquidating the collateral if the issuer defaults or enters bankruptcy. NOTE 2. FEDERAL TAX INFORMATION Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from generally accepted accounting principles. These differences are primarily due to differing treatments for deferral of losses from wash sales and capital loss carry- 133 forwards. 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 December 31, 2002, permanent items identified and reclassified among the components of net assets are as follows:
ACCUMULATED OVERDISTRIBUTED NET NET REALIZED INVESTMENT INCOME LOSS PAID-IN CAPITAL ------------------ ------------ --------------- $ 2,616 $ -- $ (2,616)
Net investment income, net realized gains (losses) and net assets were not affected by this reclassification. The tax character of distributions paid during 2002 and 2001 was as follows:
2002 2001 -------- -------- Distributions paid from: Ordinary income $ 21,644 $ 61,395
As of December 31, 2002, the components of distributable earnings on a tax basis were as follows:
UNREALIZED DEPRECIATION* ------------- $ (2,481,116)
*The difference between book-basis and tax-basis unrealized depreciation is attributable primarily to the tax deferral of losses on wash sales. The following capital loss carryforwards are available to reduce taxable income arising from future net realized gains on investments, if any, to the extent permitted by the Internal Revenue Code:
YEAR OF CAPITAL LOSS EXPIRATION CARRYFORWARD ---------- ------------ 2010 $ 20,614
NOTE 3. FEES AND COMPENSATION PAID TO AFFILIATES MANAGEMENT AND SUB-ADVISORY FEES--The Manager receives a monthly fee equal to 0.70% annually of the Fund's average daily net assets. The Manager, out of the management fee it receives, pays Colonial a monthly sub-advisory fee equal to 0.50% annually of the Fund's average daily net assets. PRICING AND BOOKKEEPING FEES--Colonial is responsible for providing pricing and bookkeeping services to the Fund under a Pricing and Bookkeeping Agreement Under a separate agreement (the "Outsourcing Agreement"), Colonial has delegated those functions to State Street Bank & Trust Company ("State Street"). Colonial pays fees to State Street under the Outsourcing Agreement. Under its pricing and bookkeeping agreement with the Fund, Colonial 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. The Fund also pays out-of-pocket costs for pricing services. TRANSFER AGENT FEE--Liberty Funds Services, Inc. (the "Transfer Agent"), an affiliate of the Manager, provides shareholder services for an annual rate of $7,500. DISTRIBUTION FEE--The Fund has adopted a 12b-1 plan, which requires it to pay LFD a monthly distribution fee equal to 0.25% annually of Class B average daily net assets as of the 20th of each month. EXPENSE LIMITS--The Manager and LFD have voluntarily agreed to reimburse all expenses, including management fees and distribution fees, but excluding interest, taxes, brokerage and extraordinary expenses incurred by the Fund in excess of 1.10% annually of the Fund's average daily net assets. LFD will first reimburse the Class B distribution fee up to 0.25% annually to reach the 1.10% limit on Class B expenses. If additional reimbursement is needed to meet the limit for each class, the Manager will then reimburse other expenses to the extent necessary. If additional reimbursement is still needed to reach the expense limit, the Manager will then waive a portion of its management fee to reach the expense limit. This arrangement may be terminated or modified by the Manager or LFD at any time. OTHER--The Fund pays no compensation to its officers, all of whom are employees of Colonial 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 $151 of custody fees were reduced by balance credits for the year ended December 31, 2002. The Fund could have invested a portion of the assets utilized in connection with the expense offset arrangement in an income-producing asset if it had not entered into such an agreement. 134 NOTE 4. PORTFOLIO INFORMATION INVESTMENT ACTIVITY--For the year ended December 31, 2002, purchases and sales of investments, other than short-term obligations, were $15,291,714 and $4,198,293, respectively. Unrealized appreciation (depreciation) at December 31, 2002, based on cost of investments for federal income tax purposes, was: Gross unrealized appreciation $ 1,806,752 Gross unrealized depreciation (4,287,868) ------------ Net unrealized depreciation $ (2,481,116) ============
OTHER--The Fund may focus its investments in certain industries, subjecting it to greater risk than a fund that is more diversified. NOTE 5. OTHER RELATED PARTY TRANSACTIONS For the year ended December 31, 2002, the Fund used AlphaTrade Inc., a wholly-owned subsidiary of Colonial, as a broker. Total commissions paid to AlphaTrade Inc. during the year were $597. 135 FINANCIAL HIGHLIGHTS Liberty Select Value Fund, Variable Series--Class B Shares Selected data for a share outstanding throughout each period is as follows:
YEAR ENDED PERIOD DECEMBER 31, ENDED ------------------------- DECEMBER 31, 2002 2001 2000 (a) ---------- ---------- ---------- Net Asset Value, Beginning of Period $ 13.65 $ 13.24 $ 12.00 ---------- ---------- ---------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (b) 0.01 0.05 0.09 Net realized and unrealized gain (loss) on investments (1.54) 0.41 1.28 ---------- ---------- ---------- Total from Investment Operations (1.53) 0.46 1.37 ---------- ---------- ---------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.01) (0.03) (0.07) From net realized gains -- (0.02) --(c) Return of capital -- -- (0.06) ---------- ---------- ---------- Total Distributions Declared to Shareholders (0.01) (0.05) (0.13) ---------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 12.11 $ 13.65 $ 13.24 ========== ========== ========== Total return (d)(e)(f) (11.21)% 3.47% 11.38%(g) RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA: Expenses (h) 1.10% 1.10% 1.10%(i) Net investment income (h) 0.09% 0.34% 1.13%(i) Waiver/reimbursement 0.08% 0.73% 1.56%(i) Portfolio turnover rate 21% 15% 26%(g) Net assets, end of period (000's) $ 24,615 $ 16,886 $ 3,762
(a) For the period from commencement of operations on May 30, 2000 to December 31, 2000. (b) Per share data was calculated using average shares outstanding during the period. (c) Rounds to less than $0.01 per share. (d) Total return at net asset value assuming all distributions reinvested. (e) Had the Distributor and/or Manager not waived or reimbursed a portion of expenses, total return would have been reduced. (f) Total return figure does not include any insurance company charges associated with a variable annuity. If included, total return would be reduced. (g) Not annualized. (h) The benefits derived from custody credits and directed brokerage arrangements, if applicable, had an impact of less than 0.01%. (i) Annualized. 136 REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of Liberty Variable Investment Trust and the Class B Shareholders of Liberty Select Value Fund, Variable Series In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio, and the related statements of operations and of changes in net assets and the Class B financial highlights present fairly, in all material respects, the financial position of Liberty Select Value Fund, Variable Series (the "Fund") (a series of Liberty Variable Investment Trust) at December 31, 2002, and the results of its operations, the changes in its net assets and the Class B financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and the Class B financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2002 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts February 12, 2003 137 UNAUDITED INFORMATION FEDERAL INCOME TAX INFORMATION 100% of the ordinary income distributed by the Fund, for the year ended December 31, 2002, qualifies for the corporate dividends received deduction 138 PORTFOLIO MANAGER'S DISCUSSION Liberty Value Fund, Variable Series / December 31, 2002 Liberty Value Fund, Variable Series seeks primarily income and long-term capital growth, and secondarily, preservation of capital. Scott Schermerhorn, the fund's portfolio manager, is a senior vice president of Colonial Management Associates, Inc. ANOTHER DIFFICULT YEAR FOR STOCKS As the year began, an aggressive government stimulus package, combined with brisk consumer spending, helped stocks recover from their lows of the previous fall. By mid-year, however, both value and growth stocks headed down as investors responded to growing revelations of financial and accounting irregularities in a variety of Fortune 500 companies. Our investments in three of these companies, WorldCom, The Williams Companies and El Paso Corporation (0.4% of net assets) were the main reason for the fund's negative performance. Even though the markets moved higher in the fourth quarter of the calendar year, those positive returns were not enough to overcome the deficit created earlier in the year. We eliminated our positions in WorldCom and The Williams Companies in July. HELP FROM TELECOMMUNICATIONS AND PHARMACEUTICALS The telecommunications sector contributed positively to fund performance as many local providers returned to a slower growth strategy with greater emphasis on paying stable dividends. We increased our exposure to telecommunications companies at the end of the third quarter, and our positions in Verizon, Bell South and SBC (2.9%, 1.9% and 2.0% of net assets, respectively) all helped performance. We also did well with health care and pharmaceutical stocks. Earnings at Merck (2.6% of net assets) were flat compared to the previous year, which was a good sign in a generally weak market for corporate profits. Overall, we reduced our position in Merck during the period. We are maintaining a position in this company because we believe Merck has the potential to perform well. We also favored the energy sector, but we believe the companies we own would still have reasonable profit potential even if the price of oil settles at around $25 a barrel, which is what we expect it to do in the year ahead. BACK TO BASICS Based on our belief that consumers may substantially reduce their spending on non-essential items, we reduced our retail holdings. In the same spirit, we started a position in Safeway (2.5% of net assets), a well-managed, high quality grocery store chain that has the potential to fare well even if consumers pull back on spending. While we don't anticipate another lapse into recession, we believe that much of the spending fueled by mortgage refinancing and zero-percent vehicle loans is likely to fall off in the coming year. MODEST RECOVERY EXPECTED NEXT YEAR Looking forward to 2003, we expect a gradual economic recovery that may not be as robust as investors would like. We are focusing on undervalued sectors that we believe should appreciate over time, with a bias toward stocks that pay dividends. These companies may have an added benefit in difficult markets: they can cut dividends if necessary to maintain their financial strength without having to resort to borrowing. Despite the economic uncertainty, we still believe that the greatest risk is not to be invested in the stock market. ---------- Economic and market conditions can frequently change. There is no assurance that the trends described here will continue or commence. An investment in Liberty Value Fund, Variable Series offers the potential for long-term growth, but also involves certain risks, including stock market fluctuations due to economic and business developments. Value stocks are securities of companies that may have experienced adverse business or industry developments or may be subject to special risks that have caused the stocks to be out of favor. If the advisor's assessment of a company's prospects is wrong, the price of its stock may not approach the value the advisor has placed on it. Holdings are disclosed as of December 31, 2002, and are subject to change. 139 PERFORMANCE INFORMATION Liberty Value Fund, Variable Series / December 31, 2002 AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 2002 (%)
1-YEAR 5-YEAR LIFE ---------------------------------------------------------------- Class B(1) (6/1/00) -20.76 1.48 8.74 S&P 500 Index(2) -22.09 -0.58 9.31
Inception date of share class is in parentheses. [CHART] VALUE OF A $10,000 INVESTMENT, 7/1/93(3) - 12/31/02 CLASS B: $22,168
CLASS B SHARES S&P 500 Index $10,000 Jul-93 $9,970 $10,000 Jul-93 $10,070 $9,960 Aug-93 $10,540 $10,337 Sep-93 $10,540 $10,258 Oct-93 $10,710 $10,470 Nov-93 $10,400 $10,371 Dec-93 $10,501 $10,496 Jan-94 $10,856 $10,853 Feb-94 $10,674 $10,559 Mar-94 $10,339 $10,100 Apr-94 $10,420 $10,229 May-94 $10,360 $10,396 Jun-94 $10,157 $10,141 Jul-94 $10,460 $10,474 Aug-94 $10,724 $10,902 Sep-94 $10,582 $10,636 Oct-94 $10,511 $10,874 Nov-94 $10,156 $10,478 Dec-94 $10,421 $10,633 Jan-95 $10,557 $10,909 Feb-95 $10,910 $11,333 Mar-95 $11,181 $11,668 Apr-95 $11,452 $12,011 May-95 $11,836 $12,490 Jun-95 $12,117 $12,780 Jul-95 $12,428 $13,203 Aug-95 $12,678 $13,236 Sep-95 $12,876 $13,794 Oct-95 $12,948 $13,744 Nov-95 $13,572 $14,346 Dec-95 $13,626 $14,623 Jan-96 $14,099 $15,121 Feb-96 $14,260 $15,261 Mar-96 $14,324 $15,408 Apr-96 $14,517 $15,634 May-96 $14,745 $16,036 Jun-96 $14,778 $16,097 Jul-96 $14,175 $15,385 Aug-96 $14,465 $15,710 Sep-96 $14,993 $16,593 Oct-96 $15,251 $17,051 Nov-96 $15,973 $18,338 Dec-96 $15,974 $17,975 Jan-97 $16,501 $19,097 Feb-97 $16,685 $19,248 Mar-97 $15,895 $18,459 Apr-97 $16,697 $19,559 May-97 $17,680 $20,754 Jun-97 $18,606 $21,677 Jul-97 $19,408 $23,401 Aug-97 $19,133 $22,090 Sep-97 $20,105 $23,299 Oct-97 $19,429 $22,520 Nov-97 $20,300 $23,563 Dec-97 $20,602 $23,968 Jan-98 $20,656 $24,232 Feb-98 $22,040 $25,979 Mar-98 $22,643 $27,309 Apr-98 $22,927 $27,588 May-98 $22,282 $27,113 Jun-98 $22,940 $28,214 Jul-98 $22,079 $27,915 Aug-98 $19,355 $23,881 Sep-98 $19,059 $25,412 Oct-98 $20,804 $27,476 Nov-98 $21,974 $29,141 Dec-98 $22,897 $30,819 Jan-99 $23,217 $32,107 Feb-99 $22,267 $31,109 Mar-99 $22,895 $32,353 Apr-99 $23,594 $33,605 May-99 $23,455 $32,812 Jun-99 $24,892 $34,627 Jul-99 $24,153 $33,550 Aug-99 $23,998 $33,382 Sep-99 $23,329 $32,467 Oct-99 $24,348 $34,522 Nov-99 $24,222 $35,223 Dec-99 $24,166 $37,294 Jan-00 $22,975 $35,422 Feb-00 $21,307 $34,753 Mar-00 $23,783 $38,152 Apr-00 $24,460 $37,003 May-00 $25,744 $36,245 Jun-00 $24,187 $37,136 Jul-00 $24,131 $36,557 Aug-00 $25,176 $38,827 Sep-00 $25,561 $36,777 Oct-00 $26,627 $36,623 Nov-00 $26,406 $33,737 Dec-00 $28,080 $33,902 Jan-01 $28,156 $35,106 Feb-01 $27,599 $31,907 Mar-01 $26,909 $29,888 Apr-01 $27,487 $32,207 May-01 $27,823 $32,423 Jun-01 $26,818 $31,635 Jul-01 $27,674 $31,325 Aug-01 $27,580 $29,367 Sep-01 $26,388 $26,997 Oct-01 $27,209 $27,513 Nov-01 $27,786 $29,623 Dec-01 $27,961 $29,884 Jan-02 $27,270 $29,447 Feb-02 $27,796 $28,879 Mar-02 $28,547 $29,965 Apr-02 $27,836 $28,149 May-02 $27,533 $27,944 Jun-02 $24,168 $25,954 Jul-02 $22,080 $23,932 Aug-02 $22,910 $24,088 Sep-02 $20,409 $21,472 Oct-02 $21,860 $23,359 Nov-02 $23,270 $24,733 Dec-02 $22,168 $23,289
NET ASSET VALUE PER SHARE ($) 12/31/01 12/31/02 ---------------------------------------------------------------- Class B 13.80 10.70
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 SHARES. Total return performance includes changes in share price and reinvestment of all distributions. The S&P (Standard & Poor's) 500 Index is an unmanaged index that tracks the performance of 500 widely held, large-capitalization US stocks. Indexes are not investments, do not incur fees or expenses and are not professionally managed. It is not possible to invest directly in an index. Securities in the fund may not match those in the index. MUTUAL FUND PERFORMANCE CHANGES OVER TIME. CURRENT RETURNS FOR THE FUND MAY BE DIFFERENT THAN THAT SHOWN. Performance numbers reflect all fund expenses, but do not include any insurance charges imposed by your insurance company's separate accounts. If performance included the effect of these additional charges, it would be lower. (1) Class B share(newer class shares) performance information includes returns of the fund's class A shares (the older existing fund class) for periods prior to the inception of the newer class shares. These class A share returns were not restated to reflect any expense differential (e.g., Rule 12b-1 fees) between class A shares and the newer class shares. If differences in expenses were reflected, the returns for the periods prior to the inception of the newer class shares would be lower. (2) Index performance is from June 30, 1993. (3) Inception date of class A shares (oldest existing share class). 140 INVESTMENT PORTFOLIO Liberty Value Fund, Variable Series / December 31, 2002
SHARES VALUE ----------- ----------- COMMON STOCKS--98.6% CONSUMER DISCRETIONARY--11.9% AUTOMOBILES & COMPONENTS--1.4% AUTO PARTS & EQUIPMENT--1.4% Delphi Automotive Systems Corp. 195,178 $ 1,571,183 ----------- CONSUMER DURABLES & APPAREL--1.1% CONSUMER ELECTRONICS--1.1% Matsushita Electric Industrial Co., Ltd., ADR 125,900 1,208,640 ----------- HOTELS, RESTAURANTS & LEISURE--2.1% RESTAURANTS--2.1% McDonald's Corp. 141,500 2,275,320 ----------- MEDIA--5.5% ADVERTISING--1.1% Interpublic Group of Companies, Inc. 79,400 1,117,952 ----------- BROADCASTING & CABLE TV--1.9% Comcast Corp. (a) 89,200 2,102,444 ----------- MOVIES & ENTERTAINMENT--2.5% AOL Time Warner, Inc.(a) 78,200 1,024,420 News Corp., Ltd., ADR 65,700 1,724,625 ----------- 2,749,045 ----------- RETAILING--1.8% SPECIALTY STORES--1.8% Office Depot, Inc.(a) 136,500 2,014,740 ----------- CONSUMER STAPLES--12.3% FOOD & DRUG RETAIL--2.5% FOOD RETAIL--2.5% Safeway, Inc.(a) 114,700 2,679,392 ----------- FOOD, BEVERAGES & TOBACCO--9.8% AGRICULTURAL PRODUCTS--1.0% Archer-Daniels-Midland Co. 87,400 1,083,760 ----------- PACKAGED FOODS--7.9% ConAgra Foods, Inc. 131,500 3,288,815 Del Monte Foods Co.(a) 19,293 148,557 H.J. Heinz Co. 43,200 1,419,984 Sara Lee Corp. 171,300 3,855,963 ----------- 8,713,319 ----------- TOBACCO--0.9% Philip Morris Companies, Inc. 22,900 928,137 ----------- ENERGY--10.4% INTEGRATED OIL & GAS--7.6% ChevronTexaco Corp. 14,500 963,960 Marathon Oil Corp. 101,200 2,154,548 ConocoPhillips Petroleum Co. 41,070 1,987,377 Royal Dutch Petroleum Co., NY Shares 73,400 3,231,068 ----------- 8,336,953 ----------- OIL & GAS EQUIPMENT & SERVICES--1.7% Halliburton Co. 98,800 1,848,548 ----------- OIL & GAS EXPLORATION & PRODUCTION--1.1% Anadarko Petroleum Corp. 24,100 1,154,390 ----------- FINANCIALS--21.6% DIVERSIFIED FINANCIAL SERVICES--7.9% Citigroup, Inc. 133,600 $ 4,701,384 Freddie Mac 28,700 1,694,735 J.P. Morgan Chase & Co. 95,200 2,284,800 ----------- 8,680,919 ----------- INSURANCE--13.7% LIFE & HEALTH INSURANCE--3.0% AFLAC, Inc. 54,500 1,641,540 Lincoln National Corp. 51,700 1,632,686 ----------- 3,274,226 ----------- MULTI-LINE INSURANCE--2.8% American International Group, Inc. 53,000 3,066,050 ----------- PROPERTY & CASUALTY INSURANCE--7.9% Berkshire Hathaway, Inc., Class A (a) 70 5,092,500 Chubb Corp. 37,800 1,973,160 St. Paul Cos 45,400 1,545,870 ----------- 8,611,530 ----------- HEALTH CARE--8.7% HEALTH CARE EQUIPMENT & SERVICES--3.7% MANAGED HEALTHCARE SERVICES--3.7% Aetna Inc. 99,100 4,074,992 ----------- PHARMACEUTICALS & BIOTECHNOLOGY--5.0% PHARMACEUTICALS--5.0% Bristol-Myers Squibb Co. 43,900 1,016,285 Merck & Co., Inc. 50,200 2,841,822 Wyeth 42,500 1,589,500 ----------- 5,447,607 ----------- INDUSTRIALS--7.4% CAPITAL GOODS--5.3% AEROSPACE & DEFENSE--2.7% Raytheon Co. 38,000 1,168,500 Honeywell International Inc. 74,300 1,783,200 ----------- 2,951,700 ----------- INDUSTRIAL CONGLOMERATE--1.4% Textron Inc. 37,800 1,625,022 ----------- INDUSTRIAL MACHINERY--1.2% Dover Corp. 44,600 1,300,536 ----------- COMMERCIAL SERVICES & SUPPLIES--1.4% ENVIRONMENTAL SERVICES--1.4% Waste Management, Inc. 64,800 1,485,216 ----------- TRANSPORTATION--0.7% AIRLINES--0.7% AMR Corp.(a) 112,600 743,160 ----------- INFORMATION TECHNOLOGY--4.5% SOFTWARE & SERVICES--1.6% INFORMATION TECHNOLOGY CONSULTING & SERVICES--1.6% Electronic Data Systems Corp. 92,100 1,697,403 -----------
See Notes to Investment Portfolio. 141
SHARES VALUE ----------- ------------- TECHNOLOGY HARDWARE & EQUIPMENT--2.9% ELECTRONIC EQUIPMENT & INSTRUMENTS--0.7% Celestica, Inc.(a) 53,900 $ 759,990 ------------- OFFICE ELECTRONICS--1.5% Xerox Corp.(a) 208,700 1,680,035 ------------- TELECOMMUNICATIONS EQUIPMENT--0.7% Motorola, Inc. 85,800 742,170 ------------- MATERIALS--6.6% CHEMICALS--1.3% DIVERSIFIED CHEMICALS--1.3% Akzo Nobel NV, ADR 45,400 1,447,806 ------------- METALS & MINING--1.7% GOLD--1.0% Barrick Gold Corp. 71,400 1,100,274 ------------- STEEL--0.7% Nucor Corp. 17,200 710,360 ------------- PAPER & FOREST PRODUCTS--3.6% PAPER PRODUCTS--3.6% Bowater Inc. 22,700 952,265 Georgia-Pacific Corp. 114,900 1,856,784 International Paper Co. 33,800 1,181,986 ------------- 3,991,035 ------------- TELECOMMUNICATION SERVICES--10.5% DIVERSIFIED TELECOMMUNICATION SERVICES--10.5% INTEGRATED TELECOMMUNICATION SERVICES--10.5% AT&T Corp. 70,700 1,845,977 BellSouth Corp. 80,500 2,082,535 Deutsche Telekom AG, ADR 168,850 2,144,395 SBC Communications, Inc. 82,000 2,223,020 Verizon Communications, Inc. 80,700 3,127,125 ------------- 11,423,052 ------------- UTILITIES--4.7% ELECTRIC UTILITIES--2.8% American Electric Power Co. 20,600 $ 562,998 PG&E Corp. (a) 123,600 1,718,040 TXU Corp. 38,800 724,784 ------------- 3,005,822 ------------- GAS UTILITIES -- 0.4% El Paso Corp. 62,800 437,088 ------------- MULTI-UTILITIES & UNREGULATED POWER -- 1.5% Duke Energy Corp. 83,900 1,639,406 ------------- TOTAL COMMON STOCKS (cost of $122,083,949) 107,679,222 ------------- PAR ----------- SHORT-TERM OBLIGATION -- 2.0% Repurchase agreement with State Street Bank & Trust Co., dated 12/31/02, due 01/02/03 at 1.180%, collateralized by U.S. Treasury Note maturing 02/15/12, market value $2,206,969 (repurchase proceeds $2,160,142) (cost of $2,160,000) $ 2,160,000 2,160,000 ------------- TOTAL INVESTMENTS -- 100.6% (cost of $124,243,949)(b) 109,839,222 ------------- OTHER ASSETS & LIABILITIES, NET -- (0.6)% (614,432) ------------- NET ASSETS -- 100.0% $ 109,224,790 =============
NOTES TO INVESTMENT PORTFOLIO: (a) Non-income producing. (b) Cost for federal income tax purposes is $124,756,598. The difference between cost for generally accepted accounting principles and cost on a tax basis is related to deferral of losses on wash sales. Realized losses have been deferred for tax purposes and cost adjusted accordingly.
ACRONYM NAME ------- ---- ADR American Depositary Receipt
See Notes to Financial Statements 142 STATEMENT OF ASSETS AND LIABILITIES Liberty Value Fund, Variable Series / December 31, 2002 ASSETS: Investments, at cost $ 124,243,949 ------------- Investments, at value $ 109,839,222 Cash 928 Receivable for: Fund shares sold 41,441 Interest 71 Dividends 195,897 Deferred Trustees' compensation plan 4,607 ------------- TOTAL ASSETS 110,082,166 ------------- LIABILITIES: Payable for: Investments purchased 111,333 Fund shares repurchased 607,768 Management fee 63,340 Transfer agent fee 625 Pricing and bookkeeping fees 3,763 Deferred Trustees' fee 4,607 Other liabilities 65,940 ------------- TOTAL LIABILITIES 857,376 ------------- NET ASSETS $ 109,224,790 ============= COMPOSITION OF NET ASSETS: Paid-in capital $ 137,373,784 Overdistributed net investment income (4,037) Accumulated net realized loss (13,740,198) Net unrealized depreciation on: Investments (14,404,727) Foreign currency translations (32) ------------- NET ASSETS $ 109,224,790 ============= CLASS A: Net assets $ 100,980,408 Shares outstanding 9,417,656 ============= Net asset value per share $ 10.72 ============= CLASS B: Net assets $ 8,244,382 Shares outstanding 770,167 ============= Net asset value per share $ 10.70 =============
See Notes to Financial Statements. 143 STATEMENT OF OPERATIONS Liberty Value Fund, Variable Series For the Year Ended December 31, 2002 INVESTMENT INCOME: Dividends $ 2,656,322 Interest 43,478 ------------- Total Investment Income (net of foreign taxes withheld of $36,237) 2,699,800 ------------- EXPENSES: Management fee 890,087 Distribution fee--Class B 21,281 Pricing and bookkeeping fees 60,845 Transfer agent fee 7,500 Trustees' fee 9,482 Custody fee 8,073 Other expenses 32,177 ------------- Total Expenses 1,029,445 Custody earnings credit (63) ------------- Net Expenses 1,029,382 ------------- Net Investment Income 1,670,418 ------------- NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS: Net realized loss on investments (12,969,698) Net change in unrealized appreciation/depreciation on investments (21,667,186) ------------- Net Loss (34,636,884) ------------- Net Decrease in Net Assets from Operations $ (32,966,466) =============
See Notes to Financial Statements. 144 STATEMENT OF CHANGES IN NET ASSETS Liberty Value Fund, Variable Series
YEAR ENDED DECEMBER 31, ---------------------------- INCREASE (DECREASE) IN NET ASSETS: 2002 2001 ---------------------------------- ------------- ------------- OPERATIONS: Net investment income $ 1,670,418 $ 2,045,561 Net realized gain (loss) on investments (12,969,698) 16,948,658 Net change in unrealized appreciation/depreciation on investments (21,667,186) (20,337,495) ------------- ------------- Net Decrease from Operations (32,966,466) (1,343,276) ------------- ------------- DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income: Class A (1,561,038) (1,952,148) Class B (107,850) (92,744) From net realized gains: Class A (921,862) (11,312,710) Class B (71,850) (537,449) ------------- ------------- Total Distributions Declared to Shareholders (2,662,600) (13,895,051) ------------- ------------- SHARE TRANSACTIONS: Class A: Subscriptions 5,009,117 5,987,008 Distributions reinvested 2,482,900 13,264,858 Redemptions (31,381,229) (42,341,707) ------------- ------------- Net Decrease (23,889,212) (23,089,841) ------------- ------------- Class B: Subscriptions 4,179,765 7,448,901 Distributions reinvested 179,700 630,193 Redemptions (1,563,744) (902,742) ------------- ------------- Net Increase 2,795,721 7,176,352 ------------- ------------- Net Decrease from Share Transactions (21,093,491) (15,913,489) ------------- ------------- Total Decrease in Net Assets (56,722,557) (31,151,816) NET ASSETS: Beginning of period 165,947,347 197,099,163 ------------- ------------- End of period (including overdistributed net investment income of $(4,037) and $(5,556), respectively) $ 109,224,790 $ 165,947,347 ============= ============= CHANGES IN SHARES: Class A: Subscriptions 395,329 406,061 Issued for distributions reinvested 232,093 957,751 Redemptions (2,655,968) (2,891,621) ------------- ------------- Net Decrease (2,028,546) (1,527,809) ------------- ------------- Class B: Subscriptions 336,266 506,945 Issued for distributions reinvested 16,821 45,567 Redemptions (144,885) (62,240) ------------- ------------- Net Increase 208,202 490,272 ------------- -------------
See Notes to Financial Statements. 145 NOTES TO FINANCIAL STATEMENTS Liberty Value Fund, Variable Series / December 31, 2002 NOTE 1. ORGANIZATION AND ACCOUNTING POLICIES ORGANIZATION--Liberty Value Fund, Variable Series (the "Fund"), a series of Liberty Variable Investment Trust (the "Trust"), is a diversified portfolio of a Massachusetts business trust, registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The Fund's investment goal is to seek primarily income and long-term capital growth and secondarily, preservation of capital. The Fund's capitalization consists of an unlimited number of shares of beneficial interest without par value that represent a separate series of the Trust. The Fund offers two classes of shares: Class A and Class B. Each share of a class represents an equal proportionate beneficial interest in that share class and, when issued and outstanding, is fully paid and nonassessable. Shareholders would be entitled to share proportionally in the net assets of their share class available for distribution to shareholders upon liquidation of the Fund. Shares of the Fund are available and are being marketed exclusively as a pooled funding vehicle for variable annuity contracts ("VA contracts") and Variable Life Insurance Policies ("VLI Policies") offered by the separate accounts of certain life insurance companies ("Participating Insurance Companies"). The Participating Insurance Companies and their separate accounts own all the shares of the Fund. Liberty Advisory Services Corp. (the "Manager") ("LASC") provides investment management and advisory services to the Fund pursuant to its Management Agreement with the Fund. Colonial Management Associates, Inc. ("Colonial") provides sub-advisory services. LASC has delegated various administrative matters to Colonial. Colonial also provides pricing and bookkeeping services to the Fund. Liberty Funds Distributor, Inc. ("LFD"), an affiliate of the Manager, serves as the principal underwriter of the Fund. The Manager, Colonial and LFD are wholly-owned indirect subsidiaries of FleetBoston Financial Corporation ("FleetBoston"). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. SECURITY VALUATION AND TRANSACTIONS--Equity securities generally are valued at the last sale price or, in the case of unlisted or listed securities for which there were no sales during the day, at the current quoted bid price. Forward currency contracts are valued based on the weighted value of exchange-traded contracts with similar durations. Short-term obligations with a maturity of 60 days or less are valued at amortized cost. The values of all assets and liabilities quoted in foreign currencies are translated into U.S. dollars at that day's exchange rates. 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. Generally, trading in foreign securities is substantially completed each day at various times prior to the close of the New York Stock Exchange ("NYSE"). The values of such securities used in computing the net asset value of the Fund's shares are determined as of such times. Foreign currency exchange rates are also generally determined prior to the close of the NYSE. Occasionally, events affecting the values of such securities and such exchange rates may occur between the times at which they are determined and the close of the customary trading session of the NYSE which would not be reflected in the computation of the Fund's net asset value. If events materially affecting the value of such securities and such exchange rates occur during such period, then these securities will be valued at their fair value as determined in good faith by or under the supervision of the Board of Trustees. 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. DETERMINATION OF CLASS NET ASSET VALUES AND FINANCIAL HIGHLIGHTS--All income, expenses (other than the Class B distribution fee), 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. The per share data was calculated using average shares outstanding during the period. In addition, Class B net investment income per share data and ratios reflect the distribution fee applicable to Class B shares only. 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. DISTRIBUTIONS TO SHAREHOLDERS--The Fund intends to distribute as income dividends or capital gains distributions, 146 at least annually, substantially all of its net investment income and net profits realized from the sale of investments. All dividends and distributions are reinvested in additional shares of the Fund at net asset value as of the record date of the distribution. Income and capital gain distributions are determined in accordance with federal income tax regulations. FOREIGN CURRENCY TRANSACTIONS--Net realized and unrealized gains (losses) on foreign currency transactions includes gains (losses) arising from the fluctuations in exchange rates between trade and settlement dates on securities transactions, gains (losses) arising from the disposition of foreign currency, and currency gains (losses) between the accrual and payment dates on dividends, interest income and foreign withholding taxes. The Fund does not distinguish that portion of gains (losses) on investments which is due to changes in foreign exchange rates from that which is due to changes in market prices of the investments. Such fluctuations are included with the net realized and unrealized gains (losses) on investments. FORWARD CURRENCY CONTRACTS--The Fund may enter into forward currency contracts to purchase or sell foreign currencies at predetermined exchange rates in connection with the settlement of purchases and sales of securities. The Fund may also enter into forward currency contracts to hedge certain other foreign currency denominated assets. The contracts are used to minimize the exposure to foreign exchange rate fluctuations during the period between trade and settlement date of the contracts. All contracts are marked-to-market daily, resulting in unrealized gains (losses) which become realized at the time the forward currency contracts are closed or mature. Realized and unrealized gains (losses) arising from such transactions are included in net realized and unrealized gains (losses) on foreign currency transactions. Forward currency contracts do not eliminate fluctuations in the prices of the Fund's portfolio securities. While the maximum potential loss from such contracts is the aggregate face value in U.S. dollars at the time the contract was opened, exposure is typically limited to the change in value of the contract (in U.S. dollars) over the period it remains open. Risks may also arise if counterparties fail to perform their obligations under the contracts. OTHER--Interest income is recorded on the accrual basis. Corporate actions and dividend income are recorded on the ex-date (except for certain foreign securities which are recorded as soon after ex-date as the Fund becomes aware of such), net of non-reclaimable tax withholdings. Where a high level of uncertainty as to collection exists, income on securities is recorded net of all tax withholdings with any rebates recorded when received. The Fund's custodian takes possession through the federal book-entry system of securities collateralizing repurchase agreements. Collateral is marked-to-market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund. The Fund may experience costs and delays in liquidating the collateral if the issuer defaults or enters bankruptcy. NOTE 2. FEDERAL TAX INFORMATION Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from generally accepted accounting principles. These differences are primarily due to differing treatments for deferral of losses from wash sales, post-October losses, capital loss carryforwards 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 December 31, 2002, permanent items identified and reclassified among the components of net assets are as follows:
OVERDISTRIBUTED NET ACCUMULATED NET PAID-IN INVESTMENT INCOME REALIZED LOSS CAPITAL ------------------- --------------- ------- $ (11) $ 10 $ 1
Net investment income, net realized gains (losses) and net assets were not affected by this reclassification. The tax character of distributions paid during 2002 and 2001 was as follows:
2002 2001 ----------- ------------ Distributions paid from: Ordinary Income $ 1,668,888 $ 3,940,882 Long-term capital gain 993,712 9,954,169 ----------- ------------ $ 2,662,600 $ 13,895,051 =========== ============
As of December 31, 2002, the components of distributable earnings on a tax basis were as follows:
UNDISTRIBUTED UNREALIZED ORDINARY INCOME DEPRECIATION* --------------- ------------- $ 2,139 $ (14,917,408)
* The difference between book-basis and tax-basis unrealized depreciation is attributable primarily to the tax deferral of losses on wash sales. 147 The following capital loss carryforwards are available to reduce taxable income arising from future net realized gains on investments, if any, to the extent permitted by the Internal Revenue Code:
YEAR OF CAPITAL LOSS EXPIRATION CARRYFORWARD ------------ ------------ 2010 $ 11,754,808
Under current tax rules, certain capital losses realized after October 31 may be deferred and treated as occurring on the first day of the following fiscal year. As of December 31, 2002, for federal income tax purposes, post October losses of $1,472,740 were deferred to January 1, 2003. NOTE 3. FEES AND COMPENSATION PAID TO AFFILIATES MANAGEMENT AND SUB-ADVISORY FEES--The Manager receives a monthly fee equal to 0.65% annually of the Fund's average daily net assets. The Manager, out of the management fee it receives, pays Colonial a monthly sub-advisory fee equal to 0.45% annually of the Fund's average daily net assets. PRICING AND BOOKKEEPING FEES--Colonial is responsible for providing pricing and bookkeeping services to the Fund under a Pricing and Bookkeeping Agreement. Under a separate agreement (the "Outsourcing Agreement"), Colonial has delegated those functions to State Street Bank & Trust Company ("State Street"). Colonial pays fees to State Street under the Outsourcing Agreement. Under its pricing and bookkeeping agreement with the Fund, Colonial 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 December 31, 2002, the net asset based fee rate was 0.036%. The Fund also pays out-of-pocket costs for pricing services. TRANSFER AGENT FEE--Liberty Funds Services, Inc. (the "Transfer Agent"), an affiliate of the Manager, provides shareholder services for an annual rate of $7,500. DISTRIBUTION FEE--The Fund has adopted a 12b-1 plan, which requires it to pay LFD a monthly distribution fee equal to 0.25% annually of Class B average daily net assets as of the 20th of each month. OTHER--The Fund pays no compensation to its officers, all of whom are employees of Colonial 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 $63 of custody fees were reduced by balance credits for the year ended December 31, 2002. The Fund could have invested a portion of the assets utilized in connection with the expense offset arrangement in an income-producing asset if it had not entered into such an agreement. NOTE 4. PORTFOLIO INFORMATION INVESTMENT ACTIVITY--For the year ended December 31, 2002, purchases and sales of investments, other than short-term obligations, were $91,516,373 and $105,183,601, respectively. Unrealized appreciation (depreciation) at December 31, 2002, based on cost of investments for federal income tax purposes, was: Gross unrealized appreciation $ 8,847,949 Gross unrealized depreciation (23,765,325) ------------- Net unrealized depreciation $ (14,917,376) =============
OTHER--There are certain additional risks involved when investing in foreign securities that are not inherent with investments in domestic securities. These risks may involve foreign currency exchange rate fluctuations, adverse political and economic developments and the possible prevention of foreign currency exchange or the imposition of other foreign governmental laws or restrictions. The Fund may focus its investments in certain industries, subjecting it to greater risk than a fund that is more diversified. NOTE 5. OTHER RELATED PARTY TRANSACTIONS For the year ended December 31, 2002, the Fund used AlphaTrade Inc. and Fleet Securities, Inc., both wholly-owned subsidiaries of Colonial, as brokers. Total commissions paid to AlphaTrade Inc. and Fleet Securities, Inc. during the year were $16,343 and $525, respectively. NOTE 6. PROPOSED REORGANIZATION The Board of Trustees has approved a proposal to reorganize the Fund, subject to shareholder approval and the satisfaction of certain other conditions. Shareholders of the Fund are scheduled to vote on the proposal at a special meeting of shareholders to be held on February 19, 2003. If approved at the special meeting, the reorganization is proposed to take place on or around April 4, 2003. 148 FINANCIAL HIGHLIGHTS Liberty Value Fund, Variable Series--Class B Shares Selected data for a share outstanding throughout each period is as follows:
YEAR ENDED PERIOD DECEMBER 31, ENDED ------------------------ DECEMBER 31, 2002 2001 2000 (a) ---------- ---------- ------------- Net Asset Value, Beginning of Period $ 13.80 $ 15.09 $ 13.94 ---------- ---------- ---------- INCOME FROM INVESTMENT OPERATIONS: Net investment income(b) 0.12 0.13 0.09 Net realized and unrealized gain (loss) on investments and foreign currency (2.99) (0.19) 1.29 ---------- ---------- ---------- Total from Investment Operations (2.87) (0.06) 1.38 ---------- ---------- ---------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.14) (0.17) (0.19) In excess of net investment income -- -- (0.01) From net realized gains (0.09) (1.06) (0.03) ---------- ---------- ---------- Total Distributions Declared to Shareholders (0.23) (1.23) (0.23) ---------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 10.70 $ 13.80 $ 15.09 ========== ========== ========== Total return(c)(d) (20.76)% (0.43)% 9.86%(e)(f) RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA: Expenses(g) 0.99% 1.06% 1.00%(h) Net investment income(g) 0.99% 0.91% 1.09%(h) Waiver/reimbursement -- -- 0.04%(h) Portfolio turnover rate 68% 54% 84% Net assets, end of period (000's) $ 8,244 $ 7,755 $ 1,082
(a) For the period from commencement of operations on June 1, 2000 to December 31, 2000. (b) Per share data was calculated using average shares outstanding during the period. (c) Total return at net asset value assuming all distributions reinvested. (d) Total return figure does not include any insurance company charges associated with a variable annuity. If included, total return would be reduced. (e) Had the Manager and/or Distributor not waived or reimbursed a portion of expenses, total return would have been reduced. (f) Not annualized. (g) The benefits derived from custody credits and directed brokerage arrangements, if applicable, had an impact of less than 0.01%. (h) Annualized. 149 REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of Liberty Variable Investment Trust and the Class B Shareholders of Liberty Value Fund, Variable Series In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio, and the related statements of operations and of changes in net assets and the Class B financial highlights present fairly, in all material respects, the financial position of Liberty Value Fund, Variable Series (the "Fund") (a series of Liberty Variable Investment Trust) at December 31, 2002, and the results of its operations, the changes in its net assets and the Class B financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and the Class B financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2002 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts February 12, 2003 150 UNAUDITED INFORMATION FEDERAL INCOME TAX INFORMATION 100.00% of the ordinary income distributed by the Fund, for the year ended December 31, 2002, qualifies for the corporate dividends received deduction. 151 PORTFOLIO MANAGER'S DISCUSSION Newport Tiger Fund, Variable Series / December 31, 2002 Newport Tiger Fund, Variable Series seeks long-term capital appreciation. Since August 2002, Eric Sandlund, senior equity portfolio manager of Newport Pacific Management, Inc., has served as the portfolio manager of the fund. Previous to that, the fund was managed by Lynda Couch. Weakness in the global economy took its toll on Asia during the period. Economies that depend mostly on exports for their economic strength were particularly hard hit, especially Singapore, Hong Kong and Taiwan. However, countries for which domestic spending has become a bigger part of economic growth, including India, China and Thailand, were in a better position to weather the global economic downturn. HONG KONG AND SINGAPORE UNDERPERFORMED OTHER ASIAN MARKETS The fund's relatively large positions in Hong Kong and Singapore were the main detractors from returns, as these markets were among the worst performers in Asia. Hong Kong's real estate sector, which has been the traditional driver of the economy, suffered from a decline in property values. Singapore was affected primarily by the lower demand for exports which resulted from the pull-back in the global economy. INVESTMENTS IN "CONTINENTAL ECONOMIES" AIDED PERFORMANCE The economies of China and India are considered continental economies because they have large and diverse populations that can support commerce within their borders and hence are less dependent on exports for their economic strength. When investing in these two countries, we focused on companies whose earnings come primarily from domestic consumption. In China we sought less volatile companies that offer stable growth over the long term. Two examples are Beijing Datang, a utility company, and Zhejiang Expressway (1.1% and 1.0% of net assets, respectively), a company that operates toll roads in the greater Shanghai area, the fastest growing region in China. We believe that Zhejiang Expressway could prosper from China's dramatic increase in the use of private automobiles. In India, we found opportunity in companies that have been benefiting from the rapidly growing housing sector. We built a position in Housing Development Finance Corporation (4.9% of net assets), a mortgage lender. We also favored companies that capitalized on India's large pool of engineering and scientific talent. We invested in Infosys Technologies (6.1% of net assets), a software company that provides technical personnel to multinational corporations. We also purchased Dr. Reddy's Laboratories (2.3% of net assets), a manufacturer of generic drugs that is well-positioned to benefit from rising health care costs around the world. THAILAND'S PRO-GROWTH AGENDA LED TO INVESTMENT OPPORTUNITIES The government of Thailand has adopted a pro-growth agenda that encourages infrastructure development and personal spending. Interest rates in Thailand have declined dramatically, and there has been a substantial rise in automobile and home sales. To take advantage of these trends, we invested in Siam Cement (2.0% of net assets), a company that could profit from an increase in construction projects. We also invested in Thai banks, which could do well in an environment of lower interest rates and economic expansion. FOCUSING ON DOMESTIC GROWTH We are concerned about the prospects for the US economy and are cautious about investing in countries that rely heavily on the United States as an export market. Therefore, we plan to focus primarily on regions in which economic growth is driven more by internal demand for goods and services. These include China and India, where economic growth is estimated to be two to three times that of most other countries. We also believe the domestic economy in Thailand will continue to be a source of investment opportunity for the fund. -------------------- Economic and market conditions can frequently change. There is no assurance that the trends described here will continue or commence. Investing in Newport Tiger, Variable Series offers long-term growth potential; however, the net asset value of the fund will fluctuate due to economic and political developments and currency exchange rate fluctuations. Many of the Asian countries are considered emerging economies, which means there may be greater risks associated with investing there than in more developed countries. In addition, concentration of investments in a single region may result in greater volatility. Holdings are disclosed as of December 31, 2002 and are subject to change. 152 PERFORMANCE INFORMATION Newport Tiger Fund, Variable Series / December 31, 2002 AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 2002(%)
1-YEAR 5-YEAR LIFE ------------------------------------------------------------- Class B(1) (6/1/00) -17.70 -1.79 -2.74 MSCI AC Free Asia ex Japan Index(2) -6.09 -2.81 -6.07 MSCI EAFE (GDP) Index(2) -15.90 -1.71 1.16
Inception date of share class is in parentheses. [CHART] VALUE OF A $10,000 INVESTMENT, 5/1/95(3) - 12/31/02 Class B: $8,084
CLASS B SHARES MSCI EAFE (GDP) INDEX MSCI AC FREE ASIA EX JAPAN INDEX 5/1/95 $ 10,000 $ 10,000 $ 10,000 5/31/95 $ 11,100 $ 9,903 $ 11,125 6/30/95 $ 10,900 $ 9,792 $ 10,951 7/31/95 $ 11,200 $ 10,432 $ 11,157 8/31/95 $ 10,851 $ 9,996 $ 10,643 9/30/95 $ 11,050 $ 10,115 $ 10,770 10/31/95 $ 11,000 $ 9,822 $ 10,584 11/30/95 $ 11,050 $ 10,029 $ 10,344 12/31/95 $ 11,501 $ 10,459 $ 10,856 1/31/96 $ 12,661 $ 10,591 $ 11,700 2/29/96 $ 12,560 $ 10,623 $ 11,827 3/31/96 $ 12,560 $ 10,764 $ 11,914 4/30/96 $ 12,510 $ 11,099 $ 12,342 5/31/96 $ 12,460 $ 10,935 $ 12,204 6/30/96 $ 12,208 $ 11,020 $ 12,022 7/31/96 $ 11,552 $ 10,704 $ 11,135 8/30/96 $ 11,956 $ 10,697 $ 11,471 9/30/96 $ 12,308 $ 10,992 $ 11,669 10/31/96 $ 12,207 $ 10,872 $ 11,447 11/30/96 $ 12,813 $ 11,336 $ 11,987 12/31/96 $ 12,851 $ 11,256 $ 11,945 1/31/97 $ 12,750 $ 11,044 $ 12,193 2/28/97 $ 12,750 $ 11,121 $ 12,296 3/31/97 $ 11,985 $ 11,334 $ 11,602 4/30/97 $ 11,781 $ 11,305 $ 11,429 5/31/97 $ 12,852 $ 11,894 $ 11,946 6/30/97 $ 13,464 $ 12,602 $ 12,384 7/31/97 $ 13,668 $ 12,879 $ 12,488 8/31/97 $ 11,324 $ 11,955 $ 10,274 9/30/97 $ 11,681 $ 12,722 $ 10,227 10/31/97 $ 9,028 $ 11,782 $ 7,954 11/30/97 $ 8,876 $ 11,734 $ 7,408 12/31/97 $ 8,850 $ 11,904 $ 7,132 1/31/98 $ 7,556 $ 12,523 $ 6,515 2/28/98 $ 9,212 $ 13,243 $ 7,897 3/31/98 $ 9,161 $ 13,965 $ 7,781 4/30/98 $ 8,385 $ 14,174 $ 7,098 5/31/98 $ 7,246 $ 14,375 $ 6,015 6/30/98 $ 6,522 $ 14,510 $ 5,340 7/31/98 $ 6,004 $ 14,699 $ 5,205 8/31/98 $ 5,124 $ 12,762 $ 4,455 9/30/98 $ 6,003 $ 12,406 $ 4,897 10/31/98 $ 7,763 $ 13,786 $ 5,961 11/30/98 $ 8,281 $ 14,502 $ 6,442 12/31/98 $ 8,281 $ 15,085 $ 6,576 1/31/99 $ 7,806 $ 15,100 $ 6,472 2/28/99 $ 7,806 $ 14,626 $ 6,345 3/31/99 $ 8,492 $ 15,395 $ 7,106 4/30/99 $ 10,338 $ 16,013 $ 8,405 5/31/99 $ 9,652 $ 15,174 $ 8,224 6/30/99 $ 10,707 $ 15,937 $ 9,509 7/31/99 $ 10,707 $ 16,421 $ 9,300 8/31/99 $ 10,760 $ 16,528 $ 9,530 9/30/99 $ 10,338 $ 16,812 $ 8,863 10/31/99 $ 11,023 $ 17,391 $ 9,148 11/30/99 $ 12,342 $ 18,013 $ 10,017 12/31/99 $ 13,912 $ 19,762 $ 10,829 1/31/00 $ 13,274 $ 18,669 $ 10,776 2/29/00 $ 13,646 $ 19,356 $ 10,551 3/31/00 $ 14,177 $ 19,931 $ 10,799 4/30/00 $ 13,274 $ 18,710 $ 9,809 5/31/00 $ 12,530 $ 18,292 $ 8,955 6/30/00 $ 13,864 $ 19,088 $ 9,429 7/31/00 $ 13,811 $ 18,128 $ 9,026 8/31/00 $ 13,757 $ 18,327 $ 8,959 9/30/00 $ 12,851 $ 17,475 $ 7,932 10/31/00 $ 12,211 $ 16,974 $ 7,309 11/30/00 $ 11,571 $ 16,295 $ 7,026 12/31/00 $ 11,786 $ 16,692 $ 7,015 1/31/01 $ 12,701 $ 16,846 $ 7,918 2/28/01 $ 11,947 $ 15,717 $ 7,543 3/31/01 $ 10,548 $ 14,702 $ 6,690 4/30/01 $ 11,140 $ 15,666 $ 6,700 5/31/01 $ 10,817 $ 15,099 $ 6,690 6/30/01 $ 10,494 $ 14,530 $ 6,530 7/31/01 $ 10,279 $ 14,209 $ 6,283 8/31/01 $ 9,633 $ 13,831 $ 6,185 9/30/01 $ 8,126 $ 12,297 $ 5,213 10/31/01 $ 8,395 $ 12,582 $ 5,494 11/30/01 $ 9,364 $ 13,049 $ 6,228 12/31/01 $ 9,823 $ 12,985 $ 6,746 1/31/02 $ 9,823 $ 12,263 $ 7,015 2/28/02 $ 9,606 $ 12,383 $ 7,067 3/31/02 $ 9,985 $ 13,157 $ 7,542 4/30/02 $ 9,985 $ 13,234 $ 7,618 5/31/02 $ 9,660 $ 13,493 $ 7,446 6/30/02 $ 9,171 $ 12,994 $ 7,075 7/31/02 $ 8,682 $ 11,657 $ 6,807 8/31/02 $ 8,465 $ 11,647 $ 6,687 9/30/02 $ 7,760 $ 10,300 $ 5,951 10/31/02 $ 8,086 $ 10,727 $ 6,253 11/30/02 $ 8,520 $ 11,280 $ 6,585 12/31/02 $ 8,084 $ 10,921 $ 6,184
NET ASSET VALUE PER SHARE ($) 12/31/01 12/31/02 --------------------------------------------------------- Class B 1.81 1.47
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 SHARES. Total return performance includes changes in share price and reinvestment of all distributions. The MSCI (Morgan Stanley Capital International) AC (All Country) Free Asia Ex Japan Index is an unmanaged index that tracks the performance of equity securities in eleven countries in Asia, excluding Japan and taking into account local market restrictions on share ownership by foreigners. As announced in the semiannual report dated June 30, 2002, the fund now compares its performance to the MSCI AC Free Asia ex Japan Index. In addition, this report contains returns for the fund's previous benchmark, the MSCI EAFE(GDP) Index. Indexes are not investments, do not incur fees or expenses and are not professionally managed. It is not possible to invest directly in an index. Securities in the fund may not match those in an index. MUTUAL FUND PERFORMANCE CHANGES OVER TIME. CURRENT RETURNS FOR THE FUND MAY BE DIFFERENT THAN THAT SHOWN. Performance numbers reflect all fund expenses, but do not include any insurance charges imposed by your insurance company's separate accounts. If performance included the effect of these additional charges, it would be lower. (1) Class B share (newer class shares) performance information includes returns of the fund's class A shares (the older existing fund class) for periods prior to the inception of the newer class shares. These class A share returns were not restated to reflect any expense differential (e.g., Rule 12b-1 fees) between class A shares and the newer class shares. If differences in expenses were reflected, the returns for the periods prior to the inception of the newer class of shares would be lower. (2) Index performance is from April 30, 1995. (3) Inception date of class A shares (oldest existing share class). 153 INVESTMENT PORTFOLIO Newport Tiger Fund, Variable Series / December 31, 2002
SHARES VALUE ------------ ------------ COMMON STOCKS--98.7% CONSUMER DISCRETIONARY--9.2% CONSUMER DURABLES & APPAREL--2.9% APPAREL & ACCESSORIES--2.9% Li & Fung Ltd. 740,000 $ 702,182 ------------ HOTELS, RESTAURANTS & LEISURE--1.9% CASINOS & GAMING--1.9% Genting Berhad 134,000 472,526 ------------ MEDIA--4.0% BROADCASTING & CABLE TV--1.0% Television Broadcasts Ltd. 77,000 242,891 ------------ PUBLISHING & PRINTING--3.0% Singapore Press Holdings Ltd. 69,164 725,671 ------------ RETAILING--0.4% SPECIALTY RETAIL--0.4% Big C Supercenter(a) 223,300 85,387 ------------ CONSUMER STAPLES--2.9% FOOD & DRUG RETAILING--1.5% FOOD RETAIL--1.5% President Chain Store Corp. 233,056 353,114 ------------ FOOD, BEVERAGES & TOBACCO--1.4% PACKAGED FOODS--1.4% Nestle India Ltd. 30,100 328,526 ------------ FINANCIALS--37.9% BANKS--16.1% Bangkok Bank Public Co., Ltd.(a) 344,500 395,197 DBS Bank Ltd. 37,638 238,675 Hang Seng Bank Ltd. 110,200 1,172,859 Hong Leong Bank Berhad 194,000 229,737 Kookmin Bank 14,363 508,618 Public Bank Berhad 608,750 416,513 Thai Farmers Bank Public Co., Inc.(a) 221,200 133,284 United Overseas Bank Ltd. 117,000 795,895 ------------ 3,890,778 ------------ DIVERSIFIED FINANCIALS--10.2% CONSUMER FINANCE--4.9% Housing Development Finance Corp., Ltd. 159,308 1,190,076 ------------ MULTI-SECTOR HOLDINGS--5.3% Haw Par Corp., Ltd. --(b) 1 Hutchison Whampoa Ltd. 203,500 1,273,416 Swire Pacific Ltd., Series A 500 1,914 ------------ 1,275,331 ------------ REAL ESTATE--11.6% REAL ESTATE MANAGEMENT & DEVELOPMENT--11.6% Cheung Kong Holdings Ltd. 52,000 338,396 City Developments Ltd. 154,000 369,319 Henderson Land Development Co., Ltd. 81,000 243,565 Land and House Co., Ltd. 211,700 $ 394,944 SM Prime Holdings, Inc. 3,011,000 267,908 Sun Hung Kai Properties Ltd. 200,000 1,182,271 ------------ 2,796,403 ------------ HEALTH CARE--2.3% PHARMACEUTICALS & BIOTECHNOLOGY--2.3% PHARMACEUTICALS--2.3% Dr. Reddy's Laboratories Ltd. 28,400 548,972 ------------ INDUSTRIALS--4.7% CAPITAL GOODS--3.3% AEROSPACE & DEFENSE--3.3% Singapore Technologies Engineering Ltd. 843,000 801,862 ------------ ELECTRICAL COMPONENTS & EQUIPMENT--0.2% Hon Hai Precision Industry Co., Ltd. 16,500 57,143 ------------ HIGHWAYS & RAILTRACKS--1.2% China Merchants Holdings International Co, Ltd. 58,000 40,533 Zhejiang Expressway Co., Ltd. 648,000 249,278 ------------ 289,811 ------------ INFORMATION TECHNOLOGY--19.8% SOFTWARE & SERVICES--6.1% INFORMATION TECHNOLOGY CONSULTING & SERVICES--6.1% Infosys Technologies Ltd. 14,900 1,482,589 ------------ TECHNOLOGY HARDWARE & EQUIPMENT--13.7% COMPUTER STORAGE & PERIPHERALS--0.5% Asustek Computer, Inc. 71,000 124,993 ------------ ELECTRONIC EQUIPMENT & INSTRUMENTS--1.9% Legend Group Ltd. 570,000 188,208 Venture Manufacturing (Singapore) Ltd. 35,000 280,460 ------------ 468,668 ------------ SEMICONDUCTORS--11.3% Samsung Electronics 6,550 1,734,075 Taiwan Semiconductor Manufacturing Co.(a) 801,541 985,445 ------------ 2,719,520 ------------ MATERIALS--2.0% CONSTRUCTION MATERIALS--2.0% The Siam Cement Public Co., Ltd. (Non Voting Depositary Receipts) 12,500 339,513 The Siam Cement Public Co., Ltd. 219,500 146,249 ------------ 485,762
See Notes to Investment Portfolio. 154
SHARES VALUE ------------ ------------ TELECOMMUNICATION SERVICES--9.6% DIVERSIFIED TELECOMMUNICATION SERVICES--2.3% INTEGRATED TELECOMMUNICATION SERVICES--2.3% KT Corp., ADR 12,900 $ 551,435 ------------ WIRELESS TELECOMMUNICATION SERVICES--7.3% China Mobile (Hong Kong) Ltd.(a)(c) 494,500 1,177,947 SK Telecom Co., Ltd. 3,000 579,234 ------------ 1,757,181 ------------ UTILITIES--10.3% ELECTRIC UTILITIES--6.3% Beijing Datang Power Generation Co., Ltd. 810,000 262,260 Huaneng Power International, Inc. 1,574,000 1,261,452 ------------ 1,523,712 ------------ GAS UTILITIES--4.0% Hong Kong & China Gas Co., Ltd. 756,002 974,261 ------------ TOTAL COMMON STOCKS (cost of $22,709,957) 23,848,794 ------------ PAR ------------ SHORT-TERM OBLIGATION--1.0% Repurchase agreement with State Street Bank & Trust Co., dated 12/31/02, due 01/02/03 at 1.180%, collateralized by U.S. Treasury Bonds and Notes with various maturities to 2015, market value $258,019 (repurchase proceeds $251,016) (cost of $251,000) $ 251,000 251,000 ------------ TOTAL INVESTMENTS--99.7% (cost of $22,960,957)(d) 24,099,794 ------------ OTHER ASSETS & LIABILITIES, NET--0.3% 73,336 ------------ NET ASSETS--100.0% $ 24,173,130 ============
NOTES TO INVESTMENT PORTFOLIO: (a) Non-income producing. (b) Shares rounds to less than 1. (c) Represents fair value as determined in good faith under the direction of the Trustees. (d) Cost for federal income tax purposes is $23,067,788. The difference between cost for generally accepted accounting principles and cost on a tax basis is related to deferral of losses on wash sales.
SUMMARY OF SECURITIES BY COUNTRY % OF TOTAL (UNAUDITED) VALUE INVESTMENTS ----------------------------------------- ------------ ------------ Hong Kong $ 9,311,432 38.6% South Korea 3,373,362 14.0% Singapore 3,211,884 13.3% India 3,001,191 12.5% Taiwan 1,520,695 6.3% Thailand 1,494,574 6.2% Malaysia 1,118,776 4.7% United States 799,972 3.3% Philippines 267,908 1.1% ------------ ------------ $ 24,099,794 100.0% ============ ============
Certain securities are listed by country of underlying exposure but may trade predominantly on other exchanges.
ACRONYM NAME ------- ---- ADR American Depositary Receipt
See Notes to Financial Statements. 155 STATEMENT OF ASSETS & LIABILITIES Newport Tiger Fund, Variable Series / December 31, 2002 ASSETS: Investments, at cost $ 22,960,957 ------------- Investments, at value $ 24,099,794 Cash 466 Foreign currency (cost of $96,721) 96,102 Receivable for: Investments sold 17,214 Fund shares sold 8,612 Interest 8 Dividends 24,880 Deferred Trustees' compensation plan 2,608 Other assets 35,351 ------------- TOTAL ASSETS 24,285,035 ------------- LIABILITIES: Payable for: Investments purchased 44,742 Fund shares repurchased 4,112 Management fee 19,708 Transfer agent fee 625 Pricing and bookkeeping fees 856 Audit fee 22,895 Custody fee 11,952 Deferred Trustees' fee 2,608 Other liabilities 4,407 ------------- TOTAL LIABILITIES 111,905 ------------- NET ASSETS $ 24,173,130 ============= COMPOSITION OF NET ASSETS: Paid-in capital $ 35,154,903 Overdistributed net investment income (3,562) Accumulated net realized loss (12,116,607) Net unrealized appreciation (depreciation) on: Investments 1,138,837 Foreign currency translations (441) ------------- NET ASSETS $ 24,173,130 ============= CLASS A: Net assets $ 23,086,652 Shares outstanding 15,971,070 ============= Net asset value per share $ 1.45 ============= CLASS B: Net assets $ 1,086,478 Shares outstanding 738,389 ============= Net asset value per share $ 1.47 =============
See Notes to Financial Statements. 156 STATEMENT OF OPERATIONS Newport Tiger Fund, Variable Series For the Year Ended December 31, 2002 INVESTMENT INCOME: Dividends $ 672,125 Interest 40,346 ------------ Total Investment Income (net of foreign taxes withheld of $81,622) 712,471 ------------ EXPENSES: Management fee 287,063 Distribution fee--Class B 2,853 Pricing and bookkeeping fees 11,198 Transfer agent fee 7,500 Trustees' fee 6,130 Audit fee 21,470 Custody fee 60,386 Other expenses 11,405 ------------ Total Expenses 408,005 Custody earnings credit (266) ------------ Net Expenses 407,739 ------------ Net Investment Income 304,732 ------------ NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS AND FOREIGN CURRENCY: Net realized loss on: Investments (13,172) Foreign currency transactions (35,423) ------------ Net realized loss (48,595) ------------ Net change in unrealized appreciation/depreciation on: Investments (3,024,661) Foreign currency translations (407) ------------ Net change in unrealized appreciation/depreciation (3,025,068) ------------ Net Loss (3,073,663) ------------ Net Decrease in Net Assets from Operations $ (2,768,931) ============
See Notes to Financial Statements. 157 STATEMENT OF CHANGES IN NET ASSETS Newport Tiger Fund, Variable Series
YEAR ENDED DECEMBER 31, -------------------------------- INCREASE (DECREASE) IN NET ASSETS: 2002 2001 ---------------------------------- -------------- -------------- OPERATIONS: Net investment income $ 304,732 $ 379,639 Net realized loss on investments and foreign currency transactions (48,595) (3,264,041) Net change in unrealized appreciation/depreciation on investments and foreign currency translations (3,025,068) (3,653,808) -------------- -------------- Net Decrease from Operations (2,768,931) (6,538,210) -------------- -------------- DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income: Class A (253,001) (277,176) Class B (11,587) (14,334) Return of capital: Class A (62,217) -- Class B (2,850) -- -------------- -------------- Total Distributions Declared to Shareholders (329,655) (291,510) -------------- -------------- SHARE TRANSACTIONS: Class A: Subscriptions 349,774,001 103,323,070 Distributions reinvested 315,218 277,176 Redemptions (357,739,000) (106,863,599) -------------- -------------- Net Decrease (7,649,781) (3,263,353) -------------- -------------- Class B: Subscriptions 2,488,667 61,963,745 Distributions reinvested 14,437 14,334 Redemptions (3,501,399) (60,955,504) -------------- -------------- Net Increase (Decrease) (998,295) 1,022,575 -------------- -------------- Net Decrease from Share Transactions (8,648,076) (2,240,778) -------------- -------------- Total Decrease in Net Assets (11,746,662) (9,070,498) NET ASSETS: Beginning of period 35,919,792 44,990,290 -------------- -------------- End of period (including overdistributed net investment income of $(3,562) and $(8,284), respectively) $ 24,173,130 $ 35,919,792 ============== ============== CHANGES IN SHARES: Class A: Subscriptions 199,407,089 56,485,625 Issued for distributions reinvested 214,434 159,296 Redemptions (202,704,318) (57,837,979) -------------- -------------- Net Decrease (3,082,795) (1,193,058) -------------- -------------- Class B: Subscriptions 1,369,557 33,916,649 Issued for distributions reinvested 9,625 8,053 Redemptions (1,874,153) (32,985,806) -------------- -------------- Net Increase/(Decrease) (494,971) 938,896 -------------- --------------
See Notes to Financial Statements. 158 NOTES TO FINANCIAL STATEMENTS Newport Tiger Fund, Variable Series / December 31, 2002 NOTE 1. ORGANIZATION AND ACCOUNTING POLICIES ORGANIZATION--Newport Tiger Fund, Variable Series (the "Fund"), a series of Liberty Variable Investment Trust (the "Trust"), is a diversified portfolio of a Massachusetts business trust, registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The Fund's investment goal is to seek long-term capital appreciation. The Fund's capitalization consists of an unlimited number of shares of beneficial interest without par value that represent a separate series of the Trust. The Fund offers two classes of shares: Class A and Class B. Each share of a class represents an equal proportionate beneficial interest in that share class and, when issued and outstanding, is fully paid and nonassessable. Shareholders would be entitled to share proportionally in the net assets of their share class available for distribution to shareholders upon liquidation of the Fund. Shares of the Fund are available and are being marketed exclusively as a pooled funding vehicle for variable annuity contracts ("VA contracts") and Variable Life Insurance Policies ("VLI Policies") offered by the separate accounts of certain life insurance companies ("Participating Insurance Companies"). The Participating Insurance Companies and their separate accounts own all the shares of the Fund. Liberty Advisory Services Corp. (the "Manager") ("LASC") provides investment management and advisory services to the Fund pursuant to its Management Agreement with the Fund. LASC has appointed Newport Fund Management, Inc. ("Newport"), an affiliate of the Manager, as Sub-Advisor to the Fund. LASC has delegated various administrative matters to Colonial Management Associates, Inc. ("Colonial"). Colonial also provides pricing and bookkeeping services to the Fund. Liberty Funds Distributor, Inc. ("LFD"), an affiliate of the Manager, serves as the principal underwriter of the Fund. The Manager, Colonial, Newport and LFD are wholly-owned indirect subsidiaries of FleetBoston Financial Corporation ("FleetBoston"). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. SECURITY VALUATION AND TRANSACTIONS--Equity securities generally are valued at the last sale price or, in the case of unlisted or listed securities for which there were no sales during the day, at the current quoted bid price. Forward currency contracts are valued based on the weighted value of exchange-traded contracts with similar durations. Short-term obligations with a maturity of 60 days or less are valued at amortized cost. The values of all assets and liabilities quoted in foreign currencies are translated into U.S. dollars at that day's exchange rates. 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. Generally, trading in foreign securities is substantially completed each day at various times prior to the close of the New York Stock Exchange ("NYSE"). The values of such securities used in computing the net asset value of the Fund's shares are determined as of such times. Foreign currency exchange rates are also generally determined prior to the close of the NYSE. Occasionally, events affecting the values of such securities and such exchange rates may occur between the times at which they are determined and the close of the customary trading session of the NYSE which would not be reflected in the computation of the Fund's net asset value. If events materially affecting the value of such securities and such exchange rates occur during such period, then these securities will be valued at their fair value as determined in good faith by or under the supervision of the Board of Trustees. 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. DETERMINATION OF CLASS NET ASSET VALUES AND FINANCIAL HIGHLIGHTS--All income, expenses (other than the Class B distribution fee), 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. The per share data was calculated using average shares outstanding during the period. In addition, Class B net investment income per share data and ratios reflect the distribution fee applicable to Class B shares only. 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. DISTRIBUTIONS TO SHAREHOLDERS--The Fund intends to distribute as income dividends or capital gains distributions, 159 at least annually, substantially all of its net investment income and net profits realized from the sale of investments. All dividends and distributions are reinvested in additional shares of the Fund at net asset value as of the record date of the distribution. Income and capital gain distributions are determined in accordance with federal income tax regulations. FOREIGN CURRENCY TRANSACTIONS--Net realized and unrealized gains (losses) on foreign currency transactions includes gains (losses) arising from the fluctuations in exchange rates between trade and settlement dates on securities transactions, gains (losses) arising from the disposition of foreign currency, and currency gains (losses) between the accrual and payment dates on dividends, interest income and foreign withholding taxes. The Fund does not distinguish that portion of gains (losses) on investments which is due to changes in foreign exchange rates from that which is due to changes in market prices of the investments. Such fluctuations are included with the net realized and unrealized gains (losses) on investments. FORWARD CURRENCY CONTRACTS--The Fund may enter into forward currency contracts to purchase or sell foreign currencies at predetermined exchange rates in connection with the settlement of purchases and sales of securities. The Fund may also enter into forward currency contracts to hedge certain other foreign currency denominated assets. The contracts are used to minimize the exposure to foreign exchange rate fluctuations during the period between trade and settlement date of the contracts. All contracts are marked-to-market daily, resulting in unrealized gains (losses) which become realized at the time the forward currency contracts are closed or mature. Realized and unrealized gains (losses) arising from such transactions are included in net realized and unrealized gains (losses) on foreign currency transactions. Forward currency contracts do not eliminate fluctuations in the prices of the Fund's portfolio securities. While the maximum potential loss from such contracts is the aggregate face value in U.S. dollars at the time the contract was opened, exposure is typically limited to the change in value of the contract (in U.S. dollars) over the period it remains open. Risks may also arise if counterparties fail to perform their obligations under the contracts. OTHER--Interest income is recorded on the accrual basis. Corporate actions and dividend income are recorded on the ex-date (except for certain foreign securities which are recorded as soon after ex-date as the Fund becomes aware of such), net of non-reclaimable tax withholdings. Where a high level of uncertainty as to collection exists, income on securities is recorded net of all tax withholdings with any rebates recorded when received. The Fund's custodian takes possession through the federal book-entry system of securities collateralizing repurchase agreements. Collateral is marked-to-market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund. The Fund may experience costs and delays in liquidating the collateral if the issuer defaults or enters bankruptcy. NOTE 2. FEDERAL TAX INFORMATION Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from generally accepted accounting principles. These differences are primarily due to differing treatments for foreign currency transactions, deferral of losses from wash sales, post-October losses, capital loss carryforwards 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 December 31, 2002, permanent items identified and reclassified among the components of net assets are as follows:
OVERDISTRIBUTED NET ACCUMULATED PAID-IN INVESTMENT INCOME NET REALIZED LOSS CAPITAL ------------------- ----------------- ------- $ (35,422) $ 35,422 --
Net investment income, net realized gains (losses) and net assets were not affected by this reclassification. The tax character of distributions paid during 2002 and 2001 was as follows:
2002 2001 --------- --------- Distributions paid from: Ordinary income $ 264,588 $ 291,510 Return of capital 65,067 -- --------- --------- $ 329,655 $ 291,510 ========= =========
As of December 31, 2002, the components of distributable earnings on a tax basis were as follows:
UNREALIZED APPRECIATION* ------------- $ 1,031,565
*The difference between book-basis and tax-basis unrealized appreciation is attributable primarily to the tax deferral of losses on wash sales and the realization for tax purposes of unrealized gains on certain forward foreign currency contracts. 160 The following capital loss carryforwards are available to reduce taxable income arising from future net realized gains on investments, if any, to the extent permitted by the Internal Revenue Code:
YEAR OF EXPIRATION CAPITAL LOSS CARRYFORWARD ------------------ ------------------------- 2005 $ 2,191,366 2006 5,726,423 2007 1,050,865 2009 2,161,521 2010 879,602 ------------ $ 12,009,777 ============
Under current tax rules, certain capital losses realized after October 31 may be deferred and treated as occurring on the first day of the following fiscal year. As of December 31, 2002, for federal income tax purposes, post October losses of $106 were deferred to January 1, 2003. NOTE 3. FEES AND COMPENSATION PAID TO AFFILIATES MANAGEMENT AND SUB-ADVISORY FEES--The Manager receives a monthly fee equal to 0.90% annually of the Fund's average daily net assets. The Manager, out of the management fee it receives, pays Newport a monthly sub-advisory fee equal to 0.70% annually of the Fund's average daily net assets. PRICING AND BOOKKEEPING FEES--Colonial is responsible for providing pricing and bookkeeping services to the Fund under a Pricing and Bookkeeping Agreement. Under a separate agreement (the "Outsourcing Agreement"), Colonial has delegated those functions to State Street Bank & Trust Company ("State Street"). Colonial pays fees to State Street under the Outsourcing Agreement. Under its pricing and bookkeeping agreement with the Fund, Colonial 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. The Fund also pays out-of-pocket costs for pricing services. TRANSFER AGENT FEE--Liberty Funds Services, Inc. (the "Transfer Agent"), an affiliate of the Manager, provides shareholder services for an annual rate of $7,500. DISTRIBUTION FEE--The Fund has adopted a 12b-1 plan, which requires it to pay LFD a monthly distribution fee equal to 0.25% annually of Class B average daily net assets as of the 20th of each month. OTHER--The Fund pays no compensation to its officers, all of whom are employees of Colonial 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 $266 of custody fees were reduced by balance credits for the year ended December 31, 2002. The Fund could have invested a portion of the assets utilized in connection with the expense offset arrangement in an income-producing asset if it had not entered into such an agreement. NOTE 4. PORTFOLIO INFORMATION INVESTMENT ACTIVITY--For the year ended December 31, 2002, purchases and sales of investments, other than short-term obligations, were $8,132,655 and $14,724,145, respectively. Unrealized appreciation (depreciation) at December 31, 2002, based on cost of investments for federal income tax purposes, was: Gross unrealized appreciation $ 3,858,404 Gross unrealized depreciation (2,826,398) ------------ Net unrealized appreciation $ 1,032,006 ============
OTHER--There are certain additional risks involved when investing in foreign securities that are not inherent with investments in domestic securities. These risks may involve foreign currency exchange rate fluctuations, adverse political and economic developments and the possible prevention of foreign currency exchange or the imposition of other foreign governmental laws or restrictions. The Fund may focus its investments in certain industries, subjecting it to greater risk than a fund that is more diversified. 161 FINANCIAL HIGHLIGHTS Newport Tiger Fund, Variable Series--Class B Shares Selected data for a share outstanding throughout each period is as follows:
YEAR ENDED PERIOD DECEMBER 31, ENDED ----------------------------- DECEMBER 31, 2002 2001 2000 (a) ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 1.81 $ 2.19 $ 2.35 INCOME FROM INVESTMENT OPERATIONS: Net investment income (b) 0.01 0.01 --(c) Net realized and unrealized gain (loss) on investments and foreign currency (0.33) (0.37) (0.14) ------------ ------------ ------------ Total from Investment Operations (0.32) (0.36) (0.14) ------------ ------------ ------------ LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.02) (0.02) (0.02) Return of capital --(c) -- -- ------------ ------------ ------------ Total Distributions Declared to Shareholders (0.02) (0.02) (0.02) ------------ ------------ ------------ Net Asset Value, End of Period $ 1.47 $ 1.81 $ 2.19 ============ ============ ============ Total return (d)(e) (17.70)% (16.66)% (5.94)%(f) RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA: Expenses (g) 1.52% 1.56% 1.47%(h) Net investment income (g) 0.71% 0.74% 0.11%(h) Portfolio turnover rate 28% 24% 22% Net assets, end of period (000's) $ 1,086 $ 2,232 $ 644
(a) For the period from commencement of operations on June 1, 2000 to December 31, 2000. (b) Per share data was calculated using average shares outstanding during the period. (c) Rounds to less than $0.01 per share. (d) Total return at net asset value assuming all distributions reinvested. (e) Total return figure does not include any insurance company charges associated with a variable annuity. If included, total return would be reduced. (f) Not annualized. (g) The benefits derived from custody credits and directed brokerage arrangements, if applicable, had an impact of less than 0.01%. (h) Annualized. 162 REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of Liberty Variable Investment Trust and the Class B Shareholders of Newport Tiger Fund, Variable Series In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio, and the related statements of operations and of changes in net assets and the Class B financial highlights present fairly, in all material respects, the financial position of Newport Tiger Fund, Variable Series (the "Fund") (a series of Liberty Variable Investment Trust) at December 31, 2002, and the results of its operations, the changes in its net assets and the Class B financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and the Class B financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2002 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts February 12, 2003 163 PORTFOLIO MANAGERS' DISCUSSION Rydex Financial Services Fund, Variable Series / December 31, 2002 Rydex Financial Services Fund, Variable Series seeks capital appreciation. The fund is managed by a team of professionals at Rydex Global Advisors. In a year of double-digit losses for the US stock market--the third consecutive year of substantial losses--financial services stocks actually held up slightly better than the overall stock market. Nevertheless, concerns about credit quality and weak capital activity resulted in negative returns for the sector. Banking stocks turned in the best performance in the sector and the fund's exposure to this group benefited performance. The corporate lending operations of several key banks incurred heavy losses resulting from major corporate bankruptcies, including Enron and WorldCom, Inc., neither of which was owned by the fund. However, revenues from mortgage refinancing did bolster the banking group and helped offset some of the negative performance. Investment services firms, notably those involved in investment banking, faced serious accusations and penalties for conflicts of interest between their research and investment banking activities. Additionally, some firms were charged with allocating shares of hot initial public offerings to corporate executives to curry favor on their capital financing decisions, a practice called "spinning" by industry insiders. On an industry basis, this group, along with other diversified financial services companies, were the worst performers in the sector. Exposure to diversified financial services detracted from performance. LOOKING AHEAD Loan credit quality remained weak going into the new year and showed no signs of immediate improvement. A rally in the stock market would be favorable for the sector. But if the stock market continues to falter, the shares of financial services firms are likely to suffer. Further extended weakness in the stock market would have a negative impact on investment banking and private equity activity, trading profits and other activities that are sensitive to the capital markets. -------------------- This is the last report for this fund. This fund will be liquidated on Friday, March 28, 2003. If you have any questions about this liquidation, please contact your insurance company. Economic and market conditions can frequently change. There is no assurance that the trends described here will continue or commence. The fund's primary risks include equity and market risk, as well as risk inherent in investing in the securities of a limited number of issuers conducting business in the financial services sector. As a non-diversified portfolio, the fund may invest a significant percentage of its assets in a single issuer. As a result, it may have increased risk compared to a more diversified fund. 164 PERFORMANCE INFORMATION Rydex Financial Services Fund, Variable Series / December 31, 2002 AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 2002(%)
1-YEAR LIFE ------------------------------------------------------------- Class B (5/30/00) -14.20 -3.12 S&P Financial Services Index(1) -14.64 -3.04
Inception date of share class is in parentheses. [CHART] VALUE OF A $10,000 INVESTMENT, 5/30/00 - 12/31/02 Class B: $9,211
CLASS B SHARES S&P FINANCIAL SERVICES INDEX 5/30/2000 $ 10,000 $ 10,000 05/30/2000 - 05/31/2000 $ 10,150 $ 10,000 06/01/2000 - 06/30/2000 $ 9,600 $ 9,394 07/01/2000 - 07/31/2000 $ 10,424 $ 10,365 08/01/2000 - 08/31/2000 $ 11,499 $ 11,360 09/01/2000 - 09/30/2000 $ 11,841 $ 11,631 10/01/2000 - 10/31/2000 $ 11,774 $ 11,580 11/01/2000 - 11/30/2000 $ 11,166 $ 10,898 12/01/2000 - 12/31/2000 $ 12,178 $ 11,882 01/01/2001 - 01/31/2001 $ 11,909 $ 11,848 02/01/2001 - 02/28/2001 $ 11,188 $ 11,070 03/01/2001 - 03/31/2001 $ 10,869 $ 10,737 04/01/2001 - 04/30/2001 $ 11,180 $ 11,136 05/01/2001 - 05/31/2001 $ 11,574 $ 11,585 06/01/2001 - 06/30/2001 $ 11,456 $ 11,580 07/01/2001 - 07/31/2001 $ 11,297 $ 11,393 08/01/2001 - 08/31/2001 $ 10,625 $ 10,699 09/01/2001 - 09/30/2001 $ 10,070 $ 10,068 10/01/2001 - 10/31/2001 $ 9,768 $ 9,880 11/01/2001 - 11/30/2001 $ 10,466 $ 10,586 12/01/2001 - 12/31/2001 $ 10,734 $ 10,818 01/01/2002 - 01/31/2002 $ 10,634 $ 10,648 02/01/2002 - 02/28/2002 $ 10,567 $ 10,493 03/01/2002 - 03/31/2002 $ 11,241 $ 11,191 04/01/2002 - 04/30/2002 $ 11,190 $ 10,892 05/01/2002 - 05/31/2002 $ 11,216 $ 10,874 06/01/2002 - 06/30/2002 $ 10,660 $ 10,357 07/01/2002 - 07/31/2002 $ 9,774 $ 9,536 08/01/2002 - 08/31/2002 $ 9,951 $ 9,732 09/01/2002 - 09/30/2002 $ 8,686 $ 8,594 10/01/2002 - 10/31/2002 $ 9,337 $ 9,372 11/01/2002 - 11/30/2002 $ 9,684 $ 9,757 12/01/2002 - 12/31/2002 $ 9,211 $ 9,234
NET ASSET VALUE PER SHARE ($) 12/31/01 12/31/02 ----------------------------------------------------------- Class B 12.73 10.81
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 SHARES. Total return performance includes changes in share price and reinvestment of all distributions. The S&P (Standard & Poor's) Financial Services Index is an unmanaged index that tracks the performance of domestic financial services stocks. Indexes are not investments, do not incur fees or expenses and are not professionally managed. It is not possible to invest directly in an index. Securities in the fund may not match those in the index. MUTUAL FUND PERFORMANCE CHANGES OVER TIME. CURRENT RETURNS FOR THE FUND MAY BE DIFFERENT THAN THAT SHOWN. Performance numbers reflect all fund expenses, but do not include any insurance charges imposed by your insurance company's separate accounts. If performance included the effect of these additional charges, it would be lower. (1) Index performance is from May 31, 2000. 165 INVESTMENT PORTFOLIO Rydex Financial Services Fund, Variable Series / December 31, 2002
SHARES VALUE ------------ ------------ COMMON STOCKS--98.2% FINANCIALS--98.2% BANKS--39.4% AmSouth Bancorp 1,320 $ 25,344 BB&T Corp. 1,150 42,539 Bank One Corp. 2,410 88,086 Bank of America Corp. 2,972 206,762 Bank of New York Co., Inc. 1,622 38,863 Charter One Financial, Inc. 800 22,984 Comerica, Inc. 520 22,485 Fifth Third Bancorp 1,223 71,607 Golden West Financial Corp. 550 39,495 GreenPoint Financial Corp. 630 28,463 Huntington Bancshares, Inc. 1,270 23,762 KeyCorp 1,250 31,425 M&T Bank Corp. 340 26,979 Marshall & Ilsley Corp. 840 22,999 Mellon Financial Corp. 1,150 30,026 National City Corp. 1,380 37,702 National Commerce Financial Corp. 950 22,658 North Fork Bancorporation, Inc. 670 22,605 Northern Trust Corp. 640 22,432 PNC Financial Services Group, Inc. 710 29,749 Regions Financial Corp. 900 30,024 SouthTrust Corp. 1,130 28,081 Suntrust Banks, Inc. 640 36,429 Union Planters Corp. 880 24,763 U.S. Bancorp 4,350 92,307 Wachovia Corp. 2,810 102,396 Washington Mutual, Inc. 2,210 76,326 Wells Fargo & Co. 3,410 159,827 ------------ 1,407,118 ------------ DIVERSIFIED FINANCIALS--33.2% CONSUMER FINANCE--3.2% Countrywide Financial Corp. 480 24,792 Household International, Inc. 1,170 32,538 MBNA Corp. 3,045 57,916 ------------ 115,246 ------------ DIVERSIFIED FINANCIAL SERVICES--30.0% American Express Co. 2,890 102,162 Charles Schwab Corp. 3,990 43,292 Citigroup, Inc. 4,534 159,551 Fannie Mae 2,080 133,806 Franklin Resources, Inc. 900 30,672 Freddie Mac 1,510 89,165 Goldman Sachs Group, Inc. 1,100 74,910 J.P. Morgan Chase & Co. 4,171 100,104 Lehman Brothers Holdings, Inc. 700 37,303 Merrill Lynch & Co., Inc. 1,990 75,520 Moody's Corp. 450 18,581 Morgan Stanley 2,410 96,207 Principal Financial Group 1,110 33,444 SLM Corp. 410 42,583 State Street Corp. 890 34,710 ------------ 1,072,010 ------------ INSURANCE--23.8% INSURANCE BROKERS--1.6% Marsh & McLennan Companies, Inc. 1,240 $ 57,300 ------------ LIFE & HEALTH INSURANCE--5.2% AFLAC, Inc. 1,300 39,156 Jefferson-Pilot Corp. 630 24,009 John Hancock Financial Services, Inc. 1,070 29,853 MetLife, Inc. 1,720 46,509 Prudential Financial, Inc. 1,440 45,706 ------------ 185,233 ------------ MULTI-LINE INSURANCE--10.2% American International Group, Inc. 5,261 304,343 Hartford Financial Services Group, Inc. 710 32,255 Loews Corp. 600 26,676 ------------ 363,274 ------------ PROPERTY & CASUALTY INSURANCE--6.8% ACE Ltd. 850 24,939 Allstate Corp. 1,545 57,150 Chubb Corp. 560 29,232 Progressive Corp. 600 29,778 St. Paul Companies, Inc. 770 26,219 Travelers Property Casualty Corp.(a) 2,753 40,331 XL Capital Ltd. 440 33,990 ------------ 241,639 ------------ REAL ESTATE--1.8% REAL ESTATE INVESTMENT TRUST--1.8% Equity Office Properties Trust 1,360 33,973 Equity Residential 1,310 32,200 ------------ 66,173 ------------ TOTAL COMMON STOCKS (cost of $3,654,300) 3,507,993 ------------ PAR ------------ SHORT-TERM OBLIGATION--4.0% Repurchase agreement with State Steet Bank & Trust Co., dated 12/31/02, due 01/02/03 at 1.180%, collateralized by U.S. Treasury Bond maturing 02/15/16, market value $152,625 (repurchase proceeds $143,009) (cost of $143,000) $ 143,000 143,000 ------------ TOTAL INVESTMENTS--102.2% (cost of $3,797,300) (b) 3,650,993 ------------ OTHER ASSETS & LIABILITIES, NET--(2.2)% (79,881) ------------ NET ASSETS--100.0% $ 3,571,112 ============
NOTES TO INVESTMENT PORTFOLIO: (a) Non-income producing. (b) Cost for federal income tax purposes is $4,007,924. The difference between cost for generally accepted accounting principles and cost on a tax basis is related to deferral of losses on wash sales and investment in real estate investment trusts. Realized losses have been deferred for tax purposes and cost adjusted accordingly. See Notes to Financial Statements. 166 STATEMENT OF ASSETS & LIABILITIES Rydex Financial Services Fund, Variable Series / December 31, 2002 ASSETS: Investments, at cost $ 3,797,300 ----------- Investments, at value $ 3,650,993 Cash 286 Receivable for: Investments sold 12,140 Fund shares sold 2,892 Interest 4 Dividends 5,566 Expense reimbursement due from Manager/Distributor 3,799 Deferred Trustees' compensation plan 593 ----------- TOTAL ASSETS 3,676,273 ----------- LIABILITIES: Payable for: Investments purchased 77,673 Fund shares repurchased 1,223 Management fee 2,650 Distribution fee--Class B 47 Transfer agent fee 625 Pricing and bookkeeping fees 850 Trustees' fee 202 Audit fee 15,250 Reports to shareholders 3,380 Deferred Trustees' fee 593 Other liabilities 2,668 ----------- TOTAL LIABILITIES 105,161 ----------- NET ASSETS $ 3,571,112 =========== COMPOSITION OF NET ASSETS: Paid-in capital $ 4,277,483 Overdistributed net investment income (881) Accumulated net realized loss (559,183) Net unrealized depreciation on investments (146,307) ----------- NET ASSETS $ 3,571,112 =========== CLASS A: Net assets $ 92,303 Shares outstanding 8,520 ----------- Net asset value per share $ 10.83 =========== CLASS B: Net assets $ 3,478,809 Shares outstanding 321,757 ----------- Net asset value per share $ 10.81 ===========
See Notes to Financial Statements. 167 STATEMENT OF OPERATIONS Rydex Financial Services Fund, Variable Series For the Year Ended December 31, 2002 INVESTMENT INCOME: Dividends $ 84,157 Interest 1,288 ---------- Total Investment Income 85,445 ---------- EXPENSES: Management fee 35,434 Distribution fee--Class B 10,167 Pricing and bookkeeping fees 10,757 Transfer agent fee 7,500 Trustees' fee 5,864 Custody fee 9,530 Audit fee 15,425 Other expenses 3,880 ---------- Total Expenses 98,557 Fees and expenses reimbursed by Manager (27,926) Fees reimbursed by Distributor--Class B (10,167) Custody earnings credit (99) ---------- Net Expenses 60,365 ---------- Net Investment Income 25,080 ---------- NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS: Net realized loss on investments (535,833) Net change in unrealized appreciation/depreciation on investments (37,710) ---------- Net Loss (573,543) ---------- Net Decrease in Net Assets from Operations $ (548,463) ==========
See Notes to Financial Statements. 168 STATEMENT OF CHANGES IN NET ASSETS Rydex Financial Services Fund, Variable Series
YEAR ENDED DECEMBER 31, ---------------------------- INCREASE (DECREASE) IN NET ASSETS: 2002 2001 ---------------------------------- ------------ ------------ OPERATIONS: Net investment income $ 25,080 $ 16,187 Net realized loss on investments (535,833) (11,097) Net change in unrealized appreciation/depreciation on investments (37,710) (414,242) ------------ ------------ Net Decrease from Operations (548,463) (409,152) ------------ ------------ DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income: Class A (677) (377) Class B (25,258) (16,068) From net realized gains: Class A (280) (43) Class B (10,904) (1,844) ------------ ------------ Total Distributions Declared to Shareholders (37,119) (18,332) ------------ ------------ SHARE TRANSACTIONS: Class A: Distributions reinvested 957 420 ------------ ------------ Net Increase 957 420 ------------ ------------ Class B: Subscriptions 2,173,568 2,907,847 Distributions reinvested 36,162 17,912 Redemptions (2,747,968) (532,597) ------------ ------------ Net Increase (Decrease) (538,238) 2,393,162 ------------ ------------ Net Increase (Decrease) from Share Transactions (537,281) 2,393,582 ------------ ------------ Total Increase (Decrease) in Net Assets (1,122,863) 1,966,098 NET ASSETS: Beginning of period 4,693,975 2,727,877 ------------ ------------ End of period (including overdistributed net investment income of $(881) and $(690), respectively) $ 3,571,112 $ 4,693,975 ============ ============ CHANGES IN SHARES: Class A: Issued for distributions reinvested 87 34 ------------ ------------ Net Increase 87 34 ------------ ------------ Class B: Subscriptions 172,422 221,262 Issued for distributions reinvested 3,325 1,412 Redemptions (214,283) (42,091) ------------ ------------ Net Increase (Decrease) (38,536) 180,583 ------------ ------------
See Notes to Financial Statements. 169 NOTES TO FINANCIAL STATEMENTS Rydex Financial Services Fund, Variable Series / December 31, 2002 NOTE 1. ORGANIZATION AND ACCOUNTING POLICIES ORGANIZATION--Rydex Financial Services Fund, Variable Series (the "Fund"), a series of Liberty Variable Investment Trust (the "Trust"), is a non-diversified portfolio of a Massachusetts business trust, registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The Fund's investment goal is to seek capital appreciation. The Fund's capitalization consists of an unlimited number of shares of beneficial interest without par value that represent a separate series of the Trust. The Fund offers two classes of shares: Class A and Class B. Each share of a class represents an equal proportionate beneficial interest in that share class and, when issued and outstanding, is fully paid and nonassessable. Shareholders would be entitled to share proportionally in the net assets of their share class available for distribution to shareholders upon liquidation of the Fund. Shares of the Fund are available and are being marketed exclusively as a pooled funding vehicle for variable annuity contracts ("VA contracts") and Variable Life Insurance Policies ("VLI Policies") offered by the separate accounts of certain life insurance companies ("Participating Insurance Companies"). The Participating Insurance Companies and their separate accounts own all the shares of the Fund. Liberty Advisory Services Corp. (the "Manager") ("LASC") provides investment management and advisory services to the Fund pursuant to its Management Agreement with the Fund. Colonial Management Associates, Inc. ("Colonial") provides sub-advisory services. LASC has delegated various administrative matters to Colonial. Colonial also provides pricing and bookkeeping services to the Fund. Liberty Funds Distributor, Inc. ("LFD"), an affiliate of the Manager, serves as the principal underwriter of the Fund. The Manager, Colonial and LFD are wholly-owned indirect subsidiaries of FleetBoston Financial Corporation ("FleetBoston"). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. SECURITY VALUATION AND TRANSACTIONS--Equity securities generally are valued at the last sale price or, in the case of unlisted or listed securities for which there were no sales during the day, at the current quoted bid price. Short-term obligations with a maturity of 60 days or less are valued at amortized cost. 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. 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. DETERMINATION OF CLASS NET ASSET VALUES AND FINANCIAL HIGHLIGHTS--All income, expenses (other than the Class B distribution fee), 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. The per share data was calculated using average shares outstanding during the period. In addition, Class B net investment income per share data and ratios reflect the distribution fee applicable to Class B shares only. 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. DISTRIBUTIONS TO SHAREHOLDERS--The Fund intends to distribute as income dividends or capital gains distributions, at least annually, substantially all of its net investment income and net profits realized from the sale of investments. All dividends and distributions are reinvested in additional shares of the Fund at net asset value as of the record date of the distribution. Income and capital gain distributions are determined in accordance with federal income tax regulations. OTHER--Interest income is recorded on the accrual basis. Corporate actions and dividend income are recorded on the ex-date. The Fund's custodian takes possession through the federal book-entry system of securities collateralizing repurchase agreements. Collateral is marked-to-market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund. The Fund may experience costs and delays in liquidating the collateral if the issuer defaults or enters bankruptcy. NOTE 2. FEDERAL TAX INFORMATION Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from generally accepted accounting principles. These differences are primarily due to differing treatments for deferral of losses from wash sales, post-October losses, 170 capital loss carryforwards 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 December 31, 2002, permanent items identified and reclassified among the components of net assets are as follows:
OVERDISTRIBUTED NET ACCUMULATED PAID-IN INVESTMENT INCOME NET REALIZED LOSS CAPITAL ------------------- ----------------- ------- $ 664 $ 818 $ (1,482)
Net investment income, net realized gains (losses) and net assets were not affected by this reclassification. The tax character of distributions paid during 2002 and 2001 was as follows:
2002 2001 ------------ ------------ Distributions paid from: Ordinary income $ 32,706 $ 18,332 Long-term capital gain 4,413 -- -------- -------- $ 37,119 $ 18,332 ======== ========
As of December 31, 2002, the components of distributable earnings on a tax basis were as follows:
UNREALIZED DEPRECIATION* ------------- $ (356,931)
*The difference between book-basis and tax-basis unrealized depreciation is attributable primarily to the tx deferral of losseson wash sales and investments in real estate investment trusts. The following capital loss carryforwards are available to reduce taxable income arising from future net realized gains on investments, if any, to the extent permitted by the Internal Revenue Code:
YEAR OF CAPITAL LOSS EXPIRATION CARRYFORWARD ---------- ------------ 2010 $ 346,531
Under current tax rules, certain capital losses realized after October 31 may be deferred and treated as occurring on the first day of the following fiscal year. As of December 31, 2002, for federal income tax purposes, post October losses of $1,870 were deferred to January 1, 2003. NOTE 3. FEES AND COMPENSATION PAID TO AFFILIATES MANAGEMENT AND SUB-ADVISORY FEES--The Manager receives a monthly fee equal to 0.85% annually of the Fund's average daily net assets. The Manager, out of the management fee it receives, pays Colonial a monthly sub-advisory fee equal to 0.65% annually of the Fund's average daily net assets. Rydex Global Advisors has been retained by Colonial to manage the day-to-day investment operations of the Fund. Colonial, out of the sub-advisory fee it receives, pays Rydex Global Advisors for services rendered. PRICING AND BOOKKEEPING FEES--Colonial is responsible for providing pricing and bookkeeping services to the Fund under a Pricing and Bookkeeping Agreement. Under a separate agreement (the "Outsourcing Agreement"), Colonial has delegated those functions to State Street Bank & Trust Company ("State Street"). Colonial pays fees to State Street under the Outsourcing Agreement. Under its pricing and bookkeeping agreement with the Fund, Colonial 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. The Fund also pays out-of-pocket costs for pricing services. TRANSFER AGENT FEE--Liberty Funds Services, Inc. (the "Transfer Agent"), an affiliate of the Manager, provides shareholder services for an annual rate of $7,500. DISTRIBUTION FEE--The Fund has adopted a 12b-1 plan, which requires it to pay LFD a monthly distribution fee equal to 0.25% annually of Class B average daily net assets as of the 20th of each month. EXPENSE LIMITS--The Manager and LFD have voluntarily agreed to reimburse all expenses, including management fees and distribution fees, but excluding interest, taxes, brokerage and extraordinary expenses incurred by the Fund in excess of 1.45% annually of the Fund's average daily net assets. LFD will first reimburse the Class B distribution fee up to 0.25% annually to reach the 1.45% limit on Class B expenses. If additional reimbursement is needed to meet the limit for each class, the Manager will then reimburse other expenses to the extent necessary. If additional reimbursement is still needed to reach the expense limit, the Manager will then waive a portion of its management fee to reach the expense limit. This arrangement may be terminated or modified by the Manager or LFD at any time. OTHER--The Fund pays no compensation to its officers, all of whom are employees of Colonial 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. 171 The Fund has an agreement with its custodian bank under which $99 of custody fees were reduced by balance credits for the year ended December 31, 2002. The Fund could have invested a portion of the assets utilized in connection with the expense offset arrangement in an income-producing asset if it had not entered into such an agreement. NOTE 4. PORTFOLIO INFORMATION INVESTMENT ACTIVITY--For the year ended December 31, 2002, purchases and sales of investments, other than short-term obligations, were $10,002,029 and $10,527,101, respectively. Unrealized appreciation (depreciation) at December 31, 2002, based on cost of investments for federal income tax purposes, was: Gross unrealized appreciation $ 133,775 Gross unrealized depreciation (490,706) ---------- Net unrealized depreciation $ (356,931) ==========
OTHER--The Fund may focus its investments in certain industries, subjecting it to greater risk than a fund that is more diversified. NOTE 5. FUND LIQUIDATION The Board of Trustees has decided to terminate the Fund. The effective date of termination for the Fund will be March 28, 2003. 172 FINANCIAL HIGHLIGHTS Rydex Financial Services Fund, Variable Series--Class B Shares Selected data for a share outstanding throughout each period is as follows:
YEAR ENDED PERIOD DECEMBER 31, ENDED ----------------------------- DECEMBER 31, 2002 2001 2000(a) ------------ ------------ ------------ Net Asset Value, Beginning of Period $ 12.73 $ 14.50 $ 12.00 ------------ ------------ ------------ INCOME FROM INVESTMENT OPERATIONS: Net investment income(b) 0.07 0.06 0.04 Net realized and unrealized gain (loss) on investments (1.88) (1.78) 2.58 ------------ ------------ ------------ Total from Investment Operations (1.81) (1.72) 2.62 ------------ ------------ ------------ LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.08) (0.04) (0.02) In excess of net investment income -- -- (0.01) From net realized gains (0.03) (0.01) (0.05) Return of capital -- -- (0.04) ------------ ------------ ------------ Total Distributions Declared to Shareholders (0.11) (0.05) (0.12) ------------ ------------ ------------ NET ASSET VALUE, END OF PERIOD $ 10.81 $ 12.73 $ 14.50 ============ ============ ============ Total return (c)(d)(e) (14.20)% (11.86)% 21.79%(f) RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA: Expenses(g) 1.45% 1.45% 1.45%(h) Net investment income(g) 0.60% 0.44% 0.50%(h) Waiver/reimbursement 0.92% 1.57% 3.14%(h) Portfolio turnover rate 242% 57% 4%(f) Net assets, end of period (000's) $ 3,479 $ 4,586 $ 2,606
(a) For the period from commencement of operation on May 30, 2000 to December 31, 2000. (b) Per share data was calculated using average shares outstanding during the period. (c) Total return at net asset value assuming all distributions reinvested. (d) Had the Manager and/or Distributor not waived or reimbursed a portion of expenses, total return would have been reduced. (e) Total return figure does not include any insurance company charges associated with a variable annuity. If included, total return would be reduced. (f) Not annualized. (g) The benefits derived from custody credits and directed brokerage arrangements, if applicable, had an impact of less than 0.01%. (h) Annualized. 173 REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of Liberty Variable Investment Trust and the Class B Shareholders of Rydex Financial Services Fund, Variable Series In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio, and the related statements of operations and of changes in net assets and the Class B financial highlights present fairly, in all material respects, the financial position of Rydex Financial Services Fund, Variable Series (the "Fund") (a series of Liberty Variable Investment Trust) at December 31, 2002, and the results of its operations, the changes in its net assets and the Class B financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and the Class B financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2002 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. As discussed in Note 5, the Board of Trustees has approved the liquidation of the Fund, effective March 28, 2003. PricewaterhouseCoopers LLP Boston, Massachusetts February 12, 2003 174 UNAUDITED INFORMATION FEDERAL INCOME TAX INFORMATION 100.00% of the ordinary income distributed by the Fund, for the year ended December 31, 2002, qualifies for the corporate dividends received deduction. 175 PORTFOLIO MANAGERS' DISCUSSION Rydex Health Care Fund, Variable Series / December 31, 2002 Rydex Health Care Fund, Variable Series seeks capital appreciation. The fund is managed by a team of professionals at Rydex Global Advisors. During 2002, the health care sector declined in line with the overall stock market, which posted sizeable negative returns for the third consecutive year. An unprecedented wave of patent expirations on blockbuster medicines, along with subsequent competition from generic drug makers, contributed to slower earnings growth. In addition, the year was marked by lackluster research and development activity, and no major new drug discoveries were announced by major pharmaceutical companies. Our strategy has been to emphasize larger established names with sound balance sheets, proven and marketable products and strong new product pipelines. These companies exhibit pure sector exposure taking into account sales, assets and earnings. They are the companies in the health care sector that we feel represent current leadership, business momentum and market share. The fund's investments in biotechnology stocks were a drag on performance. Although the sector continued to demonstrate good long-term growth prospects, a series of clinical disappointments and regulatory product delays, combined with generally negative market conditions, brought stock prices down. Health care equipment and supply companies outperformed the sector as a whole. Investors rotated out of pharmaceutical stocks and into equipment and supply company stocks as new product launches and FDA approvals at companies such as Medtronic and Guidant (4.2% and 0.8% of net assets, respectively) raised investor expectations. Investments in health care providers and services were also strong performers throughout most of the year. However, investigations into Medicaid fraud late in the year brought the group down. LOOKING AHEAD We expect 2003 to be a better year for health care for several reasons. For starters, a Republican-dominated Congress is expected to set a more business-friendly tone for the industry, although one of the hottest issues in 2003 could be the legislative effort to pass a Medicare prescription drug benefit. With a new head at the Food and Drug Administration, the pace of new drug approvals, which had slowed considerably while the agency was without a commissioner, could pick up. Fewer product patents are scheduled to expire in 2003 and several new product launches are expected. What's more, the longer-term outlook for health care appears positive. Spending on health care and pharmaceuticals in the United States should continue to rise as the population ages and life expectancies get longer. ------------------- This is the last report for this fund. This fund will be liquidated on Friday, March 28, 2003. If you have any questions about this liquidation, please contact your insurance company. Economic and market conditions can frequently change. There is no assurance that the trends described here will continue or commence. The fund's primary risks include equity and market risk, as well as risk inherent in investing in the securities of a limited number of issuers conducting business in the health care sector. As a non-diversified portfolio, the fund may invest a significant percentage of its assets in the securities of a single issuer. As a result, it may have increased risk compared to a more diversified fund. Holdings are disclosed as of December 31, 2002, and are subject to change. 176 PERFORMANCE INFORMATION Rydex Health Care Fund, Variable Series / December 31, 2002 AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 2002 (%)
1-YEAR LIFE --------------------------------------------------------- Class B (5/30/00) -19.73 -6.61 S&P Health Care Index(1) -18.83 -5.74
Inception date of share class is in parentheses. [CHART] VALUE OF A $10,000 INVESTMENT, 5/30/00 - 12/31/02 Class B: $8,375
CLASS B SHARES S&P HEALTH CARE INDEX 5/30/00 $ 10,000 $ 10,000 05/30/2000 - 05/31/2000 $ 10,067 $ 10,000 06/01/2000 - 06/30/2000 $ 11,051 $ 10,832 07/01/2000 - 07/31/2000 $ 10,434 $ 10,224 08/01/2000 - 08/31/2000 $ 10,668 $ 10,295 09/01/2000 - 09/30/2000 $ 11,085 $ 10,806 10/01/2000 - 10/31/2000 $ 11,185 $ 11,202 11/01/2000 - 11/30/2000 $ 11,510 $ 11,679 12/01/2000 - 12/31/2000 $ 11,852 $ 12,006 01/01/2001 - 01/31/2001 $ 10,885 $ 11,026 02/01/2001 - 02/28/2001 $ 11,001 $ 11,053 03/01/2001 - 03/31/2001 $ 10,185 $ 10,232 04/01/2001 - 04/30/2001 $ 10,468 $ 10,512 05/01/2001 - 05/31/2001 $ 10,626 $ 10,640 06/01/2001 - 06/30/2001 $ 10,318 $ 10,146 07/01/2001 - 07/31/2001 $ 10,651 $ 10,691 08/01/2001 - 08/31/2001 $ 10,301 $ 10,313 09/01/2001 - 09/30/2001 $ 10,309 $ 10,463 10/01/2001 - 10/31/2001 $ 10,309 $ 10,413 11/01/2001 - 11/30/2001 $ 10,701 $ 10,918 12/01/2001 - 12/31/2001 $ 10,434 $ 10,572 01/01/2002 - 01/31/2002 $ 10,276 $ 10,472 02/01/2002 - 02/28/2002 $ 10,259 $ 10,513 03/01/2002 - 03/31/2002 $ 10,284 $ 10,535 04/01/2002 - 04/30/2002 $ 9,659 $ 9,883 05/01/2002 - 05/31/2002 $ 9,534 $ 9,695 06/01/2002 - 06/30/2002 $ 8,692 $ 8,805 07/01/2002 - 07/31/2002 $ 8,492 $ 8,624 08/01/2002 - 08/31/2002 $ 8,592 $ 8,730 09/01/2002 - 09/30/2002 $ 8,084 $ 8,169 10/01/2002 - 10/31/2002 $ 8,476 $ 8,660 11/01/2002 - 11/30/2002 $ 8,667 $ 8,893 12/01/2002 - 12/31/2002 $ 8,375 $ 8,581
NET ASSET VALUE PER SHARE ($) 12/31/01 12/31/02 ------------------------------------------------------------ Class B 12.52 10.05
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 SHARES. Total return performance includes changes in share price and reinvestment of all distributions. The S&P (Standard & Poor's) Health Care Index is an unmanaged index that tracks the performance of domestic health care stocks. Indexes are not investments, do not incur fees or expenses and are not professionally managed. It is not possible to invest directly in an index. Securities in the fund may not match those in the index. MUTUAL FUND PERFORMANCE CHANGES OVER TIME. CURRENT RETURNS FOR THE FUND MAY BE DIFFERENT THAN THAT SHOWN. Performance numbers reflect all fund expenses, but do not include any insurance charges imposed by your insurance company's separate accounts. If performance included the effect of these additional charges, it would be lower. (1) Index performance is from May 31, 2000. 177 INVESTMENT PORTFOLIO Rydex Health Care Fund, Variable Series / December 31, 2002
SHARES VALUE --------------- --------------- COMMON STOCKS--98.2% HEALTH CARE--98.2% HEALTH CARE EQUIPMENT & Services--27.0% HEALTH CARE DISTRIBUTORS & SERVICES--4.5% AmerisourceBergen Corp. 520 $ 28,241 Cardinal Health, Inc. 1,987 117,610 Express Scripts, Inc. (a) 508 24,404 Lincare Holdings, Inc. (a) 740 23,399 McKesson Corp. 1,420 38,383 Quest Diagnostics, Inc. (a) 572 32,547 --------------- 264,584 --------------- HEALTH CARE EQUIPMENT--13.0% Apogent Technologies, Inc. (a) 960 19,968 Bard (C.R.), Inc. 420 24,360 Baxter International, Inc. 2,730 76,440 Beckman Coulter, Inc. 490 14,465 Becton, Dickinson & Co. 1,350 41,431 Bio-Rad Laboratories, Inc., Class A (a) 190 7,353 Boston Scientific Corp. (a) 1,940 82,489 CONMED Corp. (a) 550 10,774 Diagnostic Products Corp. 250 9,655 Guidant Corp. 1,550 47,817 Hillenbrand Industries, Inc. 410 19,807 ICU Medical, Inc. (a) 250 9,325 INAMED Corp. (a) 370 11,396 Invacare Corp. 430 14,319 Medtronic, Inc. 5,420 247,152 Mentor Corp. 380 14,630 St. Jude Medical, Inc. 990 39,323 Stryker Corp. 980 65,778 --------------- 756,482 --------------- HEALTH CARE FACILITIES--3.0% HCA, Inc. 2,325 96,487 Health Management Associates, Inc. (a) 1,450 25,955 Tenet Healthcare Corp. 2,237 36,687 Triad Hospitals, Inc. (a) 550 16,407 --------------- 175,536 --------------- HEALTH CARE SUPPLIES--0.7% Alcon, Inc. (a) 210 8,284 Bausch & Lomb, Inc. 490 17,640 Ocular Sciences, Inc. (a) 400 6,208 Sybron Dental Specialties, Inc. (a) 690 10,246 --------------- 42,378 --------------- MANAGED HEALTH CARE--5.8% Aetna, Inc. 820 33,718 Anthem, Inc. (a) 730 45,917 CIGNA Corp. 680 27,962 First Health Group Corp. (a) 760 18,506 Health Net, Inc. (a) 930 24,552 Oxford Health Plans, Inc. (a) 620 22,599 UnitedHealth Group, Inc. 1,380 115,230 Wellpoint Health Networks, Inc. 730 51,947 --------------- 340,431 --------------- PHARMACEUTICALS & BIOTECHNOLOGY--71.2% BIOTECHNOLOGY--8.4% Abgenix, Inc. (a) 1,180 $ 8,697 Affymetrix, Inc. (a) 510 11,674 Amgen, Inc. (a) 5,890 284,723 Biogen, Inc. (a) 1,040 41,662 Genzyme Corp. (a) 1,330 39,328 IDEC Pharmaceuticals Corp. (a) 930 30,848 IDEXX Laboratories, Inc. (a) 420 13,797 MedImmune, Inc. (a) 1,550 42,114 OSI Pharmaceuticals, Inc. (a) 380 6,232 Protein Design Labs, Inc. (a) 1,120 9,520 --------------- 488,595 --------------- PHARMACEUTICALS--62.8% Abbott Laboratories 6,820 272,800 Allergan, Inc. 640 36,877 Aventis SA, ADR 60 3,251 Barr Laboratories, Inc. (a) 300 19,527 Bristol-Myers Squibb Co. 8,590 198,858 Eli Lilly & Co. 4,845 307,657 Forest Laboratories, Inc. (a) 830 81,523 ICN Pharmaceuticals, Inc. 1,080 11,783 IVAX Corp. (a) 1,303 15,805 Johnson & Johnson 12,879 691,731 Medicis Pharmaceutical Corp. (a) 320 15,894 Merck & Co., Inc. 9,719 550,193 Mylan Laboratories, Inc. 720 25,128 Perrigo Co. (a) 910 11,057 Pfizer, Inc. 26,908 822,578 Pharmaceutical Resources, Inc. (a) 260 7,748 Pharmacia Corp. 5,685 237,633 Schering-Plough Corp. 6,583 146,143 Wyeth 5,860 219,164 --------------- 3,675,350 --------------- MATERIALS--0.0% CHEMICALS--0.0% FERTILIZERS & Agricultural Chemicals--0.0% Syngenta AG, ADR (a) 1 12 --------------- TOTAL COMMON STOCKS (cost of $6,551,699) 5,743,368 --------------- PAR --------------- SHORT-TERM OBLIGATION--2.9% Repurchase agreement with State Street Bank & Trust Co., dated 12/31/02, due 01/02/03 at 1.180%, collateralized by U.S. Treasury Bond maturing 02/15/19, market value $174,816 (repurchase proceeds $171,011) (cost of $171,000) $ 171,000 171,000 ---------------
See Notes to Investment Portfolio. 178
VALUE --------------- TOTAL INVESTMENTS--101.1% (cost of $6,722,699) (b) $ 5,914,368 --------------- OTHER ASSETS & LIABILITIES, NET--(1.1)% (66,346) --------------- NET ASSETS--100.0% $ 5,848,022 ===============
NOTES TO INVESTMENT PORTFOLIO: (a) Non-income producing. (b) Cost for federal income tax purposes is $7,084,161. The difference between cost for generally accepted accounting principles and cost on a tax basis is related to deferral of losses on wash sales. Realized losses have been deferred for tax purposes and cost adjusted accordingly.
ACRONYM NAME ------- ---- ADR American Depositary Receipt
See Notes to Financial Statements. 179 STATEMENT OF ASSETS & LIABILITIES Rydex Health Care Fund, Variable Series / December 31, 2002 ASSETS: Investments, at cost $ 6,722,699 --------------- Investments, at value $ 5,914,368 Cash 160 Receivable for: Fund shares sold 36,926 Interest 6 Dividends 8,491 Deferred Trustees' compensation plan 650 --------------- TOTAL ASSETS 5,960,601 --------------- LIABILITIES: Expense reimbursement due to Manager/Distributor 2,593 Payable for: Investments purchased 81,298 Management fee 5,015 Transfer agent fee 625 Pricing and bookkeeping fees 833 Trustees' fee 352 Audit fee 15,250 Reports to shareholders 3,676 Deferred Trustees' fee 650 Other liabilities 2,287 --------------- TOTAL LIABILITIES 112,579 --------------- NET ASSETS $ 5,848,022 =============== COMPOSITION OF NET ASSETS: Paid-in capital $ 7,336,737 Accumulated net investment loss (1,049) Accumulated net realized loss (679,335) Net unrealized depreciation on investments (808,331) --------------- NET ASSETS $ 5,848,022 =============== CLASS A: Net assets $ 83,785 Shares outstanding 8,333 =============== Net asset value per share $ 10.05 =============== CLASS B: Net assets $ 5,764,237 Shares outstanding 573,295 =============== Net asset value per share $ 10.05 ===============
See Notes to Financial Statements. 180 STATEMENT OF OPERATIONS Rydex Health Care Fund, Variable Series For the Year Ended December 31, 2002 INVESTMENT INCOME: Dividends $ 81,410 Interest 1,905 --------------- Total Investment Income (net of foreign taxes withheld of $149) 83,315 --------------- EXPENSES: Management fee 63,229 Distribution fee--Class B 15,579 Pricing and bookkeeping fees 10,754 Transfer agent fee 7,500 Trustees' fee 6,190 Custody fee 7,985 Audit fee 13,825 Other expenses 4,077 --------------- Total Expenses 129,139 Fees and expenses reimbursed by Manager (12,423) Fees reimbursed by Distributor--Class B (15,579) Custody earnings credit (76) --------------- Net Expenses 101,061 --------------- Net Investment Loss (17,746) --------------- NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS: Net realized loss on investments (647,373) Net change in unrealized appreciation/depreciation on investments (767,971) --------------- Net Loss (1,415,344) --------------- Net Decrease in Net Assets from Operations $ (1,433,090) ===============
See Notes to Financial Statements. 181 STATEMENT OF CHANGES IN NET ASSETS Rydex Health Care Fund, Variable Series
YEAR ENDED DECEMBER 31, ---------------------------- 2002 2001 ------------- ------------- INCREASE (DECREASE) IN NET ASSETS: ---------------------------------- OPERATIONS: Net investment loss $ (17,746) $ (26,039) Net realized loss on investments (647,373) (31,961) Net change in unrealized appreciation/depreciation on investments (767,971) (385,128) ------------- ------------- Net Decrease from Operations (1,433,090) (443,128) ------------- ------------- SHARE TRANSACTIONS: Class B: Subscriptions 2,078,830 4,551,418 Redemptions (1,911,027) (461,421) ------------- ------------- Net Increase from Share Transactions 167,803 4,089,997 ------------- ------------- Total Increase (Decrease) in Net Assets (1,265,287) 3,646,869 NET ASSETS: Beginning of period 7,113,309 3,466,440 ------------- ------------- End of period (including accumulated net investment loss of of $(1,049) and $(721), respectively) $ 5,848,022 $ 7,113,309 ============= ============= CHANGES IN SHARES: Class B: Subscriptions 185,054 360,906 Redemptions (171,362) (36,736) ------------- ------------- Net Increase 13,692 324,170 ------------- -------------
See Notes to Financial Statements. 182 NOTES TO FINANCIAL STATEMENTS Rydex Health Care Fund, Variable Series / December 31, 2002 NOTE 1. ORGANIZATION AND ACCOUNTING POLICIES ORGANIZATION--Rydex Health Care Fund, Variable Series (the "Fund"), a series of Liberty Variable Investment Trust (the "Trust"), is a non-diversified portfolio of a Massachusetts business trust, registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The Fund's investment goal is to seek capital appreciation. The Fund's capitalization consists of an unlimited number of shares of beneficial interest without par value that represent a separate series of the Trust. The Fund offers two classes of shares: Class A and Class B. Each share of a class represents an equal proportionate beneficial interest in that share class and, when issued and outstanding, is fully paid and nonassessable. Shareholders would be entitled to share proportionally in the net assets of their share class available for distribution to shareholders upon liquidation of the Fund. Shares of the Fund are available and are being marketed exclusively as a pooled funding vehicle for variable annuity contracts ("VA contracts") and Variable Life Insurance Policies ("VLI Policies") offered by the separate accounts of certain life insurance companies ("Participating Insurance Companies"). The Participating Insurance Companies and their separate accounts own all the shares of the Fund. Liberty Advisory Services Corp. (the "Manager") ("LASC") provides investment manage- ment and advisory services to the Fund pursuant to its Management Agreement with the Fund. Colonial Management Associates, Inc. ("Colonial") provides subadvisory services. LASC has delegated various administrative matters to Colonial. Colonial also provides pricing and bookkeeping services to the Fund. Liberty Funds Distributor, Inc. ("LFD"), an affiliate of the Manager, serves as the principal underwriter of the Fund. The Manager, Colonial and LFD are wholly-owned indirect subsidiaries of FleetBoston Financial Corporation ("FleetBoston"). The preparation of financial statements in conformity with generally accepted accounting principles requires manage- ment 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 during the reporting period. Actual results could differ from those estimates. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. SECURITY VALUATION AND TRANSACTIONS--Equity securities generally are valued at the last sale price or, in the case of unlisted or listed securities for which there were no sales during the day, at the current quoted bid price. Short-term obligations with a maturity of 60 days or less are valued at amortized cost. 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. 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. DETERMINATION OF CLASS NET ASSET VALUES AND FINANCIAL HIGHLIGHTS--All income, expenses (other than the Class B distribution fee), 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. The per share data was calculated using average shares outstanding during the period. In addition, Class B net investment income per share data and ratios reflect the distribution fee applicable to Class B shares only. 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. DISTRIBUTIONS TO SHAREHOLDERS--The Fund intends to distribute as income dividends or capital gains distributions, at least annually, substantially all of its net investment income and net profits realized from the sale of investments. All dividends and distributions are reinvested in additional shares of the Fund at net asset value as of the record date of the distribution. Income and capital gain distributions are determined in accordance with federal income tax regulations. OTHER--Interest income is recorded on the accrual basis. Corporate actions and dividend income are recorded on the ex-date. The Fund's custodian takes possession through the federal book-entry system of securities collateralizing repurchase agreements. Collateral is marked-to-market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund. The Fund may experience costs and delays in liquidating the collateral if the issuer defaults or enters bankruptcy. NOTE 2. FEDERAL TAX INFORMATION Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from generally accepted accounting principles. These differences are primarily due to differing treatments for deferral of losses from wash sales, capital loss carryforwards, net operating losses and non-deductible expenses. Reclassifications 183 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 December 31, 2002, permanent items identified and reclassified among the components of net assets are as follows:
ACCUMULATED NET ACCUMULATED NET PAID-IN INVESTMENT LOSS REALIZED LOSS CAPITAL ----------------- -------------- ------- $ 17,418 $ -- $ (17,418)
Net investment income, net realized gains (losses) and net assets were not affected by this reclassification. As of December 31, 2002, the components of distributable earnings on a tax basis were as follows:
UNREALIZED DEPRECIATION* ------------- $ (1,169,793)
* The difference between book-basis and tax-basis unrealized depreciation is attributable primarily to the tax deferral of losses on wash sales. The following capital loss carryforwards are available to reduce taxable income arising from future net realized gains on investments, if any, to the extent permitted by the Internal Revenue Code:
YEAR OF CAPITAL LOSS EXPIRATION CARRYFORWARD ---------- ------------ 2009 $ 27,597 2010 290,276 --------- $ 317,873 =========
NOTE 3. FEES AND COMPENSATION PAID TO AFFILIATES MANAGEMENT AND SUB-ADVISORY FEES--The Manager receives a monthly fee equal to 1.00% annually of the Fund's average daily net assets. The Manager, out of the management fee it receives, pays Colonial a monthly sub-advisory fee equal to 0.80% annually of the Fund's average daily net assets. Rydex Global Advisors has been retained by Colonial to manage the day-to-day investment operations of the Fund. Colonial, out of the sub-advisory fee it receives, pays Rydex Global Advisors for services rendered. PRICING AND BOOKKEEPING FEES--Colonial is responsible for providing pricing and bookkeeping services to the Fund under a Pricing and Bookkeeping Agreement. Under a separate agreement (the "Outsourcing Agreement"), Colonial has delegated those functions to State Street Bank & Trust Company ("State Street"). Colonial pays fees to State Street under the Outsourcing Agreement. Under its pricing and bookkeeping agreement with the Fund, Colonial 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. The Fund also pays out-of-pocket costs for pricing services. TRANSFER AGENT FEE--Liberty Funds Services, Inc. (the "Transfer Agent"), an affiliate of the Manager, provides shareholder services for an annual rate of $7,500. DISTRIBUTION FEE--The Fund has adopted a 12b-1 plan, which requires it to pay LFD a monthly distribution fee equal to 0.25% annually of ClassB average daily net assets as of the 20th of each month. EXPENSE LIMITS--The Manager and LFD have voluntarily agreed to reimburse all expenses, including management fees and distribution fees, but excluding interest, taxes, brokerage and extraordinary expenses incurred by the Fund in excess of 1.60% annually of the Fund's average daily net assets. LFD will first reimburse the ClassB distribution fee up to 0.25% annually to reach the 1.60% limit on Class B expenses. If additional reimbursement is needed to meet the limit for each class, the Manager will then reimburse other expenses to the extent necessary. If additional reimbursement is still needed to reach the expense limit, the Manager will then waive a portion of its management fee to reach the expense limit. This arrangement may be terminated or modified by the Manager or LFD at any time. OTHER--The Fund pays no compensation to its officers, all of whom are employees of Colonial 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 $76 of custody fees were reduced by balance credits for the year ended December31, 2002. The Fund could have invested a portion of the assets utilized in connection with the expense offset arrangement in an income-producing asset if it had not entered into such an agreement. NOTE 4. PORTFOLIO INFORMATION INVESTMENT ACTIVITY--For the year ended December 31, 2002, purchases and sales of investments, other than short-term obligations, were $7,384,707 and $7,225,351, respectively. 184 Unrealized appreciation (depreciation) at December 31, 2002, based on cost of investments for federal income tax purposes, was: Gross unrealized appreciation $ 217,643 Gross unrealized depreciation (1,387,436) ------------ Net unrealized depreciation $ (1,169,793) ============
OTHER--The Fund may focus its investments in certain industries, subjecting it to greater risk than a fund that is more diversified. NOTE 5. FUND LIQUIDATION The Board of Trustees has decided to terminate the Fund. The effective date of termination for the Fund will be March 28, 2003. 185 FINANCIAL HIGHLIGHTS Rydex Health Care Fund, Variable Series--Class B Shares Selected data for a share outstanding throughout each period is as follows:
YEAR ENDED PERIOD DECEMBER 31, ENDED ---------------------------- DECEMBER 31, 2002 2001 2000 (a) ---------- --------- -------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 12.52 $ 14.22 $ 12.00 ---------- --------- ---------- INCOME FROM INVESTMENT OPERATIONS: Net investment loss (b) (0.03) (0.06) (0.03) Net realized and unrealized gain (loss) on investments (2.44) (1.64) 2.25 ---------- --------- ---------- Total from Investment Operations (2.47) (1.70) 2.22 ---------- --------- ---------- NET ASSET VALUE, END OF PERIOD $ 10.05 $ 12.52 $ 14.22 ========== ========= ========== Total return (c)(d)(e) (19.73)% (11.95)% 18.50%(f) RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA: Expenses (g) 1.60% 1.60% 1.60%(h) Net investment loss (g) (0.28)% (0.49)% (0.37)%(h) Waiver/reimbursement 0.45% 1.01% 2.79%(h) Portfolio turnover rate 115% 12% 0%(f) Net assets, end of period (000's) $ 5,764 $ 7,009 $ 3,347
(a) For the period from commencement of operations on May 30, 2000 to December 31, 2000. (b) Per share data was calculated using average shares outstanding during the period. (c) Total return at net asset value assuming all distributions reinvested. (d) Had the Manager and/or Distributor not waived or reimbursed a portion of expenses, total return would have been reduced. (e) Total return figure does not include any insurance company charges associated with a variable annuity. If included, total return would be reduced. (f) Not annualized. (g) The benefits derived from custody credits and directed brokerage arrangements, if applicable, impact of less than 0.01%. had an (h) Annualized. 186 REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of Liberty Variable Investment Trust and the Class B Shareholders of Rydex Health Care Fund, Variable Series In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio, and the related statements of operations and of changes in net assets and the Class B financial highlights present fairly, in all material respects, the financial position of Rydex Health Care Fund, Variable Series (the "Fund") (a series of Liberty Variable Investment Trust) at December 31, 2002, and the results of its operations, the changes in its net assets and the Class B financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and the Class B financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2002 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. As discussed in Note 5, the Board of Trustees has approved the liquidation of the Fund, effective March 28, 2003. PricewaterhouseCoopers LLP Boston, Massachusetts February 12, 2003 187 TRUSTEES Liberty Variable Investment Trust The Trustees serve terms of indefinite duration. The names, addresses and ages of the Trustees and officers of 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.
YEAR FIRST NUMBER OF ELECTED OR PORTFOLIOS IN FUND OTHER POSITION WITH APPOINTED PRINCIPAL OCCUPATION(S) COMPLEX OVERSEEN DIRECTORSHIPS NAME, ADDRESS AND AGE LIBERTY FUNDS(1) TO OFFICE DURING PAST FIVE YEARS BY TRUSTEE HELD ------------------------------------------------------------------------------------------------------------------------------------ DISINTERESTED TRUSTEES Douglas A. Hacker (age 47) Trustee 1996 Executive Vice 103 None c/o Liberty Funds Group LLC President--Strategy of One Financial Center United Airlines (airline) Boston, MA 02111 since December 2002 (formerly President of UAL Loyalty Services (airline) from September 2001 to December 2002; (Executive Vice President and Chief Financial Officer from March, 1993 to September 2001 of United Airlines); Senior Vice President and Chief Financial Officer of UAL, Inc. prior thereto Janet Langford Kelly (age 45) Trustee 1996 Executive Vice 103 None c/o Liberty Funds Group LLC President--Corporate One Financial Center Development and Boston, MA 02111 Administration, General Counsel and Secretary, Kellogg Company (food manufacturer), since September 1999; Senior Vice President, Secretary and General Counsel, Sara Lee Corporation (branded, packaged, consumer-products manufacturer) prior thereto Richard W. Lowry (age 66) Trustee 1995 Private Investor since 105*** None c/o Liberty Funds Group LLC 1987 (formerly Chairman One Financial Center and Chief Executive Boston, MA 02111 Officer, U.S. Plywood Corporation (building products manufacturer)) Salvatore Macera (age 71) Trustee 1998 Private Investor since 103 None c/o Liberty Funds Group LLC 1981 (formerly Executive One Financial Center Vice President and Boston, MA 02111 Director of Itek Corporation (electronics) from 1975 to 1981) Charles R. Nelson (age 60) Trustee 1981 Professor of Economics, 118* None c/o Liberty Funds Group LLC University of Washington, One Financial Center since January 1976; Ford Boston, MA 02111 and Louisa Van Voorhis Professor of Political Economy, University of 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; Trustee, Columbia Funds since July 2002; consultant on econometric and statistical matters John J. Neuhauser (age 59) Trustee 1985 Academic Vice President 105*** Saucony, Inc. c/o Liberty Funds Group LLC and Dean of Faculties (athletic One Financial Center since August 1999, Boston footwear) and Boston, MA 02111 College (formerly Dean, SkillSoft Boston College School of Corp. Management from (e-learning) September 1977 to September 1999) Thomas E. Stitzel (age 67) Trustee 1998 Business Consultant since 103 None c/o Liberty Funds Group LLC 1999 (formerly Professor One Financial Center of Finance from 1975 to Boston, MA 02111 1999 and Dean from 1977 to 1991, College of Business, Boise State University); Chartered Financial Analyst
188
YEAR FIRST NUMBER OF ELECTED OR PORTFOLIOS IN FUND OTHER POSITION WITH APPOINTED PRINCIPAL OCCUPATION(S) COMPLEX OVERSEEN DIRECTORSHIPS NAME, ADDRESS AND AGE LIBERTY FUNDS(1) TO OFFICE DURING PAST FIVE YEARS BY TRUSTEE HELD ------------------------------------------------------------------------------------------------------------------------------------ DISINTERESTED TRUSTEES (CONTINUED) Thomas C. Theobald (age 65) Trustee 1996 Managing Director, William 103 Anixter c/o Liberty Funds Group LLC Blair Capital Partners International One Financial Center (private equity investing) (network Boston, MA 02111 since September 1994 support (formerly Chief Executive equipment Officer and Chairman of distributor), the Board of Directors, Jones Lang Continental Bank LaSalle (real Corporation prior thereto) estate management services) and MONY Group (life insurance) Anne-Lee Verville (age 57) Trustee 1998 Author and speaker on 103 Chairman of c/o Liberty Funds Group LLC educational systems needs the Board of One Financial Center (formerly General Manager, Directors, Boston, MA 02111 Global Education Industry Enesco Group, from 1994 to 1997, and Inc. President, Applications (designer, Solutions Division from importer and 1991 to 1994, IBM distributor Corporation (global of giftware education and global and applications)) collectibles) INTERESTED TRUSTEES William E. Mayer** (age 62) Trustee 1994 Managing Partner, Park 105 Lee c/o Liberty Funds Group LLC Avenue Equity Partners Enterprises One Financial Center (private equity) since (print Boston, MA 02111 February 1999 (formerly media), WR Founding Partner, Hambrecht + Development Capital LLC Co. from November 1996 to (financial February 1999; Dean and service Professor, College of provider) and Business and Management, First Health University of Maryland (health care) from October 1992 to November 1996) Joseph R. Palombo** (age 49) Trustee and 2000 Chief Operating Officer of 103 None One Financial Center Chairman of the Columbia Management Group, Boston, MA 02111 Board Inc. (Columbia Management Group) since November 2001; 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) since April 1999; Executive Vice President and Director of Colonial Management Associates, Inc. since April 1999; Director of Stein Roe since September 2000; Trustee and Chairman of the Board of Stein Roe Mutual Funds since October 2000; Manager of Stein Roe Floating Rate Limited Liability Company since October 2000; Vice President of Galaxy Funds since September 2002; (formerly Vice President of 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 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. * In addition to serving as a disinterested trustee of Liberty Funds, Mr. Nelson serves as a disinterested director of Columbia Funds, currently consisting of 15 funds, which are advised by an affiliate of the Advisor. ** 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., a registered broker-dealer. Mr. Palombo is an interested person as an employee of an affiliate of the Advisor. *** In addition to serving as a trustee of Liberty Funds, Mr. Lowry, Mr. Neuhauser and Mr. Mayer each serve as a director/trustee of Liberty All-Star Funds, currently consisting of 2 funds, which are advised by an affiliate of the Advisor. 189 OFFICERS Liberty Variable Investment Trust
YEAR FIRST ELECTED OR POSITION WITH APPOINTED PRINCIPAL OCCUPATION(S) NAME, ADDRESS AND AGE LIBERTY FUNDS TO OFFICE DURING PAST FIVE YEARS ------------------------------------------------------------------------------------------------------------------------------------ Keith T. Banks (age 47) President 2001 President of Liberty Funds since November 2001; Columbia Management Group, Inc. President, Chief Investment Officer and Chief Executive 590 Madison Avenue, 36th Floor Officer of Columbia Management Group or its predecessor New York, NY 10022 since August 2000 (formerly Managing Director and Head of U.S. Equity, J.P. Morgan Investment Management from November 1996 to August 2000); President of Galaxy Funds since September 2002 Vicki L. Benjamin (age 41) Chief 2001 Controller of Liberty Funds, Stein Roe Funds and Liberty One Financial Center Accounting All-Star Funds since May 2002; Chief Accounting Officer Boston, MA 02111 Officer and of Liberty Funds, Stein Roe Funds and Liberty All-Star Controller Funds since June 2001; Controller and Chief Accounting Officer of 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 38) Treasurer 2000 Treasurer of Liberty Funds and Liberty All-Star Funds One Financial Center since December 2000 (formerly Controller of the Liberty Boston, MA 02111 Funds and Liberty All-Star Funds from February 1998 to October 2000); Treasurer of Stein Roe Funds since February 2001 (formerly Controller from May 2000 to February 2001); Treasurer of Galaxy Funds since September 2002 (formerly Vice President from April 2000 to January 2001; Vice President of Colonial Management Associates, Inc. from February 1998 to October 2000; Senior Tax Manager, Coopers & Lybrand, LLP from April 1996 to January 1998) Jean S. Loewenberg (age 57) Secretary 2002 Secretary of Liberty Funds, Stein Roe Funds and Liberty One Financial Center All-Star Funds since February 2002; General Counsel of Boston, MA 02111 Columbia Management Group since December 2001; Senior Vice President since November 1996, Assistant General Counsel since September 2002 of Fleet National Bank (formerly Senior Vice President and Group Senior Counsel of Fleet National Bank from November 1996 to September 2002)
190 LIBERTY VARIABLE INVESTMENT TRUST INVESTMENT MANAGER Liberty Advisory Services Corp. 125 High Street Boston, MA 02110 ADMINISTRATOR Colonial Management Associates, Inc. One Financial Center Boston, MA 02111 TRANSFER AGENT Liberty Funds Services, Inc. PO Box 8081 Boston, MA 02266-8081 191 (This page intentionally left blank) 192 STEINROE VARIABLE INVESTMENT TRUST 193 PORTFOLIO MANAGERS' DISCUSSION Liberty Federal Securities Fund, Variable Series / December 31, 2002 Liberty Federal Securities Fund, Variable Series seeks the highest possible level of current income, consistent with the safety of principal and maintenance of liquidity. Leslie W. Finnemore, Michael Bissonnette and Ann T. Peterson are portfolio co-managers of the fund. Ms. Finnemore and Mr. Bissonnette are senior vice presidents of Stein Roe & Farnham Incorporated (Stein Roe). Ms. Peterson is a vice president of Stein Roe. FLIGHT TO SAFETY Bonds posted strong returns in 2002 as stock prices sank for the third consecutive year. Although the Federal Reserve Board lowered short-term interest rates only once during the year, bond prices continued to move up as economic softness, geopolitical tensions and corporate governance issues pushed investors toward less risky investments. Bond yields fell dramatically, with high quality issues turning in the best performance. HIGH-QUALITY FOCUS The fund held the bulk of its assets in high-quality government bonds, including US Treasuries and mortgage bonds issued by government agencies, which benefited performance. We avoided corporate bonds, many of which suffered from the same financial reporting issues that plagued the stock market. As credit concerns mounted around mid-year, we reduced our investment in non-agency-issued mortgage bonds. We redirected the proceeds into agency-issued mortgages, boosting the credit quality of the portfolio. Although our mortgage investments did well, our investment in Treasuries did even better as the bond market rallied over the summer. For the year, however, mortgage bonds outperformed Treasuries with similar maturities. The fund also gained ground through our active management of duration, a measure of the bond's sensitivity to changes in interest rates. The longer a bond's duration, the more likely its price will rise as interest rates fall, and vice versa. We were on target for most of the year, although around mid-year we lowered duration because we expected interest rates to rise. Our decision turned out to be slightly premature as interest rates continued to fall. POTENTIAL FOR MORE STABLE INTEREST RATES We believe that interest rates may have bottomed out, and that many of the uncertainties that plagued the financial markets in 2002 appear to be headed for resolution. Prospects for the economy are also brightening, given the combination of monetary and fiscal measures in the works or already underway. Our expectation is that, as the past year's worries dissipate, investors will regain confidence and take on more risk. However, we remain optimistic about the outlook for bonds. Interest rates are unlikely to rise dramatically as long as geopolitical uncertainties continue to weigh on consumers and corporations. If interest rates stabilize, we expect mortgage bonds, which offer a yield advantage over Treasuries, to benefit. Stable or rising interest rates tend to limit prepayment risk--the risk that homeowners will pay their mortgages before their due dates and refinance at lower rates. With this in mind, our strategy will maintain a strong mortgage focus. We also plan to keep the fund's duration slightly shorter than average, anticipating a possible increase in interest rates. ---------- Economic and market conditions can frequently change. There is no assurance that the trends described here will continue or commence. Investing in fixed-income securities offers the potential for attractive current income and total returns, but also involves certain risks. The value and return of your investment may fluctuate as a result of changes in interest rates; the financial strength of issuers of lower-rated bonds. Holdings are disclosed as of December 31, 2002, and are subject to change. 194 PERFORMANCE INFORMATION Liberty Federal Securities Fund, Variable Series / December 31, 2002 AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 2002 (%)
1-YEAR 5-YEAR 10-YEAR -------------------------------------------------------------------- Class B(1) (6/1/00) 9.59 6.88 6.78 Lehman Brothers Intermediate US Government Bond Index 9.64 7.44 6.91
Inception date of share class is in parentheses. [CHART] VALUE OF A $10,000 INVESTMENT, 12/31/92 - 12/31/02 Class B: $19,271
CLASS B SHARES LEHMAN BROTHERS INTERMEDIATE US GOVERNMENT BOND INDEX 12/31/92 $ 10,000 $ 10,000 3/31/93 $ 10,322 $ 10,374 6/30/93 $ 10,488 $ 10,577 9/30/93 $ 10,556 $ 10,801 12/31/93 $ 10,627 $ 10,817 3/31/94 $ 10,439 $ 10,617 6/30/94 $ 10,366 $ 10,557 9/30/94 $ 10,440 $ 10,638 12/31/94 $ 10,460 $ 10,628 3/31/95 $ 10,945 $ 11,070 6/30/95 $ 11,485 $ 11,587 9/30/95 $ 11,722 $ 11,766 12/31/95 $ 12,106 $ 12,159 3/31/96 $ 12,023 $ 12,077 6/30/96 $ 12,094 $ 12,158 9/30/96 $ 12,344 $ 12,367 12/31/96 $ 12,675 $ 12,653 3/31/97 $ 12,662 $ 12,650 6/30/97 $ 13,100 $ 13,003 9/30/97 $ 13,487 $ 13,336 12/31/97 $ 13,821 $ 13,631 3/31/98 $ 14,008 $ 13,836 6/30/98 $ 14,295 $ 14,092 9/30/98 $ 14,733 $ 14,750 12/31/98 $ 14,761 $ 14,787 3/31/99 $ 14,833 $ 14,747 6/30/99 $ 14,760 $ 14,718 9/30/99 $ 14,905 $ 14,867 12/31/99 $ 14,920 $ 14,859 3/31/00 $ 15,153 $ 15,103 6/30/00 $ 15,353 $ 15,378 9/30/00 $ 15,828 $ 15,790 12/31/00 $ 16,458 $ 16,417 3/31/01 $ 16,886 $ 16,909 6/30/01 $ 16,935 $ 16,980 9/30/01 $ 17,767 $ 17,824 12/31/01 $ 17,587 $ 17,799 3/31/02 $ 17,533 $ 17,753 6/30/02 $ 18,215 $ 18,438 9/30/02 $ 19,169 $ 19,327 12/31/02 $ 19,271 $ 19,514
NET ASSET VALUE PER SHARE ($) 12/31/01 12/31/02 ----------------------------------------------------------- Class B 10.78 11.30
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 SHARES. Total return performance includes changes in share price and reinvestment of all distributions. The Lehman Brothers Intermediate US Government Bond Index is an unmanaged index that tracks the performance of investment grade bonds. Indexes are not investments, do not incur fees or expenses and are not professionally managed. It is not possible to invest directly in an index. Securities in the fund may not match those in the index. MUTUAL FUND PERFORMANCE CHANGES OVER TIME. CURRENT RETURNS FOR THE FUND MAY BE DIFFERENT THAN THAT SHOWN. Performance numbers reflect all fund expenses, but do not include any insurance charges imposed by your insurance company's separate accounts. If performance included the effect of these additional charges, it would be lower. (1) Class B share (newer class shares) performance information includes returns of the fund's class A shares (the older existing fund class) for periods prior to the inception of the newer class shares. These class A share returns were not restated to reflect any expense differential (e.g., Rule 12b-1 fees) between class A shares and the newer class shares. If differences in expenses were reflected, the returns for periods prior to inception of the newer class shares would be lower. 195 INVESTMENT PORTFOLIO Liberty Federal Securities Fund, Variable Series / December 31, 2002
PAR VALUE ------------- ------------- U.S. GOVERNMENT AGENCIES--64.7% FEDERAL HOME LOAN MORTGAGE CORP.: 0.000% 01/02/2003(a) $ 37,990,000 $ 37,989,209 7.000% 01/01/26 465,354 491,205 7.500% 02/01/23-05/01/24 922,634 992,311 8.500% 05/01/06 4,790 4,812 10.500% 06/01/13-02/01/19 95,559 107,284 10.750% 11/01/09 53,606 59,912 11.250% 10/01/2009-07/01/13 14,866 16,874 12.000% 07/01/13-07/01/20 203,535 236,345 ------------- 39,897,952 ------------- FEDERAL NATIONAL MORTGAGE ASSOCIATION: 6.000% 12/01/23-07/01/26 3,632,106 3,745,317 6.500% 03/01/09-10/01/28 6,736,481 7,030,368 7.000% 07/01/11-03/01/29 2,064,846 2,187,295 7.500% 11/01/29 865,746 919,885 8.500% 05/01/30 1,695,556 1,821,602 9.000% 10/01/05-05/01/20 39,421 43,340 9.250% 03/25/18 205,356 241,679 10.000% 03/01/16 82,755 92,590 12.250% 09/01/12 31,762 36,985 To Be Announced: 5.500%(b) 5,049,000 5,230,451 6.000%(b) 22,700,000 23,487,948 6.500%(b) 26,798,000 27,895,057 7.000%(b) 1,188,000 1,249,256 7.500%(b) 8,368,000 8,892,271 ------------- 82,874,044 ------------- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION: 5.750% 07/20/25 187,747 193,468 6.000% 03/15/29-06/15/29 7,681,690 8,021,731 6.500% 01/15/24-03/15/28 3,295,908 3,466,514 8.000% 04/15/08-07/15/08 305,416 329,047 9.000% 06/15/16-01/15/20 280,093 311,596 9.500% 06/15/09-08/15/22 1,442,115 1,614,248 10.000% 11/15/09-11/15/19 111,061 125,263 11.500% 04/15/13-05/15/13 107,876 125,921 To Be Announced: 6.000%(b) 2,500,000 2,600,000 7.000%(b) 8,000,000 8,475,000 ------------- 25,262,788 ------------- TOTAL U.S. GOVERNMENT AGENCIES (cost of $145,052,543) 148,034,784 ------------- U.S. GOVERNMENT OBLIGATIONS-- 42.5% U.S. TREASURY BONDS/NOTES: 3.000% 01/31/04 1,206,000 1,228,424 4.875% 02/15/12 1,400,000 1,520,257 5.500% 08/15/28 3,485,000 3,765,434 5.750% 08/15/10 25,566,000 29,394,918 6.000% 08/15/04 2,963,000 3,181,521 6.500% 02/15/10(c) 3,579,000 4,278,022 6.750% 08/15/26 5,820,000 7,281,594 6.875% 08/15/25 5,745,000 7,266,305 7.125% 02/15/23 3,333,000 4,292,017 7.500% 02/15/05 $ 23,038,000 $ 25,833,154 9.375% 02/15/06 7,425,000 9,057,631 ------------- TOTAL U.S. GOVERNMENT OBLIGATIONS (cost of $93,042,834) 97,099,277 ------------- NON-AGENCY MORTGAGE-BACKED & ASSET-BACKED SECURITIES--7.2% Advanta Mortgage Loan Trust, 7.550% 06/25/27 312,924 323,675 American Mortgage Trust, 8.190% 09/27/22 88,281 79,453 Asset Securitization Corp., 6.750% 02/14/43 1,375,000 1,524,408 Chase Funding Mortgage Loan, 6.975% 02/25/32 3,000,000 3,161,070 Citicorp Mortgage Securities, Inc., 10.000% 08/25/17 36,642 36,574 Comfed Savings Bank, 7.550% 01/25/18 29,807 23,846 GS Mortgage Securities Corp., 7.750% 09/20/27(d) 1,704,775 1,767,637 Glendale Federal Bank, 9.125% 01/25/08 4,552 4,543 Imperial Savings Association, 8.855% 06/25/17 7,719 7,700 JP Morgan Commercial Mortgage Finance Corp., 7.400% 07/15/31 2,000,000 2,319,625 LB Commercial Conduit Mortgage Trust: 6.210% 10/15/35 1,800,000 2,007,624 6.590% 02/18/30 1,500,000 1,660,993 Merrill Lynch Mortgage Investors, Inc., 7.111% 12/26/25 778,493 821,499 Mid-State Trust, 7.340% 07/01/35 1,346,570 1,442,601 Nomura Asset Securities Corp., 7.120% 04/13/39 1,000,000 1,116,397 Option One Mortgage Securities Corp., 9.660% 06/26/29(d) 72,488 72,126 Structured Asset Securities Corp., (Interest Only)1.785% 02/25/28 2,629,460 147,621 ------------- TOTAL NON-AGENCY MORTGAGE-BACKED & ASSET-BACKED SECURITIES (cost of $14,273,445) 16,517,392 -------------
See Notes to Investment Portfolio. 196
PAR VALUE ------------- ------------- SHORT-TERM OBLIGATION--18.1% Repurchase agreement with State Street Bank & Trust Co., dated 12/31/02, due 1/2/03 at 1.030%, collateralized by Federal National Mortgage Association maturing 04/30/03, market value $42,176,244 (repurchase proceeds $41,351,366) (cost of $41,349,000) $ 41,349,000 $ 41,349,000 ------------- TOTAL INVESTMENTS--132.5% (cost of $293,717,822)(e) 303,000,453 ------------- OTHER ASSETS & LIABILITIES, NET--(32.5)% (74,383,525) ------------- NET ASSETS--100.0% $ 228,616,928 =============
NOTES TO INVESTMENT PORTFOLIO: (a) Zero coupon bond (b) These securities, or a portion thereof, have been purchased on a delayed delivery basis whereby the terms that are fixed are the purchase price, interest rate and settlement date. The exact quantity purchased may be slightly more or less than the amount shown. (c) This security, with a total market value of $4,278,022 is being used to collateralize open futures contracts. (d) 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 December 31, 2002, the value of these securities amounted to $1,839,763 which represents 0.8% of net assets. (e) Cost for federal income tax purposes is $294,642,698. The difference between cost for generally accepted accounting principles and cost on a tax basis is related to amortization/accretion tax elections on fixed income securities. Short futures contracts open on December 31, 2002:
NUMBER OF EXPIRATION UNREALIZED TYPE CONTRACTS MONTH DEPRECIATION --------- --------- ---------- ------------ 2 Year U.S. Treasury Note 11 March $ (14,154) 5 Year U.S. Treasury Note 12 March (34,191) 10 Year U.S. Treasury Note 17 March (36,413) --------- $ (84,758) =========
See Notes to Financial Statements. 197 STATEMENT OF ASSETS & LIABILITIES Liberty Federal Securities Fund, Variable Series / December 31, 2002 ASSETS: Investments, at cost (includes short-term obligation) $ 293,717,822 ------------- Investments, at value $ 261,651,453 Repurchase agreement 41,349,000 Receivable for: Fund shares sold 630,864 Interest 2,382,606 Futures variation margin 5,766 Dollar Rolls 130,583 Expense reimbursement due from Distributor 6,778 Deferred Trustees' compensation plan 644 ------------- TOTAL ASSETS 306,157,694 ------------- LIABILITIES: Payable to custodian bank 41,273 Payable for: Investments purchased on a delayed delivery basis 77,262,832 Fund shares repurchased 73,559 Management fee 75,643 Administration fee 28,310 Transfer agent fee 625 Pricing and bookkeeping fees 8,506 Audit fee 24,995 Deferred Trustees' fee 644 Other liabilities 24,379 ------------- TOTAL LIABILITIES 77,540,766 ------------- NET ASSETS $ 228,616,928 ============= COMPOSITION OF NET ASSETS: Paid-in capital $ 211,384,222 Undistributed net investment income 8,265,049 Accumulated net realized loss (230,216) Net unrealized appreciation (depreciation) on: Investments 9,282,631 Futures contracts (84,758) ------------- NET ASSETS $ 228,616,928 ============= CLASS A: Net assets $ 125,945,693 Shares outstanding 11,072,817 ------------- Net asset value per share $ 11.37 ============= CLASS B: Net assets $ 102,671,235 Shares outstanding 9,084,464 ------------- Net asset value per share $ 11.30 =============
See Notes to Financial Statements. 198 STATEMENT OF OPERATIONS Liberty Federal Securities Fund, Variable Series For the Year Ended December 31, 2002 INVESTMENT INCOME: Interest $ 8,429,708 Dollar roll fee income 1,019,402 ------------ Total Investment Income 9,449,110 ------------ EXPENSES: Management fee 765,362 Administration fee 287,011 Distribution fee--Class B 188,770 Pricing and bookkeeping fees 87,816 Transfer agent fee 7,500 Trustees' fee 10,718 Custody fee 18,213 Other expenses 86,073 ------------ Total Expenses 1,451,463 Fees reimbursed by Distributor--Class B (7,158) Custody earnings credit (318) ------------ Net Expenses 1,443,987 ------------ Net Investment Income 8,005,123 ------------ NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FUTURES CONTRACTS: Net realized gain (loss) on: Investments 2,989,421 Futures contracts (214,662) ------------ Net realized gain 2,774,759 ------------ Net change in unrealized appreciation/depreciation on: Investments 7,212,931 Futures contracts (19,098) ------------ Net change in unrealized appreciation/depreciation 7,193,833 ------------ Net Gain 9,968,592 ------------ Net Increase in Net Assets from Operations $ 17,973,715 ============
See Notes to Financial Statements. 199 STATEMENT OF CHANGES IN NET ASSETS Liberty Federal Securities Fund, Variable Series
YEAR ENDED DECEMBER 31, ------------------------------ INCREASE (DECREASE) IN NET ASSETS: 2002 2001 ---------------------------------- ------------- ------------- OPERATIONS: Net investment income $ 8,005,123 $ 6,981,126 Net realized gain on investments and futures contracts 2,774,759 1,511,050 Net change in unrealized appreciation/depreciation on investments and futures contracts 7,193,833 91,976 ------------- ------------- Net Increase from Operations 17,973,715 8,584,152 ------------- ------------- DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income: Class A (4,876,880) (6,221,562) Class B (2,478,958) (737,378) ------------- ------------- Total Distributions Declared to Shareholders (7,355,838) (6,958,940) ------------- ------------- SHARE TRANSACTIONS: Class A: Subscriptions 27,971,432 18,103,544 Distributions reinvested 4,876,880 6,221,562 Redemptions (22,614,928) (20,770,747) ------------- ------------- Net Increase 10,233,384 3,554,359 ------------- ------------- Class B: Subscriptions 54,512,916 63,743,762 Distributions reinvested 2,478,958 737,378 Redemptions (8,937,222) (22,676,364) ------------- ------------- Net Increase 48,054,652 41,804,776 ------------- ------------- Net Increase from Share Transactions 58,288,036 45,359,135 ------------- ------------- Total Increase in Net Assets 68,905,913 46,984,347 NET ASSETS: Beginning of period 159,711,015 112,726,668 ------------- ------------- End of period (including undistributed net investment income of $8,265,049 and $7,167,923, respectively) $ 228,616,928 $ 159,711,015 ============= ============= CHANGES IN SHARES: Class A: Subscriptions 2,555,228 1,691,554 Issued for distributions reinvested 470,741 602,281 Redemptions (2,074,589) (1,938,659) ------------- ------------- Net Increase 951,380 355,176 ------------- ------------- Class B: Subscriptions 5,022,381 5,922,707 Issued for distributions reinvested 240,442 71,660 Redemptions (815,987) (2,071,271) ------------- ------------- Net Increase 4,446,836 3,923,096 ------------- -------------
See Notes to Financial Statements. 200 NOTES TO FINANCIAL STATEMENTS Liberty Federal Securities Fund, Variable Series / December 31, 2002 NOTE 1. ORGANIZATION AND ACCOUNTING POLICIES ORGANIZATION--Liberty Federal Securities Fund, Variable Series (the "Fund"), a series of SteinRoe Variable Investment Trust (the "Trust"), is a diversified portfolio of a Massachusetts business trust, registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The Fund's investment goal is to seek the highest possible level of current income consistent with the safety of principal and maintenance of liquidity. The Fund's capitalization consists of an unlimited number of shares of beneficial interest without par value that represent a separate series of the Trust. The Fund offers two classes of shares: Class A and Class B. Each share of a class represents an equal proportionate beneficial interest in that share class and, when issued and outstanding, is fully paid and nonassessable. Shareholders would be entitled to share proportionally in the net assets of their share class available for distribution to shareholders upon liquidation of the Fund. Shares of the Fund are available and are being marketed exclusively as a pooled funding vehicle for variable annuity contracts ("VA contracts") and Variable Life Insurance Policies ("VLI Policies") offered by the separate accounts of certain life insurance companies ("Participating Insurance Companies"). The Participating Insurance Companies and their separate accounts own all the shares of the Fund. Stein Roe & Farnham Incorporated (the "Manager") ("Stein Roe"), provides investment management, administrative and advisory services to the Fund pursuant to its Management Agreement with the Fund. The Manager also provides pricing and bookkeeping services to the Fund. Liberty Funds Distributor, Inc. ("LFD"), an affiliate of the Manager, serves as the principal underwriter of the Fund. The Manager and LFD are wholly-owned indirect subsidiaries of FleetBoston Financial Corporation ("FleetBoston"). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. SECURITY VALUATION AND TRANSACTIONS--Debt securities generally are valued by a pricing service based upon market transactions for normal, institutional-size trading units of similar securities. When management deems it appropriate, an over-the-counter or exchange bid quotation is used. Short-term obligations with a maturity of 60 days or less are valued at amortized cost. 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. 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 enter into mortgage dollar roll transactions. A mortgage dollar roll transaction involves a sale by the Fund of securities that it holds with an agreement by the Fund to repurchase substantially similar securities at an agreed upon price and date. During the period between the sale and the repurchase, the Fund will not be entitled to accrue interest and receive principal payments on the securities sold. Mortgage dollar roll transactions involve the risk that the market value of the securities sold by the Fund may decline below the repurchase price of those securities. In the event the buyer of the securities under a mortgage dollar roll transaction files for bankruptcy or becomes insolvent, the Fund's use of proceeds of the transaction may be restricted pending a determination by or with respect to the other party. 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. The Fund maintains U.S. government securities or other liquid high-grade debt obligations as collateral with respect to mortgage dollar roll transactions and securities traded on other than normal settlement terms. DETERMINATION OF CLASS NET ASSET VALUES AND FINANCIAL HIGHLIGHTS--All income, expenses (other than the Class B distribution fee), 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. The per share data was calculated using average shares outstanding during the period. In addition, Class B net investment income per share data and ratios reflect the distribution fee applicable to Class B shares only. FEDERAL INCOME TAXES--Consistent with the Fund's policy to qualify as a regulated investment company and to 201 distribute all of its taxable income, no federal income tax has been accrued. INTEREST INCOME, DEBT DISCOUNT AND PREMIUM--Interest income is recorded on the accrual basis. Fee income attributable to mortgage dollar roll transactions is recorded on the accrual basis over the term of the transaction. Discount is accreted to interest income over the life of a security with a corresponding increase in the cost basis. Premium is amortized against interest income with a corresponding decrease in the cost basis. DISTRIBUTIONS TO SHAREHOLDERS--The Fund intends to distribute as income dividends or capital gains distributions, at least annually, substantially all of its net investment income and net profits realized from the sale of investments. All dividends and distributions are reinvested in additional shares of the Fund at net asset value as of the record date of the distribution. Income and capital gain distributions are determined in accordance with federal income tax regulations. OTHER--The Fund's custodian takes possession through the federal book-entry system of securities collateralizing repurchase agreements. Collateral is marked-to-market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund. The Fund may experience costs and delays in liquidating the collateral if the issuer defaults or enters bankruptcy. NOTE 2. FEDERAL TAX INFORMATION Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from generally accepted accounting principles. These differences are primarily due to differing treatments for straddle deferrals, discount accretion/premium amortization on debt securities, 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 December 31, 2002, permanent items identified and reclassified among the components of net assets are as follows:
UNDISTRIBUTED NET ACCUMULATED NET PAID-IN INVESTMENT INCOME REALIZED LOSS CAPITAL ------------------ --------------- ------- $ 447,841 $ (447,844) $ 3
Net investment income, net realized gains (losses) and net assets were not affected by this reclassification. The tax character of distributions paid during 2002 and 2001 was as follows:
2002 2001 ----------- ----------- Distributions paid from: Ordinary income $ 7,355,838 $ 6,958,940
As of December 31, 2002, the components of distributable earnings on a tax basis were as follows:
UNDISTRIBUTED UNDISTRIBUTED LONG-TERM UNREALIZED ORDINARY INCOME CAPITAL GAINS APPRECIATION* ----------------- ------------- ------------- $ 9,191,392 $ 79,556 $ 8,272,997
* The difference between book-basis and tax-basis unrealized appreciation is attributable primarily to discount accretion/premium amortization on debt securities. NOTE 3. FEES AND COMPENSATION PAID TO AFFILIATES MANAGEMENT AND ADMINISTRATIVE FEES--The Manager receives monthly fees equal to 0.40% and 0.15% annually of the Fund's average daily net assets for management and administrative services, respectively. PRICING AND BOOKKEEPING FEES--The Manager is responsible for providing pricing and bookkeeping services to the Fund under a Pricing and Bookkeeping Agreement. Under a separate agreement (the "Outsourcing Agreement"), the Manager has delegated those functions to State Street Bank & Trust Company ("State Street"). The Manager pays fees to State Street under the Outsourcing Agreement. Under its pricing and bookkeeping agreement with the Fund, the Manager 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 December 31, 2002, the net asset based fee rate was 0.036%. The Fund also pays out-of-pocket costs for pricing services. TRANSFER AGENT FEE--Liberty Funds Services, Inc. (the "Transfer Agent"), an affiliate of the Manager, provides shareholder services for an annual rate of $7,500. DISTRIBUTION FEE--The Fund has adopted a 12b-1 plan, which requires it to pay LFD a monthly distribution fee equal to 0.25% annually of Class B average daily net assets as of the 20th of each month. EXPENSE LIMITS--The Manager has voluntarily agreed to reimburse all expenses, including management fees, but excluding interest, taxes, distribution fees, brokerage and 202 extraordinary expenses of the Fund in excess of 0.70% annually of the Fund's average daily net assets. LFD has voluntarily agreed to reimburse the Fund's Class B share distribution fee in excess of 0.20% when the total operating expenses of the Fund applicable to Class B shares, including distribution fees, are in excess of 0.90% annually of Class B average daily net assets. These arrangements may be terminated or modified by the Manager or LFD at any time. OTHER--The Fund pays no compensation to its officers, all of whom are employees of Stein Roe 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 $318 of custody fees were reduced by balance credits for the year ended December 31, 2002. The Fund could have invested a portion of the assets utilized in connection with the expense offset arrangement in an income-producing asset if it had not entered into such an agreement. NOTE 4. PORTFOLIO INFORMATION INVESTMENT ACTIVITY--For the year ended December 31, 2002, purchases and sales of investments, other than short-term obligations, were $139,780,043 and $97,823,546, respectively, of which $136,647,801 and $94,818,373, respectively, were U.S. Government securities. Unrealized appreciation (depreciation) at December 31, 2002, based on cost of investments for federal income tax purposes, was: Gross unrealized appreciation $ 8,539,808 Gross unrealized depreciation (182,053) ----------- Net unrealized appreciation $ 8,357,755 ===========
OTHER--The Fund may purchase or sell futures contracts. The Fund will use these instruments to hedge against the effects of changes in the portfolio securities due to market conditions and not for trading purposes. The use of futures contracts involves certain risks which include (1) imperfect correlation between the price movement of the instruments and the underlying securities, (2) inability to close out a position due to different trading hours, or the absence of a liquid market for either the instrument or the underlying securities or (3) an inaccurate prediction by the Manager of the future direction of the market or interest rate trends. Any of these risks may involve amounts exceeding the variation margin recorded in the Fund's Statement of Assets and Liabilities at any given time. 203 FINANCIAL HIGHLIGHTS Liberty Federal Securities Fund, Variable Series--Class B Shares Selected data for a share outstanding throughout each period is as follows:
YEAR ENDED PERIOD DECEMBER 31, ENDED -------------------------------- DECEMBER 31, 2002 2001 2000 (a) ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 10.78 $ 10.72 $ 9.87 ------------ ------------ ------------ INCOME FROM INVESTMENT OPERATIONS: Net investment income(b) 0.44 0.54(c) 0.38 Net realized and unrealized gain on investments and futures contracts 0.55 0.17(c) 0.47 ------------ ------------ ------------ Total from Investment Operations 0.99 0.71 0.85 ------------ ------------ ------------ LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.47) (0.65) -- ------------ ------------ ------------ NET ASSET VALUE, END OF PERIOD $ 11.30 $ 10.78 $ 10.72 ============ ============ ============ Total return(d)(e) 9.59%(f) 6.86%(f) 8.61%(g) RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA: Expenses(h) 0.90% 0.91% 0.87%(i) Net investment income(h) 4.03% 5.02%(c) 6.25%(i) Waiver/reimbursement 0.01% 0.04% -- Portfolio turnover rate 69% 36% 43% Net assets, end of period (000's) $ 102,671 $ 49,987 $ 7,663
(a) For the period from commencement of operations on June 1, 2000 to December 31, 2000. (b) Per share data was calculated using average shares outstanding during the period. (c) Effective January 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 December 31, 2001, was to decrease the ratio of net investment income to average net assets from 5.05% to 5.02%. The impact to net investment income and net realized and unrealized gain per share was less than $0.01. Per share data and ratios for periods prior to December 31, 2001 have not been restated to reflect this change in presentation. (d) Total return at net asset value assuming all distributions reinvested. (e) Total return figure does not include any insurance company charges associated with a variable annuity. If included, total return would be reduced. (f) Had the Manager and/or Distributor not waived or reimbursed a portion of expenses, total return would have been reduced. (g) Not annualized. (h) The benefits derived from custody credits and directed brokerage arrangements, if applicable, had an impact of less than 0.01%. (i) Annualized. 204 REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of SteinRoe Variable Investment Trust and the Class B Shareholders of Liberty Federal Securities Fund, Variable Series In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio, and the related statements of operations and of changes in net assets and the Class B financial highlights present fairly, in all material respects, the financial position of Liberty Federal Securities Fund, Variable Series (the "Fund") (a series of SteinRoe Variable Investment Trust) at December 31, 2002, and the results of its operations, the changes in its net assets and the Class B financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and the Class B financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2002 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts February 12, 2003 205 UNAUDITED INFORMATION FEDERAL INCOME TAX INFORMATION For the fiscal year ended December 31, 2002, the Fund designates long-term capital gains of $79,556. 206 PORTFOLIO MANAGER'S DISCUSSION Stein Roe Balanced Fund, Variable Series / December 31, 2002 Stein Roe Balanced Fund, Variable Series seeks high total investment return. Harvey B. Hirschhorn, executive vice president, chief economist and investment strategist of Stein Roe & Farnham Incorporated, is the fund's lead portfolio manager. Effective December 16, 2002, Mr. Hirschhorn is responsible for allocating the fund's assets among various asset classes; different investment professionals, depending on their area of expertise, manage the different asset classes. Effective January 1, 2002, Nordea Investment Management North America, Inc. (NIMNAI) replaced Nordea Securities, Inc. (NSI) as sub-advisor to the fund. NIMNAI manages the fund's foreign equity holdings. NIMNAI is an indirect wholly-owned subsidiary of Nordea AB, NSI's ultimate parent. As part of an internal reorganization, Nordea AB created NIMNAI to assume the investment management business of NSI. NIMNAI's investment decisions for the fund are made by an investment team. FALLING RATES HELPED BONDS Bonds generally outperformed stocks in 2002, but their relative success was not strong enough to bring the fund's performance into positive territory for the year. A general pattern of falling interest rates throughout the year fueled the bond market rise, particularly in government issues. Our moderate overweighting in bonds early in the year, particularly in longer-term issues, helped performance. However, corporate bond returns were disappointing in 2002 as investors migrated to the safest sector of the bond market reflecting concerns about quality. ANOTHER DOWN YEAR FOR STOCKS During the first quarter, the remnants of the prior year's aggressive government stimulus package, combined with brisk consumer spending, helped stocks rebound from their lows of the previous fall. In the second quarter, the US equity markets headed down again in response to renewed concerns about terrorism and revelations of corporate accounting scandals. Tyco, in which we held a small position earlier in the year, was one of many companies under investigation. We sold our shares fairly early, limiting our losses. After bottoming out in October, stocks again rebounded strongly in the fourth quarter but not enough to offset negative returns from earlier in the year. LITTLE HELP FROM BIG NAMES Selected US companies, including Procter & Gamble, (0.6% of net assets) posted positive returns for the year. In most cases, however, large US stocks continued their disappointing performance, particularly in the technology sector. AOL Time Warner, General Electric and Intel (0.3%, 0.6% and 0.2% of net assets, respectively) all detracted from the fund's performance. Our exposure to foreign stocks helped relative returns, as international indexes--although they generated negative returns--slightly outperformed the S&P 500. The overvalued dollar and continuing concerns over accounting issues and corporate credibility in the US made international markets more attractive to investors. STRATEGY FOR INCREASED DIVERSIFICATION Near the end of the last quarter, we implemented a plan to restructure the fund to provide greater diversification for shareholders. We brought in additional portfolio managers with experience in specific asset classes, and divided the fund into the following components: large-cap growth and value, mid-cap growth and value, small-cap growth and value, real estate investment trusts (REITs), international stocks, investment-grade bonds and non-investment grade bonds. By broadening the fund's exposure to different asset classes, we hope to dampen volatility and generate a steadier return over time. We believe this may be a good core fund choice for many investors because of its modest exposure to many types of investments. POSITIONED FOR GROWTH Toward the end of the year, we decreased our fixed- income position and added to our stock holdings to take advantage of a market that we felt was somewhat undervalued. As we enter 2003, we expect the US economy to continue to expand, resulting in an improved environment for corporate profits, which should help domestic stocks. In this environment, we favor corporate and high-yield bonds in the fixed- income universe and believe they will perform better than more conservative fixed-income investments. REITs and international stocks may not perform as well, but overall, we believe that our broader diversification across domestic and international equity and fixed-income sectors should help provide a smoother ride for investors even if market conditions remain unsettled. ---------- Economic and market conditions can frequently change. There is no assurance that the trends described here will continue or commence. Investing in fixed-income securities offers the potential for attractive current income and total returns, but also involves certain risks. The value and return of your investment may fluctuate as a result of changes in interest rates; the financial strength of issuers of lower-rated bonds; foreign, political and economic developments; and changes in currency exchange rates. An investment in Stein Roe Balanced Fund, Variable Series offers significant long-term growth potential, but also involves certain risks. The fund may be affected by stock market fluctuations that occur in response to economic and business developments, changes in interest rates and in the financial strength of issuers of lower-rated bonds. Foreign political and economic developments also may affect fund performance. Holdings are disclosed as of December 31, 2002 and are subject to change. 207 PERFORMANCE INFORMATION Stein Roe Balanced Fund, Variable Series / December 31, 2002 AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 2002 (%)
1-YEAR 5-YEAR 10-YEAR ------------------------------------------------------------------ Class B(1) (6/1/00) -11.94 -0.02 6.00 S&P 500 Index -22.09 -0.58 9.34 Lehman Brothers Government/Credit Index 11.04 7.62 7.61
Inception date of share class is in parentheses. [CHART] VALUE OF A $10,000 INVESTMENT, 12/31/92 - 12/31/02 CLASS B: $17,910
CLASS B SHARES S&P 500 INDEX LEHMAN BROTHERS GOVERNMENT/CREDIT INDEX $10,000 $10,000 $10,000 01/01/1993 - 01/31/1993 $10,080 $10,084 $10,218 02/01/1993 - 02/28/1993 $10,223 $10,221 $10,431 03/01/1993 - 03/31/1993 $10,439 $10,437 $10,466 04/01/1993 - 04/30/1993 $10,287 $10,184 $10,547 05/01/1993 - 05/31/1993 $10,391 $10,456 $10,541 06/01/1993 - 06/30/1993 $10,479 $10,486 $10,781 07/01/1993 - 07/31/1993 $10,455 $10,445 $10,850 08/01/1993 - 08/31/1993 $10,742 $10,840 $11,099 09/01/1993 - 09/30/1993 $10,742 $10,757 $11,138 10/01/1993 - 10/31/1993 $10,861 $10,980 $11,184 11/01/1993 - 11/30/1993 $10,782 $10,875 $11,057 12/01/1993 - 12/31/1993 $10,929 $11,007 $11,106 01/01/1994 - 01/31/1994 $11,145 $11,381 $11,273 02/01/1994 - 02/28/1994 $11,004 $11,073 $11,027 03/01/1994 - 03/31/1994 $10,637 $10,591 $10,757 04/01/1994 - 04/30/1994 $10,620 $10,727 $10,667 05/01/1994 - 05/31/1994 $10,728 $10,901 $10,648 06/01/1994 - 06/30/1994 $10,554 $10,634 $10,624 07/01/1994 - 07/31/1994 $10,778 $10,983 $10,836 08/01/1994 - 08/31/1994 $11,020 $11,432 $10,840 09/01/1994 - 09/30/1994 $10,753 $11,153 $10,677 10/01/1994 - 10/31/1994 $10,736 $11,403 $10,665 11/01/1994 - 11/30/1994 $10,419 $10,988 $10,646 12/01/1994 - 12/31/1994 $10,579 $11,151 $10,716 01/01/1995 - 01/31/1995 $10,700 $11,440 $10,922 02/01/1995 - 02/28/1995 $11,077 $11,885 $11,175 03/01/1995 - 03/31/1995 $11,251 $12,235 $11,250 04/01/1995 - 04/30/1995 $11,494 $12,595 $11,408 05/01/1995 - 05/31/1995 $11,858 $13,097 $11,886 06/01/1995 - 06/30/1995 $12,075 $13,401 $11,981 07/01/1995 - 07/31/1995 $12,423 $13,845 $11,934 08/01/1995 - 08/31/1995 $12,449 $13,879 $12,087 09/01/1995 - 09/30/1995 $12,692 $14,465 $12,210 10/01/1995 - 10/31/1995 $12,570 $14,413 $12,389 11/01/1995 - 11/30/1995 $12,996 $15,044 $12,594 12/01/1995 - 12/31/1995 $13,272 $15,335 $12,779 01/01/1996 - 01/31/1996 $13,536 $15,856 $12,858 02/01/1996 - 02/29/1996 $13,649 $16,004 $12,586 03/01/1996 - 03/31/1996 $13,819 $16,157 $12,480 04/01/1996 - 04/30/1996 $13,875 $16,395 $12,394 05/01/1996 - 05/31/1996 $13,989 $16,816 $12,373 06/01/1996 - 06/30/1996 $14,140 $16,880 $12,537 07/01/1996 - 07/31/1996 $13,876 $16,134 $12,566 08/01/1996 - 08/31/1996 $14,074 $16,474 $12,535 09/01/1996 - 09/30/1996 $14,479 $17,400 $12,758 10/01/1996 - 10/31/1996 $14,885 $17,880 $13,055 11/01/1996 - 11/30/1996 $15,526 $19,230 $13,295 12/01/1996 - 12/31/1996 $15,348 $18,850 $13,148 01/01/1997 - 01/31/1997 $15,828 $20,026 $13,164 02/01/1997 - 02/28/1997 $15,657 $20,184 $13,191 03/01/1997 - 03/31/1997 $15,274 $19,357 $13,034 04/01/1997 - 04/30/1997 $15,732 $20,510 $13,224 05/01/1997 - 05/31/1997 $16,372 $21,763 $13,347 06/01/1997 - 06/30/1997 $16,757 $22,732 $13,508 07/01/1997 - 07/31/1997 $17,717 $24,539 $13,921 08/01/1997 - 08/31/1997 $17,109 $23,165 $13,765 09/01/1997 - 09/30/1997 $17,855 $24,432 $13,981 10/01/1997 - 10/31/1997 $17,536 $23,616 $14,205 11/01/1997 - 11/30/1997 $17,716 $24,709 $14,280 12/01/1997 - 12/31/1997 $17,929 $25,134 $14,430 01/01/1998 - 01/31/1998 $18,089 $25,411 $14,634 02/01/1998 - 02/28/1998 $18,599 $27,243 $14,604 03/01/1998 - 03/31/1998 $19,034 $28,638 $14,650 04/01/1998 - 04/30/1998 $19,081 $28,930 $14,723 05/01/1998 - 05/31/1998 $18,833 $28,432 $14,880 06/01/1998 - 06/30/1998 $19,105 $29,587 $15,032 07/01/1998 - 07/31/1998 $19,034 $29,273 $15,044 08/01/1998 - 08/31/1998 $17,338 $25,043 $15,338 09/01/1998 - 09/30/1998 $17,950 $26,648 $15,776 10/01/1998 - 10/31/1998 $18,738 $28,812 $15,664 11/01/1998 - 11/30/1998 $19,384 $30,558 $15,758 12/01/1998 - 12/31/1998 $20,173 $32,318 $15,798 01/01/1999 - 01/31/1999 $20,680 $33,669 $15,910 02/01/1999 - 02/28/1999 $20,208 $32,622 $15,531 03/01/1999 - 03/31/1999 $20,584 $33,927 $15,609 04/01/1999 - 04/30/1999 $20,864 $35,240 $15,648 05/01/1999 - 05/31/1999 $20,557 $34,408 $15,487 06/01/1999 - 06/30/1999 $21,258 $36,311 $15,439 07/01/1999 - 07/31/1999 $20,889 $35,182 $15,395 08/01/1999 - 08/31/1999 $20,774 $35,006 $15,383 09/01/1999 - 09/30/1999 $20,811 $34,047 $15,521 10/01/1999 - 10/31/1999 $21,346 $36,202 $15,562 11/01/1999 - 11/30/1999 $21,664 $36,937 $15,552 12/01/1999 - 12/31/1999 $22,697 $39,109 $15,458 01/01/2000 - 01/31/2000 $22,148 $37,145 $15,453 02/01/2000 - 02/29/2000 $22,301 $36,443 $15,646 03/01/2000 - 03/31/2000 $23,521 $40,008 $15,873 04/01/2000 - 04/30/2000 $22,752 $38,803 $15,795 05/01/2000 - 05/31/2000 $22,231 $38,008 $15,781 06/01/2000 - 06/30/2000 $23,095 $38,943 $16,103 07/01/2000 - 07/31/2000 $23,012 $38,335 $16,274 08/01/2000 - 08/31/2000 $24,220 $40,716 $16,503 09/01/2000 - 09/30/2000 $23,438 $38,566 $16,566 10/01/2000 - 10/31/2000 $23,190 $38,404 $16,670 11/01/2000 - 11/30/2000 $22,090 $35,378 $16,955 12/01/2000 - 12/31/2000 $22,433 $35,551 $17,289 01/01/2001 - 01/31/2001 $22,913 $36,813 $17,580 02/01/2001 - 02/28/2001 $21,524 $33,460 $17,761 03/01/2001 - 03/31/2001 $20,588 $31,342 $17,842 04/01/2001 - 04/30/2001 $21,560 $33,774 $17,709 05/01/2001 - 05/31/2001 $21,428 $34,000 $17,811 06/01/2001 - 06/30/2001 $21,120 $33,174 $17,897 07/01/2001 - 07/31/2001 $21,061 $32,849 $18,342 08/01/2001 - 08/31/2001 $20,222 $30,796 $18,577 09/01/2001 - 09/30/2001 $19,221 $28,311 $18,748 10/01/2001 - 10/31/2001 $19,487 $28,851 $19,224 11/01/2001 - 11/30/2001 $20,326 $31,064 $18,909 12/01/2001 - 12/31/2001 $20,326 $31,337 $18,760 01/01/2002 - 01/31/2002 $20,135 $30,880 $18,897 02/01/2002 - 02/28/2002 $19,914 $30,284 $19,057 03/01/2002 - 03/31/2002 $20,322 $31,423 $18,670 04/01/2002 - 04/30/2002 $19,867 $29,518 $19,033 05/01/2002 - 05/31/2002 $19,837 $29,303 $19,208 06/01/2002 - 06/30/2002 $18,990 $27,217 $19,371 07/01/2002 - 07/31/2002 $18,006 $25,096 $19,603 08/01/2002 - 08/31/2002 $18,113 $25,260 $20,043 09/01/2002 - 09/30/2002 $16,946 $22,516 $20,473 10/01/2002 - 10/31/2002 $17,734 $24,496 $20,277 11/01/2002 - 11/30/2002 $18,385 $25,936 $20,289 12/01/2002 - 12/31/2002 $17,910 $24,413 $20,827
NET ASSET VALUE PER SHARE($) 12/31/01 12/31/02 ------------------------------------------------------- Class B 13.81 11.82
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 SHARES. Total return performance includes changes in share price and reinvestment of all distributions. The S&P (Standard & Poor's) 500 Index is an unmanaged index that tracks the performance of 500 widely held, large-capitalization US stocks. The Lehman Brothers Government/Credit Index is an unmanaged index that tracks the performance of a selection of US government and investment-grade US corporate bonds. Indexes are not investments, do not incur fees or expenses and are not professionally managed. It is not possible to invest directly in an index. Securities in the fund may not match those in the index. MUTUAL FUND PERFORMANCE CHANGES OVER TIME. CURRENT RETURNS FOR THE FUND MAY BE DIFFERENT THAN THAT SHOWN. Performance numbers reflect all fund expenses, but do not include any insurance charges imposed by your insurance company's separate accounts. If performance included the effect of these additional charges, it would be lower. (1) Class B shares (newer class shares) performance information includes returns of the fund's class A shares (the older existing fund class) for periods prior to the inception of the newer class shares. These class A share returns were not restated to reflect any expense differential (e.g., Rule 12b-1 fees) between class A shares and the newer class shares. If differences in expenses were reflected, the returns for the periods prior to the inception of the newer class shares would be lower. 208 INVESTMENT PORTFOLIO Stein Roe Balanced Fund, Variable Series / December 31, 2002
SHARES VALUE ------------ ----------- COMMON STOCKS--59.2% CONSUMER DISCRETIONARY--9.4% AUTOMOBILES & COMPONENTS--0.6% Advance Auto Parts, Inc. (a) 1,200 $ 58,680 American Axle & Manufacturing Holdings, Inc. (a) 1,800 42,156 Delphi Corp. 88,500 712,425 Gentex Corp. (a) 4,000 126,560 Honda Motor Co., Ltd. 10,500 388,136 Johnson Controls, Inc. 700 56,119 Lear Corp. (a) 1,900 63,232 Superior Industries International, Inc. 1,900 78,584 ----------- 1,525,892 ----------- CONSUMER DURABLES & APPAREL--1.3% American Greetings Corp., Class A 1,700 26,860 Bassett Furniture Industries, Inc. 2,400 34,368 Beazer Homes USA, Inc. (a) 1,600 96,960 Buca, Inc. (a) 2,700 22,464 Delta Apparel, Inc. 1,100 16,940 Gucci Group N.V 3,385 310,434 Helen of Troy Ltd. (a) 3,000 34,920 Jakks Pacific, Inc. (a) 3,700 49,839 Kellwood Co. 2,500 65,000 Kimball International, Inc. 3,800 54,150 Koninklijke (Royal) Philips Electronics N.V 18,300 320,493 Matsushita Electric Industries Ltd., ADR 48,700 467,520 Mattel, Inc. 4,400 84,260 Maxwell Shoe Co., Inc., Class A (a) 3,800 44,156 Nautica Enterprises, Inc. (a) 2,600 28,886 Newell Rubbermaid, Inc. 11,100 336,663 Polaris Industries, Inc. 1,600 93,760 Quaker Fabric Corp. (a) 3,800 26,410 Russ Berrie & Co., Inc. 600 20,268 Samsung Electronics Co., Ltd., GDR 5,800 774,300 Stanley Furniture, Inc. (a) 2,700 62,775 Stride Rite Corp. 2,300 16,491 Toro Co. 1,100 70,290 Vans, Inc. (a) 1,800 10,224 Wolverine World Wide, Inc. 1,800 27,198 ----------- 3,095,629 ----------- HOTELS, RESTAURANTS & LEISURE--1.4% Ameristar Casinos, Inc. (a) 3,000 42,300 Bally Total Fitness Holdings Corp. (a) 7,300 51,757 Brinker International, Inc. (a) 7,000 225,750 Compass Group PLC 56,920 302,322 Darden Restaurants, Inc. 1,500 30,675 Extended Stay American, Inc. (a) 4,600 67,850 Harrah's Entertainment, Inc. (a) 2,900 114,840 Hilton Hotels Corp. 15,900 $ 202,089 International Game Technology 1,000 75,920 Jack in the Box, Inc. (a) 1,100 19,019 Landry's Restaurants, Inc. 2,300 48,852 P & O Princess Cruises PLC 46,200 320,487 Lone Star Steakhouse & Saloon, Inc. 2,300 44,482 Magna Entertainment Corp., Class A 2,000 12,400 McDonald's Corp. 49,600 797,568 Outback Steakhouse, Inc. 2,100 72,324 PF Chang's China Bistro, Inc. (a) 1,900 68,970 Panera Bread Co. (a) 1,800 62,658 Prime Hospitality Corp. 9,100 74,165 Scientific Games Corp., Class A (a) 10,400 75,504 Six Flags, Inc. 8,200 46,822 Sonic Corp. (a) 2,900 59,421 Starwood Hotels & Resorts, Inc. 9,200 218,408 Station Casinos, Inc. (a) 3,700 65,490 YUM! Brands, Inc. (a) 15,700 380,254 ----------- 3,480,327 ----------- MEDIA--2.8% Alliance Atlantis Communications, Inc., Class B (a) 6,100 65,270 AOL Time Warner, Inc. (a) 58,300 763,730 British Sky Broadcasting Group PLC (a) 15,000 154,271 Clear Channel Communications, Inc. (a) 21,200 790,548 Comcast Corp. 32,499 766,025 Cox Radio, Inc., Class A (a) 5,300 120,893 Dai Nippon Printing Co., Ltd. 10,000 110,559 Fox Entertainment Group, Inc., Class A (a) 8,800 228,184 Grupo Televisa SA, ADR 6,600 184,338 Hispanic Broadcasting Corp. (a) 4,300 88,365 Interpublic Group of Companies, Inc. 34,600 487,168 Knight Ridder, Inc. 2,200 139,150 Liberty Media Corp. (a) 20,800 185,952 Lin TV Corp., Class A (a) 4,400 107,140 Mediacom Communications Corp., Class A (a) 3,600 31,716 New York Times Co., Class A 1,500 68,595 News Corp., Ltd., ADR 26,900 706,125 Omnicom Corp. 7,600 490,960 Radio One, Inc., Class D (a) 9,600 138,528 Regent Communications, Inc. (a) 5,100 30,141 Societe Television Francaise 1 6,570 175,418 Univision Communications, Inc. (a) 1,200 29,400 Viacom, Inc., Class B (a) 20,200 823,352
See Notes to Investment Portfolio. 209
SHARES VALUE ------------ ----------- Westwood One, Inc. 2,000 $ 74,720 WPP Group PLC 25,750 196,655 ----------- 6,957,203 ----------- RETAILING--3.3% Aaron Rents, Inc. 3,700 80,956 Abercrombie & Fitch Co., Class A (a) 2,300 47,058 Bed Bath & Beyond, Inc. (a) 17,500 604,275 Best Buy Co., Inc. (a) 11,700 282,555 Borders Group, Inc. (a) 8,100 130,410 Charming Shoppes, Inc. 10,200 42,636 Cost Plus, Inc. (California) (a) 1,100 31,537 Dollar Tree Stores, Inc. (a) 2,700 66,339 Ebay, Inc. 5,600 379,792 Electronics Boutique Holdings Corp. (a) 2,700 42,687 Family Dollar Stores, Inc. 1,600 49,936 Federated Department Stores, Inc. (a) 3,400 97,784 GTSI Corp. (a) 3,900 52,455 Gart Sports Co. (a) 3,300 63,855 Guitar Center, Inc. (a) 3,400 56,304 Handleman Co. 3,600 41,400 Hot Topic, Inc. (a) 3,100 70,928 Ito-Yokado Co., Ltd. 3,000 88,414 Kohls Corp. (a) 15,700 878,415 Limited Brands, Inc. 2,300 32,039 Lowe's Companies, Inc. 15,000 562,500 Monro Muffler Brake, Inc. (a) 2,500 42,250 Mothers Work, Inc. (a) 3,300 116,259 Nordstrom, Inc. 1,900 36,043 Office Depot, Inc. (a) 59,100 872,316 OfficeMax, Inc. (a) 1,900 9,500 Party City Corp. (a) 4,300 51,600 Petco Animal Supplies, Inc. (a) 3,400 79,693 Rent-A-Center, Inc. (a) 600 29,970 Ross Stores, Inc. 1,200 50,868 Select Comfort Corp. (a) 4,800 45,120 Shiseido Co., Ltd. 9,000 116,933 Shopko Stores, Inc. 2,600 32,370 Sports Authority, Inc. (a) 5,400 37,800 Staples, Inc. (a) 37,300 682,590 Talbots, Inc. 1,000 27,530 Target Corp. 12,700 381,000 TBC Corp. (a) 900 10,809 TJX Companies, Inc. 5,500 107,360 Tommy Hilfiger Corp. (a) 7,500 52,125 Too, Inc. (a) 1,900 44,688 Tweeter Home Entertainment Group, Inc. (a) 5,500 32,230 Wal-Mart Stores, Inc. 27,500 1,389,025 Williams Sonoma, Inc. (a) 2,600 70,590 Zale Corp. (a) 3,300 105,270 ----------- 8,126,214 ----------- CONSUMER STAPLES--5.3% FOOD & DRUG RETAILING--0.7% FamilyMart Co., Ltd. 8,000 $ 156,618 Performance Food Group Co. (a) 2,500 84,897 Safeway, Inc. (a) 49,600 1,158,656 Walgreen Co. 10,500 306,495 ----------- 1,706,666 ----------- FOOD, BEVERAGES & TOBACCO--3.8% American Italian Pasta Co., Class A (a) 1,800 64,764 Anheuser-Busch Companies, Inc. 5,500 266,200 Archer Daniels Midland Co. 39,900 494,760 Cadbury Schweppes PLC 28,160 175,402 Conagra Foods, Inc. 65,100 1,628,151 Dial Corp. (The) 4,000 81,480 Dean Foods, Co. (a) 3,600 133,560 Del Monte Foods Co. (a) 8,039 61,899 Diageo PLC 10,700 116,246 HJ Heinz Co. 18,000 591,660 Hormel Foods Corp. 800 18,664 Kraft Foods, Inc. 8,400 327,012 Koninklijke Numico N.V 9,888 124,430 Nestle SA 2,670 565,621 Pepsi Bottling Group, Inc. 17,300 444,610 Pepsico, Inc. 24,600 1,038,612 Philip Morris Companies, Inc. 21,800 883,554 Sara Lee Corp. 88,400 1,989,884 Schweitzer-Mauduit International, Inc. 800 19,600 Ralcorp Holdings, Inc. (a) 1,700 42,738 Wrigley WM Jr. Co. 4,300 235,984 ----------- 9,304,831 ----------- HOUSEHOLD & PERSONAL PRODUCTS--0.8% Alberto-Culver Co., Class B 8,900 448,560 Avon Products, Inc. 1,600 86,192 Fortune Brands, Inc. 4,900 227,899 Gillette Co. 16,000 485,760 Inter Parfums, Inc. (a) 1,900 14,706 Procter & Gamble Co. 7,800 670,332 ----------- 1,933,449 ----------- ENERGY--4.4% Amerada Hess Corp. 1,700 93,585 Anadarko Petroleum Corp. 10,400 498,160 Apache Corp. 800 45,592 BJ Services Co. (a) 5,600 180,936 BP PLC, ADR 10,700 434,955 Cal Dive International, Inc. (a) 2,100 49,350 ChevronTexaco Corp. 6,300 418,824 ConocoPhillips 21,800 1,054,902 Diamond Offshore Drilling, Inc. 1,400 30,590 Ensco International, Inc. 5,700 167,865
See Notes to Investment Portfolio. 210
SHARES VALUE ------------ ----------- Exco Resources, Inc. (a) 3,700 $ 64,676 Exel PLC 17,000 188,247 Evergreen Resources, Inc. (a) 2,600 116,610 Exxon Mobil Corp. 19,800 691,812 Halliburton Co. 33,000 617,430 Harvest Natural Resources, Inc. (a) 3,100 19,995 Key Energy Services, Inc. (a) 8,000 71,760 Lufkin Industries, Inc. 1,700 39,865 Nabors Industries Ltd. (a) 10,800 380,916 Noble Corp. (a) 14,000 492,100 Marathon Oil Corp. 47,300 1,007,017 Maverick Tube Corp. (a) 3,200 41,696 National-Oilwell, Inc. (a) 2,400 52,416 NS Group, Inc. 5,400 35,208 Occidental Petroleum Corp. 1,100 31,295 Patina Oil & Gas Corp. 1,500 47,475 Patterson-UTI Energy, Inc. (a) 4,000 120,680 Pogo Producing Co. 1,200 44,700 Remington Oil & Gas Corp. (a) 3,500 57,435 Royal Dutch Petroleum Co. 31,060 1,367,097 Shell Transport & Trading Co., PLC 79,100 520,704 Spinnaker Exploration Co. (a) 5,300 116,865 St. Mary Land & Exploration Co. 2,400 60,000 Superior Energy Services, Inc. (a) 8,800 72,160 3TEC Energy Corp. (a) 2,800 39,732 Tom Brown, Inc. (a) 1,700 42,670 Total Fina Elf SA 5,500 785,004 Transocean, Inc. 1,500 34,800 Ultra Petroleum Corp. (a) 7,100 70,290 Universal Compression Holdings, Inc. (a) 3,900 74,607 Valero Energy Corp. 1,900 70,186 Weatherford International Ltd. (a) 900 35,937 Western Gas Resources, Inc. 1,800 66,330 Westport Resources Corp. (a) 2,200 45,760 Willbros Group, Inc. (a) 5,600 46,032 XTO Energy, Inc. 6,800 167,960 ----------- 10,712,226 ----------- FINANCIALS--12.7% BANKS--1.8% BancFirst Corp. 300 14,100 Bank of Granite Corp. 2,400 42,000 BankNorth Group, Inc. 2,300 51,980 Boston Private Financial Holdings, Inc. 2,400 47,664 Bryn Mawr Bank Corp. 1,600 58,608 Capital City Bank Group, Inc. 500 19,595 Capitol Bancorp Ltd. 1,000 23,200 Charter One Financial, Inc. 2,000 57,460 Chemical Financial Corp. 2,200 70,730 Chittenden Corp. 2,900 $ 73,892 City National Corp. 1,400 61,586 Community First Bankshares, Inc. 3,800 100,548 Community Trust Bancorp, Inc. 1,400 35,196 Corus Bankshares, Inc. 1,200 52,392 Cullen/Frost Bankers, Inc. 900 29,430 DBS Bank Ltd. 30,000 190,240 Deutsche Bank AG (a) 5,950 273,926 East West Bancorp, Inc. 2,300 82,984 First Citizen Bancshares Inc., Class A 400 38,640 First Financial Bankshares, Inc. 1,000 38,000 ForeningsSparbanken AB 16,000 189,556 Golden West Financial Corp. 2,200 157,982 GreenPoint Financial Corp. 1,500 67,770 Hancock Holdings Co. 600 26,790 Lloyds TSB Group PLC 90,040 646,340 M&T Bank Corp. 900 71,415 MainSource Financial Group, Inc. 1,050 25,212 MassBank Corp. 800 22,640 Merchants Bancshares, Inc. 1,900 42,826 Mid-State Bancshares 3,600 59,119 North Fork Bancorporation, Inc. 2,200 74,228 Northrim Bancorp, Inc. 1,700 22,950 Prosperity Bancshares, Inc. 3,100 58,900 Riggs National Corp. (Washington DC) 3,900 60,411 Simmons First National Corp., Class A 900 32,985 Sovereign Bancorp, Inc. 5,100 71,655 Sumitomo Mitsui Banking Corp. 20 62,479 Texas Regional Bancshares, Inc., Class A 900 31,987 TriCo Bancshares 2,400 59,040 Trustco Bank Corp. (NY) 1,300 14,014 UBS AG 15,150 736,086 UCBH Holdings, Inc. 1,500 63,675 UFJ Holdings, Inc. 73 73,762 UniCredito Italiano S.p.A 55,850 223,151 W Holding Co., Inc. 2,700 44,307 Webster Financial Corp. 2,800 97,440 Westamerica Bancorporation 900 36,162 Whitney Holding Corp. 900 29,997 ----------- 4,465,050 ----------- DIVERSIFIED FINANCIALS--3.3% Affiliated Managers Group, Inc. (a) 700 35,210 Bear Stearns Companies, Inc. 900 53,460 Cash America International, Inc. 7,600 72,352 Citigroup, Inc. 91,500 3,219,885 CompuCredit Corp. (a) 1,700 12,019 Fannie Mae 6,900 443,877 Fortis, Inc. (b) 14,540 256,168
See Notes to Investment Portfolio. 211
SHARES VALUE ------------ ----------- Freddie Mac 16,600 $ 980,230 Goldman Sachs Group, Inc. 4,400 299,640 Janus Capital Group, Inc. 5,900 77,113 JP Morgan Chase & Co. 40,200 964,800 Lehman Brothers Holdings, Inc. 1,000 53,290 MBNA Corp. 29,400 559,188 MFC Bancorp Ltd. 6,100 44,225 MTC Technologies, Inc. (a) 2,000 50,600 Moody's Corp. 2,800 115,612 Nomura Securities, Inc. 20,000 224,655 Promise Co., Ltd. 3,300 117,540 San Paolo - IMI S.p.A. (a) 35,150 228,543 SLM Corp. 2,600 270,036 Windrose Medical Properties Trust 2,200 22,660 ----------- 8,101,103 ----------- INSURANCE--3.7% Aflac, Inc. 23,700 713,844 Alleanza Assicurazioni S.p.A 28,800 218,062 AMB Generali Holding AG 3,400 185,481 Ambac Financial Group, Inc. 2,000 112,480 American International Group, Inc. 33,700 1,949,545 Amerus Group Co. 1,100 31,097 Arthur J. Gallagher & Co. 1,200 35,256 Berkshire Hathaway, Inc., Class A (a) 30 2,182,500 Brown & Brown, Inc. 1,900 61,408 Chubb Corp. 12,500 652,500 Cincinnati Financial Corp. 800 30,040 Commerce Group, Inc, (a) 1,200 44,988 Delphi Financial Group, Inc., Class A 1,800 68,328 Everest Reinsurance Group, Ltd. 1,300 71,890 Hilb, Rogal & Hamilton Co. 1,800 73,620 Kansas City Life Insurance Co. 300 11,370 Lincoln National Corp. 22,100 697,918 Loews Corp. 800 35,568 Marsh & McLennan Companies, Inc. 8,800 406,648 MGIC Investment Corp. 8,000 330,400 Nationwide Financial Services, Inc., Class A 1,200 34,380 Navigators Group, Inc. (a) 700 16,065 PMI Group, Inc. 2,900 87,116 Philadelphia Consolidated Holding Corp. (a) 2,000 70,800 Phoenix Companies, Inc. 3,500 26,600 RLI Corp. 1,400 39,060 Radian Group, Inc. 1,800 66,870 St. Paul Companies, Inc. 19,800 674,190 StanCorp Financial Group, Inc. 1,300 63,505 State Auto Financial Corp. 2,100 32,550 ----------- 9,024,079 ----------- MULTI-SECTOR HOLDING--1.8% SPDR Trust Series 1 48,900 $ 4,314,447 ----------- REAL ESTATE--2.1% Alexandria Real Estate Equities, Inc. 4,800 204,480 Apartment Investment & Management Co., Class A 4,900 183,652 Archstone Smith Trust 5,100 120,054 Avalonbay Communities, Inc. 3,800 148,732 Boston Properties, Inc. 3,800 140,068 Carramerica Realty Corp. 4,500 112,725 Catellus Development Corp. (a) 6,500 129,025 Centerpoint Properties Trust 2,000 114,300 Chelsea Property Group, Inc. 2,600 86,606 Cousins Properties, Inc. 12,400 306,280 EastGroup Properties, Inc. 1,600 40,800 Equity Office Properties Trust 8,200 204,836 Equity One, Inc. 3,000 40,050 Equity Residental Properties Trust 4,800 117,984 First Industrial Realty Trust, Inc. 1,200 33,600 General Growth Properties, Inc. 7,500 390,000 Getty Realty Corp. 1,600 30,320 Host Marriott Corp. 10,800 95,580 Istar Financial, Inc. 12,300 345,015 Keystone Properties Trust 2,000 33,940 Kimco Realty Corp. 5,900 180,776 Liberty Property Trust 3,100 99,014 Macerich Co. 2,300 70,725 Meristar Hospitality Corp. 4,400 29,040 Mid-America Apartment Communities, Inc. 2,000 48,900 Nationwide Health Properties, Inc. 3,500 52,255 Newcastle Investment Corp. 7,400 118,178 PS Business Parks, Inc. 1,400 44,520 Pan Pacific Retail Properties, Inc. 2,300 84,019 Prentiss Properties Trust 2,100 59,388 ProLogis 10,900 274,135 Public Storage, Inc. 3,900 126,009 RFS Hotel Investors, Inc. 3,000 32,580 Reckson Associates Realty Corp. 3,900 82,095 Rouse Co. 6,000 190,200 Simon Properties Group, Inc. 6,600 224,862 St. Joe Co. 6,600 198,000 Sovran Self Storage, Inc. 1,400 39,704 Taubman Centers, Inc. 3,500 56,805 United Dominion Realty Trust 5,700 93,252 Universal Health Realty Income Trust 1,100 28,875 Urstadt Biddle Properties, Inc. 2,900 32,132 Vornado Realty Trust 4,200 156,240 ----------- 5,199,751 -----------
See Notes to Investment Portfolio. 212
SHARES VALUE ------------ ----------- HEALTH CARE--8.9% HEALTH CARE EQUIPMENT & SERVICES--3.4% Accredo Health, Inc. (a) 1,000 $ 35,250 Aetna, Inc. 43,200 1,776,384 American Healthways, Inc. (a) 5,000 87,500 American Medical Systems Holdings, Inc. (a) 4,000 64,840 AmerisourceBergen Corp. 9,800 532,238 Anthem, Inc. (a) 9,100 572,390 Biomet, Inc. 7,400 212,084 Boston Scientific Corp. (a) 1,200 51,024 Cardinal Health, Inc. 7,200 426,168 Caremark RX, Inc. (a) 11,200 182,000 Cerner Corp. (a) 2,500 78,150 Community Health Systems, Inc. (a) 2,500 51,475 DaVita, Inc. (a) 1,600 39,472 Express Scripts, Inc., Class A (a) 700 33,628 Essilor International SA 7,100 292,246 First Horizon Pharmaceutical Corp. (a) 5,500 41,129 First Health Group Corp. (a) 6,000 146,100 HCA, Inc. 12,700 527,050 Haemonetics Corp. (Mass) (a) 1,800 38,628 Hooper Holmes, Inc. 6,600 40,524 Integra Lifesciences Holdings Corp. (a) 6,500 114,725 Kindred Healthcare, Inc. (a) 1,400 25,411 Laboratory Corp. of America Holdings (a) 1,300 30,212 LifePoint Hospitals, Inc. (a) 2,200 65,848 Manor Care, Inc. (a) 1,700 31,637 Medcath Corp. (a) 3,500 35,000 Medtronic, Inc. 16,500 752,400 Millipore Corp. 2,000 68,000 Orthodontic Centers of America, Inc. (a) 3,800 41,458 Owens & Minor, Inc. 3,800 62,396 Priority Healthcare Corp. (a) 2,000 46,400 Province Healthcare Co. (a) 4,000 38,920 Quintiles Transnational Corp. (a) 2,500 30,250 Respironics, Inc. (a) 2,100 63,905 St. Jude Medical, Inc. 6,800 270,096 Sola International, Inc. (a) 2,500 32,500 Sonosite, Inc. (a) 3,900 50,973 Theragenics Corp. (a) 5,600 22,568 Thoratec Corp. (a) 6,100 46,543 US Oncology, Inc. (a) 9,800 84,966 UnitedHealth Group, Inc. 5,800 484,300 Universal American Financial Corp. (a) 2,900 16,875 Universal Health Services, Inc. 1,800 81,180 WellChoice, Inc. (a) 2,500 59,875 WellPoint Health Networks, Inc. (a) 7,900 562,164 Wright Medical Group, Inc. (a) 4,400 $ 76,820 Zoll Medical Corp. (a) 1,300 46,371 ----------- 8,470,073 ----------- PHARMACEUTICALS & BIOTECHNOLOGY--5.5% Adolor Corp. (a) 3,300 45,276 Abbott Laboratories, Inc. 21,300 852,000 American Pharmaceutical Partners, Inc. (a) 4,300 76,540 Amgen, Inc. (a) 17,900 865,286 Andrx Corp. (a) 2,600 38,142 Atrix Laboratories, Inc. (a) 3,800 58,288 Aventis SA 8,800 478,039 Barr Laboratories, Inc. (a) 1,300 84,617 Bristol Myers Squibb Co. 20,100 465,315 Cell Genesys, Inc. (a) 3,100 34,568 CV Therapeutics, Inc. (a) 1,900 34,618 Enzon Pharmaceuticals, Inc. (a) 4,500 75,240 Gilead Sciences, Inc. (a) 2,000 68,000 GlaxoSmithKline PLC 27,100 519,920 Idexx Laboratories, Inc. (a) 1,300 42,705 Ilex Oncology, Inc. (a) 4,700 33,182 Intermune, Inc. (a) 1,900 48,469 ISIS Pharmaceuticals, Inc. (a) 5,300 34,927 Johnson & Johnson 25,400 1,364,234 Kendle International, Inc. (a) 5,300 46,645 King Pharmaceuticals, Inc. (a) 3,800 65,322 Medimmune, Inc. (a) 9,500 258,115 Merck & Co., Inc. 24,100 1,364,301 Nabi Biopharmaceuticals (a) 4,200 26,040 Neopharm, Inc. (a) 2,900 29,406 Neurocrine Biosciences, Inc. (a) 1,500 68,490 Noven Pharmaceuticals, Inc. (a) 7,000 64,610 Novo Nordisk AS, Class B 3,450 99,592 Pfizer, Inc. 66,200 2,023,734 Pharmacia Corp. 27,700 1,157,860 Protein Design Laboratories, Inc. (a) 6,800 57,800 Salix Pharmaceuticals Ltd. (a) 5,600 39,144 Serologicals Corp. (a) 3,900 42,900 Shire Pharmaceuticals Group PLC 21,325 136,432 Sicor, Inc. (a) 3,300 52,305 Taro Pharmaceutical Industries Ltd. (a) 2,100 78,960 Telik, Inc. (a) 5,200 60,632 Teva Pharmaceuticals Industries Ltd., ADR 19,700 760,617 Transkaryotic Therapies, Inc. (a) 3,600 35,640 Wyeth 47,700 1,783,980 ----------- 13,471,891 -----------
See Notes to Investment Portfolio. 213
SHARES VALUE ------------ ----------- INDUSTRIALS--5.2% CAPITAL GOODS--3.0% American Power Conversion Corp. (a) 4,400 $ 66,660 Armor Holdings, Inc. (a) 5,200 71,604 Carlisle Companies, Inc. 1,700 70,346 Chicago Bridge & Iron Co. NY Shares 1,600 48,320 Comfort Systems USA, Inc. (a) 4,300 14,405 Cuno, Inc. (a) 2,100 69,552 DRS Technologies, Inc. (a) 2,000 62,660 Denbury Resources, Inc. (a) 4,700 53,110 Dover Corp. 13,500 393,660 Eaton Corp. 800 62,488 Emcor Group, Inc. (a) 1,900 100,719 Esterline Technologies Corp. 3,000 53,010 General Electric Co. 58,700 1,429,345 Graco, Inc. 1,200 34,380 Granite Construction, Inc. 1,700 26,350 Harsco Corp. 2,300 73,347 Herley Industries, Inc. (a) 1,500 26,112 Honeywell International, Inc. 32,100 770,400 Ingersoll-Rand Co. 1,600 68,896 Kadant, Inc. (a) 2,900 43,500 Kennametal, Inc. 1,200 41,376 Ladish Co., Inc. (a) 4,200 33,852 Lockheed Martin Corp. 900 51,975 Mastec, Inc. (a) 3,900 11,505 Mueller Industries, Inc. (a) 3,500 95,375 Navistar International Corp., Inc. 3,100 75,361 NCI Building Systems, Inc. (a) 1,500 32,730 Northrop Grumman Corp. 300 29,100 Oshkosh Truck Corp. 1,700 104,550 Parker Hannifin Corp. 900 41,517 Precision Castparts Corp. 1,700 41,225 Rayovac Corp. (a) 4,000 53,320 Raytheon Co. 16,800 516,600 Reliance Steel & Aluminum Co. 2,600 54,184 Shaw Group, Inc. (a) 2,600 42,770 Siemens AG 5,175 219,794 Tecumseh Products Co., Class A 800 35,304 Terex Corp. 2,700 30,078 Textron, Inc. 16,700 717,933 3M Co. 2,500 308,250 Triumph Group, Inc. (a) 1,200 38,328 Tyco International Ltd. 54,900 937,692 USHIO, Inc. 21,000 229,875 Watsco, Inc. 4,900 80,262 W.W. Grainger, Inc. 1,600 82,480 ----------- 7,444,300 ----------- COMMUNICATION SERVICES & SUPPLIES--0.2% Bellsystem24, Inc. 700 $ 136,570 Chubb PLC 127,650 180,285 Secom Co., Ltd. 6,000 205,625 ----------- 522,480 ----------- COMMERCIAL SERVICES & SUPPLIES--1.5% Apollo Group, Inc. (a) 900 39,600 Arbitron, Inc. 1,400 46,900 Banta Corp. 1,500 46,905 Bisys Group, Inc. (a) 6,000 95,400 Casella Waste System, Inc., Class A (a) 6,100 54,229 Cendant Corp. (a) 5,900 61,832 Charles River Associates, Inc. (a) 2,700 38,232 Choicepoint, Inc. (a) 2,600 102,674 Concord EFS, Inc. (a) 4,500 70,830 Consolidated Graphics, Inc. (a) 2,000 44,500 Corporate Executive Board Co. (a) 2,300 73,416 DST Systems, Inc. (a) 1,300 46,215 Daisytek International Corp. (a) 5,100 40,443 Education Management Corp. (a) 1,500 56,400 Efunds Corp. (a) 2,200 20,042 Electro Rent Corp. (a) 1,000 12,121 FTI Consulting, Inc. (a) 1,500 60,225 First Data Corp. 23,500 832,135 Hewitt Associates, Inc., Class A (a) 1,100 34,859 Imagistics International, Inc. (a) 2,100 42,000 Intercept, Inc. (a) 4,500 76,189 Kroll, Inc. (a) 2,300 43,884 Manpower, Inc. 1,600 51,040 Nam Tai Electronics, Inc. 3,600 88,020 On Assignment, Inc. (a) 6,500 55,380 Pittston Brink's Group 3,900 72,072 Republic Services, Inc. (a) 1,900 39,862 Robert Half International, Inc. 3,700 59,607 Sourcecorp, Inc. (a) 2,000 37,180 Spherion Corp. (a) 7,400 49,580 Stericycle, Inc. (a) 2,100 67,996 Sylvan Learning Systems, Inc. (a) 4,500 73,800 United Stationers, Inc. 4,000 115,204 Valassis Communications, Inc. 1,000 29,430 Waste Connections, Inc. (a) 1,900 73,359 Waste Management, Inc. 37,100 850,332 Weight Watchers International, Inc. (a) 2,100 96,537 ----------- 3,698,430 -----------
See Notes to Investment Portfolio. 214
SHARES VALUE ------------ ----------- EMPLOYMENT SERVICES--0.1% Adecco SA 5,000 $ 195,937 ----------- TRANSPORTATION--0.4% AMR Corp. 41,900 276,540 CSX Corp. 2,000 56,620 CNF, Inc. 1,300 43,212 Covenant Transport, Inc., Class A (a) 2,200 41,712 Genesee & Wyoming, Inc., Class A (a) 2,800 56,980 Heartland Express, Inc. (a) 2,500 57,278 Kansas City Southern 2,300 27,600 Old Dominion Freight Line, Inc. (a) 2,600 73,710 UTI Worldwide, Inc. 2,700 70,875 TPG N.V 15,502 251,170 Werner Enterprises, Inc. 2,500 53,825 ----------- 1,009,522 ----------- INFORMATION TECHNOLOGY--7.1% SOFTWARE & SERVICES--3.4% Accenture Ltd., Class A (a) 8,700 156,513 Activision, Inc. (a) 6,200 90,458 Acxiom Corp. (a) 3,000 46,140 Affiliated Computer Services, Inc. (a) 4,500 236,925 American Management Systems (a) 5,100 61,149 Andrew Corp. (a) 7,300 75,044 Anteon International Corp. (a) 1,600 38,400 Barra, Inc. (a) 1,200 36,396 Cadence Design Systems, Inc. (a) 3,500 41,265 Electronic Arts, Inc. (a) 8,100 403,137 Electronic Data Systems Corp 40,100 739,043 Factset Research Systems, Inc 1,400 39,578 Fidelity National Information Solutions, Inc. (a) 2,100 36,225 FreeMarkets, Inc. (a) 3,900 25,112 Henry (Jack) & Associates, Inc. 4,600 55,384 Hyperion Solutions Corp. (a) 1,700 43,639 Interland, Inc. (a) 9,800 12,740 Intuit, Inc. (a) 13,400 628,728 JDA Software Group, Inc. (a) 3,600 34,776 MPS Group, Inc. (a) 12,000 66,480 Management Network Group, Inc. (a) 15,200 22,800 MatrixOne, Inc. (a) 7,700 33,110 Mercury Interactive Corp. (a) 2,100 62,265 Microsoft Corp. 56,900 2,941,730 Novell, Inc. (a) 11,700 39,078 Oracle Corp. (a) 41,500 448,200 Pervasive Software, Inc. (a) 5,200 $ 21,424 Plato Learning, Inc. (a) 9,300 55,242 Precise Software Solutions Ltd. (a) 4,900 80,899 Rational Software Corp. (a) 2,900 30,131 Reynolds & Reynolds Co., Class A 2,500 63,675 Roxio, Inc. (a) 3,400 16,218 Safenet, Inc. (a) 1,700 43,095 SAP AG 22,480 658,048 Secure Computing Corp. (a) 8,500 54,485 Siebel Systems, Inc. (a) 78,600 587,928 Sonicwall, Inc. (a) 11,600 42,108 Stellent, Inc. (a) 3,200 14,205 Sungard Data Systems, Inc. (a) 1,500 35,340 Sybase, Inc. (a) 3,600 48,240 Symantec Corp. (a) 1,500 60,765 THQ, Inc. (a) 5,300 70,225 Valueclick, Inc. (a) 10,100 28,179 Veritas Software Corp. (a) 2,800 43,736 Webmethods, Inc. (a) 7,400 60,828 ----------- 8,429,086 ----------- TECHNOLOGY HARDWARE & EQUIPMENT--3.7% Allen Telecom, Inc. 4,200 39,774 Amphenol Corp., Class A (a) 1,700 64,600 Anixter International, Inc. (a) 2,700 62,775 Applied Films Corp. (a) 2,900 57,971 Arrow Electronics, Inc. 2,700 34,533 ATMI, Inc. (a) 3,900 72,228 AVX Corp. 3,800 37,240 Benchmark Electronics, Inc. (a) 1,300 37,258 Canon, Inc. 10,000 376,389 Celestica, Inc. (a) 20,300 286,230 Cisco Systems, Inc. (a) 82,400 1,079,440 Computer Network Technology Corp. (a) 3,600 25,560 Cymer, Inc. (a) 2,500 80,625 Datacraft Asia Ltd. 76,000 49,780 Dell Computer Corp. (a) 36,400 973,336 DSP Group, Inc. 4,500 71,190 DuPont Photomasks, Inc. (a) 1,100 25,575 Entegris, Inc. (a) 12,700 130,810 Flextronics International Ltd. (a) 59,800 489,762 Genesis MicroChip, Inc. (a) 4,000 52,200 Hewlett Packard Co. 22,100 383,656 Hoya Corp. 3,400 237,908 Hutchinson Technology, Inc. (a) 2,500 51,750 Intel Corp. 27,900 434,403 International Business Machines Corp. 8,600 666,500 Intersil Corp., Class A (a) 15,100 210,494 Itron, Inc. (a) 3,800 72,846 Jabil Circuit, Inc. (a) 4,400 78,848
See Notes to Investment Portfolio. 215
SHARES VALUE ------------ ----------- Legend Holdings Ltd. 638,000 $ 210,661 Littelfuse, Inc. (a) 2,900 48,894 MTS Systems Corp. 3,000 30,060 Methode Electronics, Inc., Class A 3,400 37,298 Microchip Technology, Inc. 19,600 479,220 Micron Technology, Inc. 12,200 118,828 Motorola, Inc. 26,300 227,495 Micro International Ltd. (a) 2,900 28,272 National Semiconductor Corp. (a) 1,100 16,511 Nokia Oyj 7,500 119,158 Novellus Systems, Inc. (a) 2,000 56,160 PMC Sierra, Inc. (a) 42,200 234,632 Photon Dynamics, Inc. (a) 1,200 27,360 Photronics, Inc. (a) 6,100 83,570 Pioneer Standard Electronics, Inc 5,300 48,654 Planar Systems, Inc. (a) 2,800 57,764 ScanSource, Inc. (a) 600 29,580 Somera Communications, Inc. (a) 4,200 11,340 Taiwan Semiconductor Manufacturing Co., Ltd., ADR (a) 11,500 81,075 Tektronix, Inc. 1,100 20,009 Tellabs, Inc. (a) 5,600 40,712 Texas Instruments, Inc. 11,800 177,118 Tollgrade Communications, Inc. (a) 2,300 26,979 Vishay Intertechnology, Inc. (a) 1,500 16,770 Xerox Corp. 83,900 675,395 Zebra Technologies Corp., Class A (a) 1,100 63,030 ----------- 9,150,226 ----------- MATERIALS--2.3% CONSTRUCTION MATERIALS--0.0% Texas Industries, Inc. 1,400 34,020 ----------- CONTAINERS & PACKAGING--0.2% Aptargroup, Inc. 1,900 59,356 Constar International, Inc. (a) 3,800 44,650 Crown Cork & Seal Co., Inc. 9,400 74,730 Greif Brothers Corp., Class A 1,700 40,460 Jarden Corp. (a) 5,300 126,511 Packaging Corp. of America 1,700 31,008 ----------- 376,715 ----------- METALS & MINING--0.3% Arch Coal, Inc. 2,200 47,498 Centex Construction Products, Inc. 1,500 52,725 Nucor Corp. 7,400 305,620 Peabody Energy Corp. 6,100 178,303 Pechiney SA 4,650 163,069 RTI International Metals, Inc. 3,400 $ 34,340 Stillwater Mining Co. (a) 2,900 15,515 ----------- 797,070 ----------- PAPER & FOREST PRODUCTS--1.0% Boise Cascade Corp. 900 22,698 Bowater, Inc. 14,300 599,885 Georgia Pacific Corp. 49,500 799,920 International Paper Co. 20,300 709,891 MeadWestvaco Corp. 2,300 56,833 UPM-Kymmene Oyj 7,125 228,643 ----------- 2,417,870 ----------- SPECIALTY CHEMICALS--0.8% Air Products & Chemicals, Inc 1,500 64,125 AKZO Nobel N.V 19,900 634,611 Cytec Industries, Inc. (a) 2,900 79,112 DSM N.V 5,000 227,463 Eastman Chemical Co. 1,800 66,186 Ecolab, Inc. 700 34,650 Engelhard Corp. 1,800 40,230 H.B. Fuller Co. 1,400 36,232 International Flavors & Fragrances, Inc. 3,200 112,320 Lubrizol Corp. 3,400 103,700 Lyondell Chemical Co. 4,000 50,560 Kaneka Corp. 37,000 197,836 Minerals Technologies, Inc. 1,100 47,465 PPG Industries, Inc. 900 45,135 Praxair, Inc. 1,300 75,101 Schulman (A), Inc. 2,100 39,081 Scotts Co. (The), Class A (a) 900 44,136 Shin-Etsu Chemical Co., Ltd. 5,000 163,776 ----------- 2,061,719 ----------- TELECOMMUNICATION SERVICES--2.5% AT&T Corp. 26,100 681,471 BellSouth Corp. 40,600 1,050,322 China Mobile (Hong Kong) Ltd. (a)(b) 98,000 233,445 Deutsche Telekom AG, ADR 48,700 618,490 Metro One Telecommunications Inc. (a) 2,700 17,415 NTT DoCoMo, Inc. 120 221,287 SBC Communications, Inc. 39,400 1,068,134 SK Telecom Co., Ltd. 10,300 219,905 Telecom Italia S.p.A 31,150 236,182 Telefonica de Espana 27,571 246,630 Telephone & Data Systems, Inc. 2,100 98,742 Verizon Communications, Inc. 35,400 1,371,750 Vodafone Group PLC 55,000 100,252 ----------- 6,164,025 ----------- UTILITIES--1.4% Allete, Inc. 1,600 36,288 Cascade Natural Gas Corp. 1,900 38,000
See Notes to Investment Portfolio. 216
SHARES VALUE --------------- --------------- Central Vermont Public Service Corp. 2,600 $ 47,528 Centrica PLC 76,500 210,547 CH Energy Group, Inc. 1,800 83,934 Duke Energy Co. 37,700 736,658 El Paso Corp. 27,900 194,184 Energy East Corp. 2,200 48,598 Entergy Corp. 1,100 50,149 Exelon Corp. 1,400 73,878 Maine Public Service Co. 600 19,200 MDU Resources Group, Inc. 4,300 110,983 MGE Energy, Inc. 900 24,094 National Grid Group PLC 64,400 473,170 Northwest Natural Gas Co. 2,600 70,356 PG&E Corp. 44,600 619,940 PPL Corp. 900 31,212 Progress Energy, Inc. 1,800 78,030 TXU Corp. 19,800 369,864 WGL Holdings, Inc. 3,000 71,760 3,388,373 --------------- TOTAL COMMON STOCKS (cost of $156,175,768) 145,578,604 --------------- PAR VALUE --------------- --------------- CORPORATE BONDS--21.0% CONSUMER DISCRETIONARY--0.6% AUTOMOBILES & COMPONENTS--0.1% Lear Corp., 7.960%, 05/15/05 $ 75,000 77,063 8.110%, 05/15/09 150,000 158,625 --------------- 235,688 --------------- MEDIA--0.1% British Sky Broadcasting Group PLC, 8.200%, 07/15/09 300,000 327,729 --------------- HOTELS, RESTAURANTS & LEISURE--0.4% Host Marriott LP, 9.500%, 01/15/07 135,000 137,025 International Game Technology, 8.375%, 05/15/09 300,000 331,500 Starwood Hotels & Resorts, Inc., 7.875%, 05/01/12 (c) 225,000 222,750 YUM! Brands, Inc., 7.700% 07/01/12 195,000 203,775 --------------- 895,050 --------------- CONSUMER STAPLES--0.6% HOUSEHOLD PRODUCTS--0.6% Procter & Gamble Co., 4.750%, 06/15/07 1,400,000 1,500,422 --------------- FINANCE, INSURANCE & REAL ESTATE--8.2% DEPOSITORY INSTITUTIONS--1.9% Citicorp, 8.040%, 12/15/19 (c) $ 1,950,000 $ 2,250,066 Den Danske Bank, 6.550%, 09/15/03 (c) 2,250,000 2,317,275 --------------- 4,567,341 --------------- INSURANCE CARRIERS--2.3% Florida Windstorm Underwriting Association, 7.125%, 02/25/19 (c) 1,900,000 2,175,386 Prudential Insurance Co. of America, 7.650%, 07/01/07 (c) 3,150,000 3,573,330 --------------- 5,748,716 --------------- NON-DEPOSITORY CREDIT INSTITUTIONS--2.8% Countrywide Home Loans, Inc., 6.850%, 06/15/04 1,500,000 1,592,700 Ford Motor Credit Corp., 6.875%, 02/01/06 1,500,000 1,505,760 Household Finance Corp., 6.500%, 01/24/06 1,500,000 1,583,160 International Lease Finance Corp., 6.375%, 03/15/09 2,000,000 2,140,300 --------------- 6,821,920 --------------- NON-DEPOSITORY INSTITUTIONS--1.2% Fannie Mae, 6.625%, 09/15/09 2,575,000 3,021,142 --------------- MANUFACTURING--1.7% CHEMICALS & ALLIED PRODUCTS--0.4% Hanson Overseas BV, 6.750%, 09/15/05 1,000,000 1,087,070 --------------- PAPER & FOREST PRODUCTS--1.3% Georgia-Pacific Corp., 8.875%, 05/15/31 1,500,000 1,290,000 Weyerhaeuser Co., 6.750%, 03/15/12 1,750,000 1,907,972 --------------- 3,197,972 --------------- MINING & ENERGY--2.7% OIL & GAS FIELD SERVICES--2.7% Baker Hughes, Inc., 6.250%, 01/15/09 2,000,000 2,228,580 Devon Financing Corp., 6.875%, 09/30/11 1,500,000 1,692,945 Kerr-McGee Corp., 5.375%, 04/15/05 1,200,000 1,275,816 Nexen, Inc., 7.875%, 03/15/32 1,250,000 1,322,738 XTO Energy, Inc., 7.500% 04/15/12 90,000 95,400 --------------- 6,615,479 ---------------
See Notes to Investment Portfolio. 217
PAR VALUE --------------- --------------- INDUSTRIALS--1.8% CAPITAL GOODS--1.8% Constellation Brands, Inc., 8.125%, 01/15/12 $ 300,000 $ 310,500 Cross Timbers Oil Co., 8.750%, 11/01/09 150,000 157,125 IBM Canada Credit, 3.750%, 11/30/07 (c) 1,500,000 1,505,805 KB Home 8.625%, 12/15/08 225,000 232,313 Owens-Illinois, Inc., 7.350% 05/15/08 270,000 251,100 Raytheon Co., 8.300%, 03/01/10 1,500,000 1,768,275 Tricon Global Restaurants, Inc., 8.875%, 04/15/11 45,000 49,050 Winn-Dixie Stores, Inc., 8.875% 04/01/08 21,000 21,420 --------------- 4,295,588 --------------- TRANSPORTATION--0.0% Kansas City Southern 7.500%, 06/15/09 54,000 56,700 --------------- SERVICES--1.7% BUSINESS SERVICES--0.5% FedEx Corp., 7.530%, 09/23/06 1,074,636 1,189,847 --------------- HEALTH CARE--1.2% AmerisourceBergen Corp., 8.125%, 09/01/08 265,000 283,550 HCA Healthcare Co., 8.750% 09/01/10 300,000 343,752 HCA, Inc., 7.125%, 06/01/06 900,000 945,270 Tenet Healthcare Corp., 5.375%, 11/15/06 1,625,000 1,503,125 --------------- 3,075,697 --------------- TRANSPORTATION, COMMUNICATIONS, ELECTRIC, GAS & SANITARY SERVICES--3.7% AIR TRANSPORTATION--0.7% United Airlines, Inc., 7.032%, 10/01/10 (d) 2,156,075 1,703,299 9.200%, 03/22/08 (d) 507,021 76,053 --------------- 1,779,352 --------------- ELECTRIC SERVICES--1.0% FirstEnergy Corp., 5.500%, 11/15/06 2,500,000 2,509,975 --------------- SANITARY SERVICES--0.1% Allied Waste North America, Inc., 7.875%, 01/01/09 300,000 298,500 --------------- TELECOMMUNICATIONS--1.9% AOL Time Warner, Inc. 7.700%, 05/01/32 $ 450,000 $ 466,834 Cable & Wireless PLC, 8.000%, 06/22/10 1,600,000 1,819,504 Verizon Wireless, Inc., 5.375%, 12/15/06 (c) 1,850,000 1,932,806 WorldCom, Inc., 8.250%, 05/15/31 (d) 1,525,000 358,375 --------------- 4,577,519 --------------- TOTAL CORPORATE BONDS (cost of $50,391,899) 51,801,707 --------------- U.S. GOVERNMENT OBLIGATIONS--8.6% U.S. GOVERNMENT AGENCIES--8.2% Federal Home Loan Mortgage Corp., Gold: 6.500%, 12/01/10-06/01/31 9,815,988 10,276,419 12.000%, 07/01/20 261,542 303,377 --------------- 10,579,796 --------------- Federal National Mortgage Association, 6.500%, 12/01/31 3,504,590 3,650,712 --------------- Government National Mortgage Association: 5.750%, 07/20/25 93,873 96,734 6.000%, 12/15/28-03/15/29 4,087,573 4,271,893 8.000%, 03/15/26 1,319,951 1,438,913 --------------- 5,807,540 --------------- U.S. GOVERNMENT BONDS & NOTES--0.4% U.S. Treasury Bonds, 5.375%, 02/15/31 560,000 610,487 7.625%, 02/15/25 (e) 150,000 205,008 --------------- 815,495 --------------- U.S. Treasury Note, 5.500%, 05/15/09 200,000 226,914 --------------- TOTAL U.S. GOVERNMENT OBLIGATIONS (cost of $19,586,236) 21,080,457 --------------- NON-AGENCY MORTGAGE-BACKED & ASSET-BACKED SECURITIES--6.9% ASSET-BACKED SECURITIES--1.9% MBNA Master Card Credit Trust, 6.600%, 04/16/07 4,250,000 4,610,952 --------------- NON-AGENCY MORTGAGE-BACKED SECURITIES--5.0% American Mortgage Trust, 8.190%, 09/27/22 233,686 210,317 GS Mortgage Securities Corp. II, 6.620%, 10/18/30 3,750,000 4,184,822 JP Morgan Commercial Mortgage Finance Corp., 6.507%, 10/15/35 3,250,000 3,652,663
See Notes to Investment Portfolio. 218
PAR VALUE --------------- --------------- LB-UBS Commercial Mortgage Trust, 6.510%, 12/15/26 $ 3,750,000 $ 4,253,861 --------------- 12,301,663 --------------- TOTAL NON-AGENCY MORTGAGE-BACKED & ASSET-BACKED SECURITIES (cost of $15,574,766) 16,912,615 --------------- SHARES --------------- PREFERRED STOCKS--0.4% CONSUMER DISCRETIONARY--0.3% MEDIA--0.3% News Corp., Ltd., ADR 27,600 625,140 --------------- HEALTH CARE--0.1% HEALTH CARE EQUIPMENT & Services--0.1% Fresenius AG 5,475 209,282 --------------- ENERGY--0.0% Exco Resources, Inc. 3,800 67,944 --------------- Total Preferred Stocks (cost of $1,361,305) 902,366 --------------- PAR --------------- SHORT-TERM OBLIGATION--3.4% Repurchase agreement with State Street Bank & Trust Co., dated 12/31/02, due 01/02/03 at 1.050%, collateralized by U.S. Treasury Bonds and Notes with various maturities to 01/31/04, market value $847,837 (repurchase proceeds $826,048) $ 826,000 826,000 --------------- Repurchase agreement with State Street Bank & Trust Co., dated 12/31/02, due 01/02/03 at 1.180%, collateralized by U.S. Treasury Bonds with various maturities to 02/15/31, market value $7,722,878 (repurchase proceeds $7,561,496) 7,561,000 7,561,000 --------------- TOTAL SHORT-TERM OBLIGATIONS (cost of $8,387,000) 8,387,000 --------------- TOTAL INVESTMENTS--99.5% (cost of $251,476,974) (f) 244,662,749 --------------- OTHER ASSETS & LIABILITIES, NET--0.5% 1,203,562 --------------- NET ASSETS--100.0% $ 245,866,311 ===============
NOTES TO INVESTMENT PORTFOLIO: (a) Non-income producing. (b) Represents fair value as determined in good faith under direction of the Trustees. (c) Securities are exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At December 31, 2002, the value of these securities amounted to $13,977,418 or 5.7% of the net assets. (d) As of December 31, 2002 the Fund held certain securities that have filed for bankruptcy protection under Chapter 11, representing 0.9% of net assets. (e) This security, or a portion thereof, with a total market value of $205,008 is being used to collateralize open futures contracts. (f) Cost for federal income tax purposes is $251,655,534. The difference between cost for generally accepted accounting principles and cost on a tax basis is related to amortization/accretion tax elections on fixed income securities, deferral of losses on wash sales and investments in real estate investment trusts.
ACRONYM NAME ------- --------------------------- ADR American Depositary Receipt GDR Global Depositary Receipt
Short futures contracts open on December 31, 2002:
UNREALIZED NUMBER OF EXPIRATION DEPRECIATION TYPE CONTRACTS MONTH AT 12/31/2002 ---- --------- ---------- ------------- 10 Year U.S. Treasury Note 13 March $ (42,065)
See Notes to Financial Statements. 219 STATEMENT OF ASSETS AND LIABILITIES Stein Roe Balanced Fund, Variable Series / December 31, 2002 ASSETS: Investments, at cost $ 251,476,974 --------------- Investments, at value $ 244,662,749 Cash 97,598 Foreign currency (cost of $851,287) 867,922 Receivable for: Investments sold 404,587 Interest 1,039,418 Dividends 249,710 Futures variation margin 2,625 Expense reimbursement due from Distributor 7,762 Deferred Trustees' compensation plan 1,315 --------------- TOTAL ASSETS 247,333,686 --------------- LIABILITIES: Payable for: Investments purchased 521,963 Fund shares repurchased 733,552 Management fee 99,188 Administration fee 32,279 Transfer agent fee 625 Pricing and bookkeeping fees 3,459 Trustees' fee 992 Audit fee 24,595 Reports to shareholders 41,479 Deferred Trustees' fee 1,315 Other liabilities 7,928 --------------- TOTAL LIABILITIES 1,467,375 --------------- NET ASSETS $ 245,866,311 =============== COMPOSITION OF NET ASSETS: Paid-in capital $ 270,214,078 Undistributed net investment income 7,585,255 Accumulated net realized loss (25,098,805) Net unrealized appreciation (depreciation) on: Investments (6,814,225) Foreign currency translations 22,073 Futures contracts (42,065) --------------- NET ASSETS $ 245,866,311 =============== CLASS A: Net assets $ 194,326,629 Shares outstanding 16,367,181 =============== Net asset value per share $ 11.87 =============== CLASS B: Net assets $ 51,539,682 Shares outstanding 4,358,669 =============== Net asset value per share $ 11.82 ===============
See Notes to Financial Statements. 220 STATEMENT OF OPERATIONS Stein Roe Balanced Fund, Variable Series For the Year Ended December 31, 2002
INVESTMENT INCOME: Dividends $ 2,381,162 Interest 7,353,146 --------------- Total Investment Income (net of foreign taxes withheld of $64,733) 9,734,308 --------------- EXPENSES: Management fee 1,280,078 Administration fee 426,693 Distribution fee--Class B 126,591 Pricing and bookkeeping fees 118,648 Transfer agent fee 7,500 Trustees' fee 15,448 Custody fee 34,109 Other expenses 97,967 --------------- Total Expenses 2,107,034 Fees reimbursed by Distributor--Class B (23,731) Custody earnings credit (306) --------------- Net Expenses 2,082,997 --------------- Net Investment Income 7,651,311 --------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, FOREIGN CURRENCY AND FUTURES CONTRACTS: Net realized gain (loss) on: Investments (18,917,669) Foreign currency transactions 112,221 Futures contracts (130,113) --------------- Net realized loss (18,935,561) --------------- Net change in unrealized appreciation/depreciation on: Investments (25,542,874) Foreign currency translations 24,657 Futures contracts (42,065) --------------- Net change in unrealized appreciation/depreciation (25,560,282) --------------- Net Loss (44,495,843) --------------- Net Decrease in Net Assets from Operations $ (36,844,532) ===============
See Notes to Financial Statements. 221 STATEMENT OF CHANGES IN NET ASSETS Stein Roe Balanced Fund, Variable Series
YEAR ENDED DECEMBER 31, ---------------------------- 2002 2001 ------------- ------------- INCREASE (DECREASE) IN NET ASSETS: ---------------------------------- OPERATIONS: Net investment income $ 7,651,311 $ 9,419,472 Net realized loss on investments, foreign currency transactions and futures contracts (18,935,561) (5,967,262) Net change in unrealized appreciation/depreciation on investments, foreign currency translations and futures contracts (25,560,282) (39,700,992) ------------- ------------- Net Decrease from Operations (36,844,532) (36,248,782) ------------- ------------- DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income: Class A (8,018,427) (10,180,998) Class B (1,439,933) (667,764) From net realized gains: Class A -- (12,602,873) Class B -- (826,612) ------------- ------------- Total Distributions Declared to Shareholders (9,458,360) (24,278,247) ------------- ------------- SHARE TRANSACTIONS: Class A: Subscriptions 4,404,498 8,714,670 Distributions reinvested 8,018,427 22,783,871 Redemptions (59,391,356) (71,929,226) ------------- ------------- Net Decrease (46,968,431) (40,430,685) ------------- ------------- Class B: Subscriptions 16,230,124 37,942,104 Distributions reinvested 1,439,933 1,494,376 Redemptions (5,779,970) (2,399,582) ------------- ------------- Net Increase 11,890,087 37,036,898 ------------- ------------- Net Decrease from Share Transactions (35,078,344) (3,393,787) ------------- ------------- Total Decrease in Net Assets (81,381,236) (63,920,816) NET ASSETS: Beginning of period 327,247,547 391,168,363 ------------- ------------- End of period (including undistributed net investment income of $7,585,255 and $9,347,107, respectively) $ 245,866,311 $ 327,247,547 ============= ============= CHANGES IN SHARES: Class A: Subscriptions 337,897 589,222 Issued for distributions reinvested 595,723 1,587,726 Redemptions (4,734,716) (5,012,155) ------------- ------------- Net Decrease (3,801,096) (2,835,207) ------------- ------------- Class B: Subscriptions 1,269,931 2,612,573 Issued for distributions reinvested 107,218 104,356 Redemptions (476,977) (176,018) ------------- ------------- Net Increase 900,172 2,540,911 ------------- -------------
See Notes to Financial Statements. 222 NOTES TO FINANCIAL STATEMENTS Stein Roe Balanced Fund, Variable Series / December 31, 2002 NOTE 1. ORGANIZATION AND ACCOUNTING POLICIES ORGANIZATION--Stein Roe Balanced Fund, Variable Series (the "Fund"), a series of SteinRoe Variable Investment Trust (the "Trust"), is a diversified portfolio of a Massachusetts business trust, registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The Fund's investment goal is to seek high total investment return by investing primarily in a diversified portfolio of common stocks, securities convertible to common stock, bonds, and cash. The Fund's capitalization consists of an unlimited number of shares of beneficial interest without par value that represent a separate series of the Trust. The Fund offers two classes of shares: Class A and Class B. Each share of a class represents an equal proportionate beneficial interest in that share class and, when issued and outstanding, is fully paid and nonassessable. Shareholders would be entitled to share proportionally in the net assets of their share class available for distribution to shareholders upon liquidation of the Fund. Shares of the Fund are available and are being marketed exclusively as a pooled funding vehicle for variable annuity contracts ("VA contracts") and Variable Life Insurance Policies ("VLI Policies") offered by the separate accounts of certain life insurance companies ("Participating Insurance Companies"). The Participating Insurance Companies and their separate accounts own all the shares of the Fund. Stein Roe & Farnham Incorporated (the "Manager") ("Stein Roe"), provides investment management, administrative and advisory services to the Fund pursuant to its Management Agreement with the Fund. The Manager also provides pricing and bookkeeping services to the Fund. Liberty Funds Distributor, Inc. ("LFD"), an affiliate of the Manager, serves as the principal underwriter of the Fund. The Manager and LFD are wholly-owned indirect subsidiaries of FleetBoston Financial Corporation ("FleetBoston"). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. SECURITY VALUATION AND TRANSACTIONS--Debt securities generally are valued by a pricing service based upon market transactions for normal, institutional-size trading units of similar securities. When management deems it appropriate, an over-the-counter or exchange bid quotation is used. Equity securities generally are valued at the last sale price or, in the case of unlisted or listed securities for which there were no sales during the day, at the current quoted bid price. Short-term obligations with a maturity of 60 days or less are valued at amortized cost. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. The values of all assets and liabilities quoted in foreign currencies are translated into U.S. dollars at that day's exchange rates. 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. Generally, trading in foreign securities is substantially completed each day at various times prior to the close of the New York Stock Exchange ("NYSE"). The values of such securities used in computing the net asset value of the Fund's shares are determined as of such times. Foreign currency exchange rates are also generally determined prior to the close of the NYSE. Occasionally, events affecting the values of such securities and such exchange rates may occur between the times at which they are determined and the close of the customary trading session of the NYSE which would not be reflected in the computation of the Fund's net asset value. If events materially affecting the value of such securities and such exchange rates occur during such period, then these securities will be valued at their fair value as determined in good faith by or under the supervision of the Board of Trustees. 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. DETERMINATION OF CLASS NET ASSET VALUES AND FINANCIAL Highlights--All income, expenses (other than the Class B distribution fee), 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. The per share data was calculated using average shares outstanding during the period. In addition, Class B net 223 investment income per share data and ratios reflect the distribution fee applicable to Class B shares only. 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. INTEREST INCOME, DEBT DISCOUNT AND PREMIUM--Interest income is recorded on the accrual basis. Discount is accreted to interest income over the life of a security with a corresponding increase in the cost basis. Premium is amortized against interest income with a corresponding decrease in the cost basis. DISTRIBUTIONS TO SHAREHOLDERS--The Fund intends to distribute as income dividends or capital gains distributions, at least annually, substantially all of its net investment income and net profits realized from the sale of investments. All dividends and distributions are reinvested in additional shares of the Fund at net asset value as of the record date of the distribution. Income and capital gain distributions are determined in accordance with federal income tax regulations. FOREIGN CURRENCY TRANSACTIONS--Net realized and unrealized gains (losses) on foreign currency transactions includes gains (losses) arising from the fluctuations in exchange rates between trade and settlement dates on securities transactions, gains (losses) arising from the disposition of foreign currency, and currency gains (losses) between the accrual and payment dates on dividends, interest income and foreign withholding taxes. The Fund does not distinguish that portion of gains (losses) on investments which is due to changes in foreign exchange rates from that which is due to changes in market prices of the investments. Such fluctuations are included with the net realized and unrealized gains (losses) on investments. OTHER--Corporate actions and dividend income are recorded on the ex-date (except for certain foreign securities which are recorded as soon after ex-date as the Fund becomes aware of such), net of non-reclaimable tax withholdings. Where a high level of uncertainty as to collection exists, income on securities is recorded net of all tax withholdings with any rebates recorded when received. The Fund's custodian takes possession through the federal book-entry system of securities collateralizing repurchase agreements. Collateral is marked-to-market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund. The Fund may experience costs and delays in liquidating the collateral if the issuer defaults or enters bankruptcy. NOTE 2. FEDERAL TAX INFORMATION Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from generally accepted accounting principles. These differences are primarily due to differing treatments for foreign currency transactions, real estate investment trusts, deferral of losses from wash sales, post-October losses, mark-to-market on futures contracts, discount accretion/premium amortization on debt securities, straddle deferrals, reclassification of paydown securities, capital loss carryforwards 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 December 31, 2002, permanent items identified and reclassified among the components of net assets are as follows:
UNDISTRIBUTED NET ACCUMULATED PAID-IN INVESTMENT INCOME NET REALIZED LOSS CAPITAL ----------------- ----------------- ------- $ 45,197 $ (45,102) $ (95)
Net investment income, net realized gains (losses) and net assets were not affected by this reclassification. The tax character of distributions paid during 2002 and 2001 was as follows:
2002 2001 ----------- ------------ Distributions paid from: Ordinary income $ 9,458,360 $ 11,307,500 Long-term capital gains -- 12,970,747 ----------- ------------ $ 9,458,360 24,278,247 =========== ============
As of December 31, 2002, the components of distributable earnings on a tax basis were as follows:
UNDISTRIBUTED ORDINARY UNREALIZED INCOME DEPRECIATION* ------------- ------------ $ 7,714,197 $ (7,012,777)
*The difference between book-basis and tax-basis unrealized depreciation is attributable primarily to the tax deferral of losses on wash sales and the realization for tax purposes of unrealized gains on certain forward foreign currency contracts, discount accretion/premium amortization on debt securities and on investments in real estate investment trusts. The following capital loss carryforwards are available to reduce taxable income arising from future net realized gains on investments, if any, to the extent permitted by the Internal Revenue Code:
YEAR OF CAPITAL LOSS EXPIRATION CARRYFORWARD ---------- ------------ 2009 $ 4,375,998 2010 14,373,391 ------------ $ 18,749,389 ============
224 Under current tax rules, certain capital losses realized after October 31 may be deferred and treated as occurring on the first day of the following fiscal year. As of December 31, 2002, for federal income tax purposes, post October losses of $6,312,524 were deferred to January 1, 2003. NOTE 3. FEES AND COMPENSATION PAID TO AFFILIATES MANAGEMENT AND ADMINISTRATIVE FEES--The Manager receives monthly fees equal to 0.45% and 0.15% annually of the Fund's average daily net assets for management and administrative services, respectively. Nordea Investment Management North America, Inc. ("Nordea") has been retained by the Manager as sub-advisor to manage the portion of the Fund's assets allocated to foreign stocks. The Manager, out of the management fee it receives, pays Nordea a monthly sub-advisory fee equal to 0.40% annually of the average daily net assets of that portion of the Fund's assets managed by Nordea. PRICING AND BOOKKEEPING FEES--The Manager is responsible for providing pricing and bookkeeping services to the Fund under a Pricing and Bookkeeping Agreement. Under a separate agreement (the "Outsourcing Agreement"), the Manager has delegated those functions to State Street Bank & Trust Company ("State Street"). The Manager pays fees to State Street under the Outsourcing Agreement. Under its pricing and bookkeeping agreement with the Fund, the Manager 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 December 13, 2002, the net asset based fee rate was 0.036%. The Fund also pays out-of-pocket costs for pricing services. TRANSFER AGENT FEE--Liberty Funds Services, Inc. (the "Transfer Agent"), an affiliate of the Manager, provides shareholder services for an annual rate of $7,500. DISTRIBUTION FEE--The Fund has adopted a 12b-1 plan, which requires it to pay LFD a monthly distribution fee totaling 0.25% annually on Class B average daily net assets as of the 20th of each month. EXPENSE LIMITS--The Manager has voluntarily agreed to reimburse all expenses, including management fees, but excluding interest, taxes, distribution fees, brokerage and extraordinary expenses of the Fund in excess of 0.75% annually of the Fund's average daily net assets. LFD has voluntarily agreed to reimbuse the Fund's Class B share distribution fee in excess of 0.15% when the total operating expenses of the Fund applicable to Class B shares, including distribution fees, are in excess of 0.90% annually of Class B average daily net assets. These arrangements may be terminated or modified by the Manager or LFD at any time. OTHER--The Fund pays no compensation to its officers, all of whom are employees of Stein Roe 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 $306 of custody fees were reduced by balance credits for the year ended December31, 2002. The Fund could have invested a portion of the assets utilized in connection with the expense offset arrangement in an income-producing asset if it had not entered into such an agreement. NOTE 4. PORTFOLIO INFORMATION INVESTMENT ACTIVITY--For the year ended December 31, 2002, purchases and sales of investments, other than short-term obligations, were $320,096,566 and $349,926,772, respectively, of which $95,215,878 and $116,884,525, respectively, were U.S. Government securities. Unrealized appreciation (depreciation) at December 31, 2002, based on cost of investments for federal income tax purposes, was: Gross unrealized appreciation $ 12,796,122 Gross unrealized depreciation (19,788,907) ------------- Net unrealized depreciation $ (6,992,785) =============
OTHER--There are certain additional risks involved when investing in foreign securities that are not inherent with investments in domestic securities. These risks may involve foreign currency exchange rate fluctuations, adverse political and economic developments and the possible prevention of foreign currency exchange or the imposition of other foreign governmental laws or restrictions. The Fund may focus its investments in certain industries, subjecting it to greater risk than a fund that is more diversified. The Fund may purchase or sell futures contracts. The Fund will use these instruments to hedge against the effects of changes in the portfolio securities due to market conditions and not for trading purposes. The use of futures contracts involves certain risks which include (1) imperfect 225 correlation between the price movement of the instruments and the underlying securities, (2) inability to close out a position due to different trading hours, or the absence of a liquid market for either the instrument or the underlying securities or (3) an inaccurate prediction by the Manager of the future direction of the market or stock price or interest rate trends. Any of these risks may involve amounts exceeding the variation margin recorded in the Fund's Statement of Assets and Liabilities at any given time. NOTE 5. OTHER RELATED PARTY TRANSACTIONS For the year ended December 31, 2002, the Fund used AlphaTrade Inc., a wholly-owned subsidiary of Colonial, as a broker. Total commissions paid to AlphaTrade Inc. during the period were $3,414. 226 FINANCIAL HIGHLIGHTS Stein Roe Balanced Fund, Variable Series--Class B Shares Selected data for a share outstanding throughout each period is as follows:
YEAR ENDED DECEMBER 31, ------------------------------------------- 2002 2001 2000 (a) ---------- ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 13.81 $ 16.33 $ 16.18 ---------- ---------- ---------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) (b) 0.33 0.35(c) 0.25 Net realized and unrealized gain (loss) on investments, foreign currency and futures contracts (1.93) (1.85)(c) (0.10) ---------- ---------- ---------- Total from Investment Operations (1.60) (1.50) 0.15 ---------- ---------- ---------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.39) (0.45) -- From net realized gains -- (0.57) -- ---------- ---------- ---------- Total Distributions Declared to Shareholders (0.39) (1.02) -- ---------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 11.82 $ 13.81 $ 16.33 ========== ========== ========== Total return (d)(e)(f) (11.94)% (9.39)% 0.93%(g) RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA: Expenses (h) 0.90% 0.90% 0.90%(i) Net investment income (h) 2.53% 2.49%(c) 2.57%(i) Waiver/reimbursement 0.05% 0.06% 0.04%(i) Portfolio turnover rate 118% 57% 39% Net assets, end of period (000's) $ 51,540 $ 47,754 $ 14,985
(a) For the period from commencement of operations on June 1, 2000 to December 31, 2000. (b) Per share data was calculated using average shares outstanding during the period. (c) As required, effective January 1, 2001, the Fund has 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 December 31, 2001, was to decrease net investment income per share by $0.01, decrease net realized and unrealized gain per share by $0.01 and to decrease the ratio of net investment income to average net assets from 2.54% to 2.49%. Per share data and ratios for periods prior to December 31, 2001 have not been restated to reflect this change in presentation. (d) Total return at net asset value assuming all distributions reinvested. (e) Had the Distributor not reimbursed a portion of expenses, total return would have been reduced. (f) Total return figure does not include any insurance company charges associated with a variable annuity. If included, total return would be reduced. (g) Not annualized. (h) The benefits derived from custody credits and directed brokerage arrangements, if applicable, less than 0.01%. had an impact of (i) Annualized. 227 REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of SteinRoe Variable Investment Trust and the Class B Shareholders of Stein Roe Balanced Fund, Variable Series In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio, and the related statements of operations and of changes in net assets and the Class B financial highlights present fairly, in all material respects, the financial position of Stein Roe Balanced Fund, Variable Series (the "Fund") (a series of SteinRoe Variable Investment Trust) at December 31, 2002, and the results of its operations, the changes in its net assets and the Class B financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and the Class B financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2002 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts February 12, 2003 228 UNAUDITED INFORMATION Stein Roe Balanced Fund, Variable Series/December 31, 2002 FEDERAL INCOME TAX INFORMATION 32.77% of the ordinary income distributed by the Fund, for the year ended December 31, 2002, qualifies for the corporate dividends received deduction. 229 PORTFOLIO MANAGERS' DISCUSSION Stein Roe Growth Stock Fund, Variable Series / December 31, 2002 Stein Roe Growth Stock Fund, Variable Series seeks long-term growth. Erik P. Gustafson and David P. Brady are co-managers of the fund. Both Mr. Gustafson and Mr. Brady are senior vice presidents of Stein Roe & Farnham Incorporated. A SOMBER ENVIRONMENT FOR GROWTH STOCKS During the year, the economy experienced sluggish growth, threats of global terrorism continued, revelations of corporate irregularities surfaced and the threat of war with Iraq undermined investor confidence. Consumer spending was the bright spot in the US economy, but business spending failed to increase as many companies continued to operate below full capacity and postpone significant outlays for new technology. For the third year in a row, stock market indexes ended the year lower. Losses in 2002 were greater than in either of the two previous years, resulting in one of the most severe bear markets since the Great Depression. Although virtually all major market indexes and sectors lost ground during the year, growth stocks were among the worst performers. FUND FOCUSED ON GROWTH OPPORTUNITIES Despite the disappointments of the past three years, the fund remains invested in high quality stocks that we believe have the potential to produce growth for long-term investors. We continued to emphasize health care stocks (which historically have held more of their value in turbulent markets). Health care also stands to benefit from an aging population that is likely to need more goods and services from these companies in the years to come. One such holding in the portfolio is Johnson & Johnson (3.7% of net assets), a company that has benefited from its broad product diversity--from personal care products to specialized medical applications. Although health care was not a strong performer for the year, our investment in Johnson & Johnson made a positive contribution to the fund's overall performance. Some of the fund's holdings in the industrial and commercial sector were hurt by the weak economy. For example, General Electric (2.5% of net assets), a highly-diversified industrial business, lost value partly because investors were put off by its complex capital structure in a year dominated by sensational news about accounting fraud. However, we continue to own the stock because we believe it has strong long-term prospects. CHANGES TO THE PORTFOLIO We recently added Oracle (2.2% of net assets), a leading supplier of business information management software, to the portfolio. Although the technology sector has been hard hit during the past three years, we believe that technology stocks, especially those in the software sector, have prospects for growth in the upcoming year if businesses increase spending. We re-evaluated our exposure to financial services companies because we believe they will face a less favorable environment if interest rates rise. In that light, we sold Washington Mutual, a diversified savings and loan. CAUTIOUS OPTIMISM We are cautiously optimistic about the economy's prospects in 2003. After three down years, we believe that investors could be rewarded with a better environment for growth stocks. Regardless of the environment, we will continue to focus our efforts on uncovering stocks of high quality companies with the potential for long-term gains. ---------- Economic and market conditions can frequently change. There is no assurance that the trends described here will continue or commence. An investment in Stein Roe Growth Stock Fund, Variable Series offers the potential for long-term growth, but also involves certain risks, including stock market fluctuations due to economic and business developments. The fund may also invest up to 25% of its assets in foreign stocks. There are also specific risks involved when investing in foreign stocks, such as currency exchange rate fluctuations, economic change, instability of emerging countries and political developments. Holdings are disclosed as of December 31, 2002, and are subject to change. 230 PERFORMANCE INFORMATION Stein Roe Growth Stock Fund, Variable Series / December 31, 2002 AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 2002 (%)
1-YEAR 5-YEAR 10-YEAR ----------------------------------------------------------------- Class B(1) (6/1/00) -30.27 -4.20 5.77 S&P 500 Index -22.09 -0.58 9.34
Inception date of share class is in parentheses. [CHART] VALUE OF A $10,000 INVESTMENT, 12/31/92 - 12/31/02 CLASS B: $17,525
CLASS B SHARES S&P 500 Index $ 10,000 $ 10,000 01/01/1993 - 03/31/1993 $ 9,836 $ 10,366 04/01/1993 - 06/30/1993 $ 9,712 $ 10,340 07/01/1993 - 09/30/1993 $ 10,050 $ 10,532 10/01/1993 - 12/31/1993 $ 10,497 $ 10,705 01/01/1994 - 03/31/1994 $ 9,832 $ 10,230 04/01/1994 - 06/30/1994 $ 9,527 $ 10,196 07/01/1994 - 09/30/1994 $ 9,964 $ 10,619 10/01/1994 - 12/31/1994 $ 9,831 $ 10,541 01/01/1995 - 03/31/1995 $ 10,547 $ 11,492 04/01/1995 - 06/30/1995 $ 11,600 $ 12,504 07/01/1995 - 09/30/1995 $ 12,767 $ 13,414 10/01/1995 - 12/31/1995 $ 13,539 $ 14,137 01/01/1996 - 03/31/1996 $ 14,170 $ 14,816 04/01/1996 - 06/30/1996 $ 15,140 $ 15,392 07/01/1996 - 09/30/1996 $ 15,598 $ 15,775 10/01/1996 - 12/31/1996 $ 16,419 $ 17,001 01/01/1997 - 03/31/1997 $ 16,332 $ 17,377 04/01/1997 - 06/30/1997 $ 19,632 $ 20,315 07/01/1997 - 09/30/1997 $ 20,787 $ 21,741 10/01/1997 - 12/31/1997 $ 21,718 $ 22,272 01/01/1998 - 03/31/1998 $ 24,237 $ 25,285 04/01/1998 - 06/30/1998 $ 25,776 $ 26,021 07/01/1998 - 09/30/1998 $ 21,972 $ 23,341 10/01/1998 - 12/31/1998 $ 27,779 $ 28,212 01/01/1999 - 03/31/1999 $ 30,987 $ 29,524 04/01/1999 - 06/30/1999 $ 31,933 $ 31,505 07/01/1999 - 09/30/1999 $ 30,224 $ 29,438 10/01/1999 - 12/31/1999 $ 38,037 $ 33,718 01/01/2000 - 03/31/2000 $ 43,727 $ 34,393 04/01/2000 - 06/30/2000 $ 41,733 $ 33,385 07/01/2000 - 09/30/2000 $ 40,369 $ 32,971 10/01/2000 - 12/31/2000 $ 33,413 $ 30,304 01/01/2001 - 03/31/2001 $ 27,673 $ 26,634 04/01/2001 - 06/30/2001 $ 28,423 $ 28,104 07/01/2001 - 09/30/2001 $ 22,715 $ 23,891 10/01/2001 - 12/31/2001 $ 25,128 $ 26,350 01/01/2002 - 03/31/2002 $ 24,153 $ 26,334 04/01/2002 - 06/30/2002 $ 20,467 $ 22,718 07/01/2002 - 09/30/2002 $ 16,736 $ 18,713 10/01/2002 - 12/31/2002 $ 17,525 $ 20,193
NET ASSET VALUE PER SHARE ($) 12/31/01 12/31/02 ------------------------------------------------------------ Class B 27.82 19.40
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 SHARES. Total return performance includes changes in share price and reinvestment of all distributions. The S&P (Standard & Poor's) 500 Index is an unmanaged index that tracks the performance of 500 widely held, large-capitalization US stocks. Indexes are not investments, do not incur fees or expenses and are not professionally managed. It is not possible to invest directly in an index. Securities in the fund may not match those in the index. MUTUAL FUND PERFORMANCE CHANGES OVER TIME. CURRENT RETURNS FOR THE FUND MAY BE DIFFERENT THAN THAT SHOWN. Performance numbers reflect all fund expenses, but do not include any insurance charges imposed by your insurance company's separate accounts. If performance included the effect of these additional charges, it would be lower. (1) Class B share (newer class shares) performance information includes returns of the fund's class A shares (the older existing fund class) for periods prior to the inception of the newer class shares. These class A share returns were not restated to reflect any expense differential (e.g., Rule 12b-1 fees) between class A shares and the newer class shares. If differences in expenses were reflected, the returns for periods prior to inception of the newer class shares would be lower. 231 INVESTMENT PORTFOLIO Stein Roe Growth Stock Fund, Variable Series / December 31, 2002 SHARES VALUE
SHARES VALUE ------------- ------------- COMMON STOCKS--99.2% CONSUMER DISCRETIONARY--10.1% MEDIA--6.1% BROADCASTING & CABLE TV--4.3% Liberty Media Corp., Class A (a) 700,000 $ 6,258,000 ------------- MOVIES & ENTERTAINMENT--1.8% AOL Time Warner, Inc. (a) 200,000 2,620,000 ------------- RETAILING--4.0% DEPARTMENT STORES--1.9% Kohl's Corp. (a) 50,000 2,797,500 ------------- HOME IMPROVEMENT RETAIL--2.1% Home Depot, Inc. 125,000 2,995,000 ------------- CONSUMER STAPLES--10.3% FOOD, BEVERAGES & TOBACCO--5.8% SOFT DRINKS--3.6% PepsiCo, Inc. 125,000 5,277,500 ------------- TOBACCO--2.2% Philip Morris Companies, Inc. 80,000 3,242,400 ------------- HOUSEHOLD & PERSONAL PRODUCTS--4.5% HOUSEHOLD PRODUCTS--4.5% Procter & Gamble Co. 75,000 6,445,500 ------------- ENERGY--2.2% OIL & GAS EQUIPMENT & SERVICES--2.2% BJ Services Co. (a) 100,000 3,231,000 ------------- FINANCIALS--12.9% DIVERSIFIED FINANCIAL SERVICES--8.9% Capital One Financial Corp. 100,000 2,972,000 Citigroup, Inc. 200,000 7,038,000 Merrill Lynch & Co., Inc. 75,000 2,846,250 ------------- 12,856,250 ------------- INSURANCE--4.0% MULTI-LINE INSURANCE--4.0% American International Group, Inc. 100,000 5,785,000 ------------- HEALTH CARE--27.6% HEALTH CARE EQUIPMENT & SERVICES--14.4% HEALTH CARE DISTRIBUTORS & SERVICE--4.8% Quest Diagnostic, Inc. (a) 50,000 2,845,000 UnitedHealth Group, Inc. 50,000 4,175,000 ------------- 7,020,000 ------------- HEALTH CARE EQUIPMENT--9.6% Baxter International, Inc. 175,000 4,900,000 Boston Scientific Corp. (a) 50,000 2,126,000 Medtronic, Inc. 150,000 6,840,000 ------------- 13,866,000 ------------- PHARMACEUTICALS & BIOTECHNOLOGY--13.2% BIOTECHNOLOGY--2.1% Genentech, Inc. (a) 50,000 $ 1,658,000 Medimmune (a) 50,000 1,358,500 ------------- 3,016,500 ------------- PHARMACEUTICALS--11.1% Johnson & Johnson 100,000 5,371,000 Pfizer, Inc. 200,000 6,114,000 Wyeth 125,000 4,675,000 ------------- 16,160,000 ------------- INDUSTRIALS--15.0% CAPITAL GOODS--11.7% AEROSPACE & DEFENSE--7.6% L-3 Communications Holdings, Inc. (a) 85,000 3,817,350 Lockheed Martin Corp. 125,000 7,218,750 ------------- 11,036,100 ------------- CONSTRUCTION & FARM MACHINERY--1.6% Caterpillar, Inc. 50,000 2,286,000 ------------- INDUSTRIAL CONGLOMERATES--2.5% General Electric Co. 150,000 3,652,500 ------------- COMMERCIAL SERVICES & SUPPLIES--3.3% DATA PROCESSING SERVICES--3.3% Concord EFS, Inc. (a) 300,000 4,722,000 ------------- INFORMATION TECHNOLOGY--19.8% SOFTWARE & SERVICES--7.6% SYSTEMS SOFTWARE--7.6% Microsoft Corp. (a) 150,000 7,755,000 Oracle Corp. (a) 300,000 3,240,000 ------------- 10,995,000 ------------- TECHNOLOGY HARDWARE & EQUIPMENT--12.2% COMPUTER HARDWARE--1.9% Dell Computer Corp. (a) 100,000 2,674,000 ------------- COMPUTER STORAGE & PERIPHERALS--1.2% Hewlett-Packard Co. 100,000 1,736,000 ------------- NETWORKING EQUIPMENT--3.6% Cisco Systems, Inc. (a) 400,000 5,240,000 ------------- SEMICONDUCTORS--1.8% Texas Instruments, Inc. 175,000 2,626,750 ------------- TELECOMMUNICATIONS EQUIPMENT--3.7% Nokia Oyj, ADR 350,000 5,425,000 ------------- TELECOMMUNICATION SERVICES--1.3% DIVERSIFIED TELECOMMUNICATION SERVICES--1.3% INTEGRATED TELECOMMUNICATION SERVICES--1.3% Verizon Communications, Inc. 50,000 1,937,500 ------------- TOTAL COMMON STOCKS (cost of $172,073,214) 143,901,500 -------------
See Notes to Investment Portfolio. 232
PAR VALUE ------------- ------------ SHORT-TERM OBLIGATION--1.2% Repurchase agreement with State Street Bank & Trust Co., dated 12/31/02, due 01/02/03 at 1.180%, collateralized by a U.S. Treasury Bond maturing 02/15/21, market value $1,826,152, (repurchase proceeds $1,786,117) (cost of $1,786,000) $ 1,786,000 $ 1,786,000 ------------- TOTAL INVESTMENTS--100.4% (cost of $173,859,214) (b) 145,687,500 ------------- OTHER ASSETS & LIABILITIES, NET--(0.4)% (630,216) ------------- NET ASSETS--100.0% $ 145,057,284 =============
NOTES TO INVESTMENT PORTFOLIO: (a) Non-income producing. (b) Cost for both financial statement and federal income tax purposes is the same.
ACRONYM NAME ------- ---- ADR American Depositary Receipt
See Notes to Financial Statements. 233 STATEMENT OF ASSETS AND LIABILITIES Stein Roe Growth Stock Fund, Variable Series / December 31, 2002 ASSETS: Investments, at cost $ 173,859,214 ------------- Investments, at value $ 145,687,500 Cash 570 Receivable for: Investments sold 244,458 Fund shares sold 5,129 Interest 58 Dividends 217,675 Expense reimbursement due from Distributor 4,984 Deferred Trustees' compensation plan 1,270 ------------- TOTAL ASSETS 146,161,644 ------------- LIABILITIES: Payable for: Investments purchased 597,330 Fund shares repurchased 357,406 Distributions--Class B 197 Management fee 69,121 Administration fee 19,854 Transfer agent fee 625 Pricing and bookkeeping fees 6,445 Trustees' fee 1,321 Deferred Trustees' fee 1,270 Other liabilities 50,791 ------------- TOTAL LIABILITIES 1,104,360 ------------- NET ASSETS $ 145,057,284 ============= COMPOSITION OF NET ASSETS: Paid-in capital $ 229,647,080 Undistributed net investment income 552,923 Accumulated net realized loss (56,971,005) Net unrealized depreciation on investments (28,171,714) ------------- NET ASSETS $ 145,057,284 ============= CLASS A: Net assets $ 123,014,837 Shares outstanding 6,315,973 ============= Net asset value per share $ 19.48 ============= CLASS B: Net assets $ 22,042,447 Shares outstanding 1,135,995 ============= Net asset value per share $ 19.40 =============
See Notes to Financial Statements. 234 STATEMENT OF OPERATIONS Stein Roe Growth Stock Fund, Variable Series For the Year Ended December 31, 2002 INVESTMENT INCOME: Dividends $ 2,012,289 Interest 101,318 ------------- Total Investment Income (net of foreign taxes withheld of $12,707) 2,113,607 ------------- EXPENSES: Management fee 971,607 Administration fee 291,482 Distribution fee--Class B 68,911 Pricing and bookkeeping fees 82,660 Transfer agent fee 7,500 Trustees' fee 12,924 Custody fee 7,564 Reports to shareholders 87,846 Other expenses 35,584 ------------- Total Expenses 1,566,078 Fees reimbursed by the Distributor--Class B (20,054) Custody earnings credit (114) ------------- Net Expenses 1,545,910 ------------- Net Investment Income 567,697 ------------- NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS: Net realized loss on investments (17,315,003) Net change in unrealized appreciation/depreciation on investments (55,764,886) ------------- Net Loss (73,079,889) ------------- Net Decrease in Net Assets from Operations $ (72,512,192) =============
See Notes to Financial Statements. 235 STATEMENT OF CHANGES IN NET ASSETS Stein Roe Growth Stock Fund, Variable Series
YEAR ENDED DECEMBER 31, ------------------------------ INCREASE (DECREASE) IN NET ASSETS: 2002 2001 ---------------------------------- ------------- ------------- OPERATIONS: Net investment income $ 567,697 $ 356,541 Net realized loss on investments (17,315,003) (39,281,274) Net change in unrealized appreciation/depreciation on investments (55,764,886) (55,958,778) ------------- ------------- Net Decrease from Operations (72,512,192) (94,883,511) ------------- ------------- DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income: Class A (370,940) (348) Class B -- (27) From net realized gains: Class A -- (52,643,708) Class B -- (4,073,383) ------------- ------------- Total Distributions Declared to Shareholders (370,940) (56,717,466) ------------- ------------- SHARE TRANSACTIONS: Class A: Subscriptions 6,190,686 10,436,046 Distributions reinvested 370,940 52,644,056 Redemptions (45,952,620) (74,629,600) ------------- ------------- Net Decrease (39,390,994) (11,549,498) ------------- ------------- Class B: Subscriptions 5,347,058 22,688,287 Distributions reinvested -- 4,073,410 Redemptions (5,774,260) (2,154,646) ------------- ------------- Net Increase (Decrease) (427,202) 24,607,051 ------------- ------------- Net Increase (Decrease) from Share Transactions (39,818,196) 13,057,553 ------------- ------------- Total Decrease in Net Assets (112,701,328) (138,543,424) NET ASSETS: Beginning of period 257,758,612 396,302,036 ------------- ------------- End of period (including undistributed net investment income of $552,923 and $356,166, respectively) $ 145,057,284 $ 257,758,612 ============= ============= CHANGES IN SHARES: Class A: Subscriptions 264,894 319,658 Issued for distributions reinvested 13,805 1,663,845 Redemptions (2,015,798) (2,356,289) ------------- ------------- Net Decrease (1,737,099) (372,786) ------------- ------------- Class B: Subscriptions 224,649 671,455 Issued for distributions reinvested -- 129,069 Redemptions (268,599) (70,430) ------------- ------------- Net Increase (Decrease) (43,950) 730,094 ------------- -------------
See Notes to Financial Statements. 236 NOTES TO FINANCIAL STATEMENTS Stein Roe Growth Stock Fund, Variable Series / December 31, 2002 NOTE 1. ORGANIZATION AND ACCOUNTING POLICIES ORGANIZATION--Stein Roe Growth Stock Fund, Variable Series (the "Fund"), a series of SteinRoe Variable Investment Trust (the "Trust"), is a diversified portfolio of a Massachusetts business trust, registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The Fund's investment goal is to seek long-term growth of capital. The Fund's capitalization consists of an unlimited number of shares of beneficial interest without par value that represent a separate series of the Trust. The Fund offers two classes of shares: Class A and Class B. Each share of a class represents an equal proportionate beneficial interest in that share class and, when issued and outstanding, is fully paid and nonassessable. Shareholders would be entitled to share proportionally in the net assets of their share class available for distribution to shareholders upon liquidation of the Fund. Shares of the Fund are available and are being marketed exclusively as a pooled funding vehicle for variable annuity contracts ("VA contracts") and Variable Life Insurance Policies ("VLI Policies") offered by the separate accounts of certain life insurance companies ("Participating Insurance Companies"). The Participating Insurance Companies and their separate accounts own all the shares of the Fund. Stein Roe & Farnham Incorporated (the "Manager") ("Stein Roe"), provides investment management, administrative and advisory services to the Fund pursuant to its Management Agreement with the Fund. The Manager also provides pricing and bookkeeping services to the Fund. Liberty Funds Distributor, Inc. ("LFD"), an affiliate of the Manager, serves as the principal underwriter of the Fund. The Manager and LFD are wholly-owned indirect subsidiaries of FleetBoston Financial Corporation ("FleetBoston"). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. SECURITY VALUATION AND TRANSACTIONS--Equity securities generally are valued at the last sale price or, in the case of unlisted or listed securities for which there were no sales during the day, at the current quoted bid price. Short-term obligations with a maturity of 60 days or less are valued at amortized cost. The values of all assets and liabilities quoted in foreign currencies are translated into U.S. dollars at that day's exchange rates. 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. Generally, trading in foreign securities is substantially completed each day at various times prior to the close of the New York Stock Exchange ("NYSE"). The values of such securities used in computing the net asset value of the Fund's shares are determined as of such times. Foreign currency exchange rates are also generally determined prior to the close of the NYSE. Occasionally, events affecting the values of such securities and such exchange rates may occur between the times at which they are determined and the close of the customary trading session of the NYSE which would not be reflected in the computation of the Fund's net asset value. If events materially affecting the value of such securities occur during such period, then these securities will be valued at their fair value as determined in good faith by or under the supervision of the Board of Trustees. 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. DETERMINATION OF CLASS NET ASSET VALUES AND FINANCIAL HIGHLIGHTS--All income, expenses (other than the Class B distribution fee), 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. The per share data was calculated using average shares outstanding during the period. In addition, Class B net investment income per share data and ratios reflect the distribution fee applicable to Class B shares only. 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. DISTRIBUTIONS TO SHAREHOLDERS--The Fund intends to distribute as income dividends or capital gains distributions, at least annually, substantially all of its net investment income and net profits realized from the sale of investments. All dividends and distributions are reinvested in additional shares of the Fund at net asset value as of the record date of the distribution. Income and capital gain 237 distributions are determined in accordance with federal income tax regulations. FOREIGN CURRENCY TRANSACTIONS--Net realized and unrealized gains (losses) on foreign currency transactions includes gains (losses) arising from the fluctuations in exchange rates between trade and settlement dates on securities transactions, gains (losses) arising from the disposition of foreign currency, and currency gains (losses) between the accrual and payment dates on dividends, interest income and foreign withholding taxes. The Fund does not distinguish that portion of gains (losses) on investments which is due to changes in foreign exchange rates from that which is due to changes in market prices of the investments. Such fluctuations are included with the net realized and unrealized gains (losses) on investments. OTHER--Interest income is recorded on the accrual basis. Corporate actions and dividend income are recorded on the ex-date (except for certain foreign securities which are recorded as soon after ex-date as the Fund becomes aware of such), net of non-reclaimable tax withholdings. Where a high level of uncertainty as to collection exists, income on securities is recorded net of all tax withholdings with any rebates recorded when received. The Fund's custodian takes possession through the federal book-entry system of securities collateralizing repurchase agreements. Collateral is marked-to-market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund. The Fund may experience costs and delays in liquidating the collateral if the issuer defaults or enters bankruptcy. NOTE 2. FEDERAL TAX INFORMATION Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from generally accepted accounting principles. Reclassifications are made to the Fund's capital accounts to reflect income and gains available for distribution (or available capital loss carryforwards) under income tax regulations. The tax character of distributions paid during 2002 and 2001 was as follows:
2002 2001 ---------- ------------- Distributions paid from: Ordinary income $ 370,940 $ 375 Long-term capital gains -- 56,717,091 ---------- ------------- $ 370,940 $ 56,717,466 ========== =============
As of December 31, 2002, the components of distributable earnings on a tax basis were as follows:
UNDISTRIBUTED UNREALIZED ORDINARY INCOME DEPRECIATION --------------- -------------- $ 555,144 $ (28,171,714)
The following capital loss carryforwards are available to reduce taxable income arising from future net realized gains on investments, if any, to the extent permitted by the Internal Revenue Code:
YEAR OF CAPITAL LOSS EXPIRATION CARRYFORWARD ---------- ------------ 2009 $ 28,434,611 2010 28,364,195 ------------ $ 56,798,806 ============
Under current tax rules, certain capital losses realized after October 31 may be deferred and treated as occurring on the first day of the following fiscal year. As of December 31, 2002, for federal income tax purposes, post October losses of $172,199 were deferred to January 1, 2003. NOTE 3. FEES AND COMPENSATION PAID TO AFFILIATES MANAGEMENT AND ADMINISTRATIVE FEES--The Manager receives monthly fees equal to 0.50% and 0.15% annually of the Fund's average daily net assets for management and administrative services, respectively. PRICING AND BOOKKEEPING FEES--The Manager is responsible for providing pricing and bookkeeping services to the Fund under a Pricing and Bookkeeping Agreement. Under a separate agreement (the "Outsourcing Agreement"), the Manager has delegated those functions to State Street Bank & Trust Company ("State Street"). The Manager pays fees to State Street under the Outsourcing Agreement. Under its pricing and bookkeeping agreement with the Fund, the Manager 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 December 31, 2002, the net asset based fee rate was 0.036%. The Fund also pays out-of-pocket costs for pricing services. TRANSFER AGENT FEE--Liberty Funds Services, Inc. (the "Transfer Agent"), an affiliate of the Manager, provides shareholder services for an annual rate of $7,500. 238 DISTRIBUTION FEE--The Fund has adopted a 12b-1 plan, which requires it to pay LFD a monthly distribution fee equal to 0.25% annually of Class B average daily net assets as of the 20th of each month. EXPENSE LIMITS--The Manager has voluntarily agreed to reimburse all expenses, including management fees, but excluding interest, taxes, distribution fees, brokerage and extraordinary expenses of the Fund in excess of 0.80% annually of the Fund's average daily net assets. LFD has voluntarily agreed to reimburse the Fund's Class B share distribution fee in excess of 0.15% when the total operating expenses of the Fund applicable to Class B shares, including distribution fees, are in excess of 0.95% annually of Class B average daily net assets. These arrangements may be terminated or modified by the Manager or LFD at any time. OTHER--The Fund pays no compensation to its officers, all of whom are employees of Stein Roe 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 $114 of custody fees were reduced by balance credits for the year ended December 31, 2002. The Fund could have invested a portion of the assets utilized in connection with the expense offset arrangement in an income-producing asset if it had not entered into such an agreement. NOTE 4. PORTFOLIO INFORMATION INVESTMENT ACTIVITY--For the year ended December 31, 2002, purchases and sales of investments, other than short-term obligations, were $129,271,335 and $167,940,461, respectively. Unrealized appreciation (depreciation) at December 31, 2002, based on cost of investments for federal income tax purposes, was: Gross unrealized appreciation $ 17,838,427 Gross unrealized depreciation (46,010,141) -------------- Net unrealized depreciation $ (28,171,714) ==============
OTHER--There are certain additional risks involved when investing in foreign securities that are not inherent with investments in domestic securities. These risks may involve foreign currency exchange rate fluctuations, adverse political and economic developments and the possible prevention of foreign currency exchange or the imposition of other foreign governmental laws or restrictions. The Fund may focus its investments in certain industries, subjecting it to greater risk than a fund that is more diversified. NOTE 5. OTHER RELATED PARTY TRANSACTIONS For the year ended December 31, 2002, the Fund used AlphaTrade Inc. and Fleet Securities, Inc., both wholly-owned subsidiaries of Colonial, as brokers. Total commissions paid to AlphaTrade Inc. and Fleet Securities, Inc. during the year were $3,168 and $2,500, respectively. 239 FINANCIAL HIGHLIGHTS Stein Roe Growth Stock Fund, Variable Series--Class B Shares Selected data for a share outstanding throughout each period is as follows:
YEAR ENDED PERIOD DECEMBER 31, ENDED ---------------------------- DECEMBER 31, 2002 2001 2000 (a) --------- ---------- ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 27.82 $ 44.59 $ 50.85 --------- ---------- ------------ INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) (b) 0.03 (0.02) (0.12) Net realized and unrealized loss on investments (8.45) (10.27) (6.14) --------- ---------- ------------ Total from Investment Operations (8.42) (10.29) (6.26) --------- ---------- ------------ LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income -- --(c) -- From net realized gains -- (6.48) -- --------- ---------- ------------ Total Distributions Declared to Shareholders -- (6.48) -- --------- ---------- ------------ NET ASSET VALUE, END OF PERIOD $ 19.40 $ 27.82 $ 44.59 ========= ========== ============ Total return (d)(e) (30.27)%(f) (24.80)%(f) (12.31)%(g) RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA: Expenses (h) 0.95% 0.95% 0.95%(i) Net investment income (loss) (h) 0.14% (0.06)% (0.43)%(i) Waiver/reimbursement 0.07% 0.06% -- Portfolio turnover rate 68% 57% 65% Net assets, end of period (000's) $ 22,042 $ 32,830 $ 20,059
(a) For the period from commencement of operations to December 31, 2000 (b) Per share data was calculated using average shares outstanding during the period. (c) Rounds to less than $0.01 per share. (d) Total return at net asset value assuming all distributions reinvested. (e) Total return figure does not include any insurance company charges associated with a variable annuity. If included, total return would be reduced. (f) Had the Distributor not waived or reimbursed a portion of expenses, total return would have been reduced. (g) Not annualized. (h) The benefits derived from custody credits and directed brokerage arrangements, if applicable, had an impact of less than 0.01%. (i) Annualized. 240 REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of SteinRoe Variable Investment Trust and the Class B Shareholders of Stein Roe Growth Stock Fund, Variable Series In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio, and the related statements of operations and of changes in net assets and the Class B financial highlights present fairly, in all material respects, the financial position of Stein Roe Growth Stock Fund, Variable Series (the "Fund") (a series of SteinRoe Variable Investment Trust) at December 31, 2002, and the results of its operations, the changes in its net assets and the Class B financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and the Class B financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2002 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts February 12, 2003 241 UNAUDITED INFORMATION FEDERAL INCOME TAX INFORMATION 100% of the ordinary income distributed by the Fund, for the year ended December 31, 2002, qualifies for the corporate dividends received deduction. 242 PORTFOLIO MANAGER'S DISCUSSION Stein Roe Money Market Fund, Variable Series / December 31, 2002 Stein Roe Money Market Fund, Variable Series seeks maximum current income, consistent with capital preservation and the maintenance of liquidity. Karen M. Arneil, senior vice president of Stein Roe & Farnham Incorporated, has been the fund's portfolio manager since July 1, 2002. SHORT-TERM INTEREST RATES START LOW AND MOVE LOWER As the US economy vacillated between recovery and recession, the Federal Reserve Board held the federal funds rate--the target overnight interest rate at which commercial banks lend money to each other--at 1.75% throughout most of the calendar year. This rate is used by the Federal Reserve to help manage economic growth. When the economy seemed in danger of slipping back into recession near the end of the year, the Fed surprised many market observers by dropping the federal funds rate by one-half of one-percent to 1.25%, a new 40-year low. Lower short-term interest rates reduced the income earned by money market funds. Concerns about liquidity increased, as money funds experienced outflows as investors sought higher returns from alternative investments. As the result of weak economic conditions, some corporate debt was downgraded during the year and the availability of high quality paper, which money market funds seek to invest in, decreased. (The fund did not own any of the downgraded securities.) In this environment, we diversified by investing in securities issued by US government agencies. MANAGING AVERAGE MATURITY TO CAPTURE YIELD Early in the year, we sought to raise the fund's income level by purchasing high quality longer-term money market securities. In January, we extended the fund's average maturity to 55 days. This strategy helped performance by securing above-market yields on a portion of the portfolio as interest rates declined. However, as the year unfolded, it became harder to determine the direction interest rates would take. At mid-year, we lowered the average maturity to 34 days in order to position the fund to benefit from a widely anticipated interest-rate increase. When it became apparent that the next rate move would be a decrease, we sought the highest yields possible within the quality parameters of the fund by extending the average maturity once again and by investing in government agency paper (16.5% of the portfolio at year-end). We raised the fund's average maturity to a high of 69 days in October. The fund's average maturity was at 56 days at the end of the year. PRESERVATION AND LIQUIDITY IN A LOW YIELD ENVIRONMENT Believing that the Fed will hold rates at very low levels, we are keeping an eye on uncertainties in other key areas that could influence the money markets in 2003--consumer confidence, the performance and health of the US corporate marketplace and developments on the international front. Because market sentiment is greatly affected by these variables, we expect to follow a conservative strategy by continuing to invest in high quality securities to preserve capital and maintain liquidity. -------------------- Economic and market conditions can frequently change. There is no assurance that the trends described here will continue or commence. An investment in Stein Roe Money Market Fund, Variable Series is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund. Holdings are disclosed as of December 31, 2002, and are subject to change. 243 PERFORMANCE INFORMATION Stein Roe Money Market Fund, Variable Series / December 31, 2002 AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 2002 (%)
1-YEAR 5-YEAR 10-YEAR ---------------------------------------------------------- The fund (1/1/89) 1.23 4.16 4.30 US Consumer Price Index 2.43 2.33 2.47
Inception date of the fund is in parentheses.
NET ASSET VALUE PER SHARE ($) 12/31/01 12/31/02 --------------------------------------------------------------- The fund 1.00 1.00
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 SHARES. Total return performance includes changes in share price and reinvestment of all distributions. The US Consumer Price Index is the government's measure of retail inflation. MUTUAL FUND PERFORMANCE CHANGES OVER TIME. CURRENT RETURNS FOR THE FUND MAY BE DIFFERENT THAN THAT SHOWN. Performance numbers reflect all fund expenses, but do not include any insurance charges imposed by your insurance company's separate accounts. If performance included the effect of these additional charges, it would be lower. 244 INVESTMENT PORTFOLIO Stein Roe Money Market Fund, Variable Series / December 31, 2002
AMORTIZED PAR COST ------------ ------------ CERTIFICATES OF DEPOSIT--5.4% Royal Bank of Canada, 1.330% 02/19/03 $ 4,000,000 $ 4,000,000 State Street Bank & Trust Co., 1.320% 02/10/03 10,000,00 10,000,000 ------------ TOTAL CERTIFICATES OF DEPOSIT (cost of $14,000,000) 14,000,000 ------------ COMMERCIAL PAPER--62.3% ABN Amro NA Finance, Inc. 1.330% 01/21/03 5,000,000 4,996,306 Amercian Express Credit Corp. 1.320% 01/24/03 10,000,00 9,991,567 Amstel Funding Corp., 1.780% 01/21/03 (a) 10,000,00 9,990,111 CDC Commercial Paper Corp., 1.330% 02/7/03 (a) 2,700,000 2,696,309 CDC Commercial Paper Corp., 1.340% 02/20/03 (a) 1,500,000 1,497,208 Ciesco LP 1.750% 01/10/03 (a) 10,000,00 9,995,625 CXC, LLC, 1.350% 02/06/03 (a) 10,000,00 9,986,500 Dexia Delaware LLC, 1.330% 02/12/03 2,000,000 1,996,897 Dexia Delaware LLC, 1.310% 03/06/03 5,000,000 4,988,356 Dexia Delaware LLC, 1.320% 03/10/03 3,000,000 2,992,520 Enterprise Funding Corp., 1.350% 01/14/03 (a) 10,000,00 9,995,125 Fountain Square Comercial Funding Corp., 1.380% 03/03/03 (a) 4,751,000 4,739,891 Fountain Square Commercial Funding Corp., 1.340% 03/18/2003 (a) 3,105,000 3,096,216 General Electric Capital Corp., 1.300% 01/13/03 10,000,00 9,995,667 Goldman Sachs Group, Inc., 1.800% 01/06/03 10,000,00 9,997,500 Govco Inc., 1.340% 01/16/03 (a) 10,000,00 9,994,417 Lloyds TSB Bank plc, 1.310% 03/05/03 5,000,000 4,988,537 Nestle Capital Corp., 1.320% 06/05/03 (a) 5,000,000 4,971,583 Old Line Funding Corp., 1.400% 01/15/03 (a) 4,874,000 4,871,346 Old Line Funding Corp., 1.360% 01/21/03 (a) 6,000,000 5,995,467 Preferred Receivables Funding Corp., 1.340% 02/06/03 (a) 6,000,000 5,991,960 Thames Asset Global, 1.800% 01/15/03 (a 7,000,000 6,995,100 Variable Funding Capital Corp., 1.360% 01/21/03 (a) 5,588,000 5,583,778 Variable Funding Capital Corp., 1.290% 03/05/03 (a) 5,000,000 4,988,713 Windmill Funding Corp., 1.790% 01/07/03 (a) 5,000,000 4,998,508 Windmill Funding Corp., 1.360% 01/17/03 (a) $ 5,000,000 $ 4,996,978 ------------ TOTAL COMMERCIAL PAPER (cost of $161,332,185) 161,332,185 ------------ CORPORATE BONDS--3.9% BANKING & FINANCIAL SERVICES--3.9% OTHER BANKING & FINANCIAL--3.9% Morgan Stanley Dean Witter & Co., 7.125% 01/15/03 (cost of $10,018,129) 10,000,000 10,018,129 ------------ U.S. GOVERNMENT AGENCIES--16.2% Federal Home Loan Bank, 1.800% 11/05/03 1,000,000 1,000,000 Federal Home Loan Bank, 1.850% 11/10/03 10,000,000 10,000,000 Federal Home Loan Bank, 1.810% 11/12/03 10,000,000 10,000,000 Federal Home Loan Bank, 2.000% 11/18/03 1,000,000 1,000,000 Federal National Mortgage Association, 5.750% 04/15/03 10,000,000 10,111,325 Federal National Mortgage Association, Discount Note, 1.270% 02/26/03 10,000,000 9,980,089 ------------ TOTAL U.S. GOVERNMENT AGENCIES (cost of $42,091,414) 42,091,414 ------------ SHORT-TERM OBLIGATION--10.7% Repurchase agreement with State Street Bank & Trust Co., dated 12/31/02, due 01/02/03 at 1.030%, collateralized by a Federal Home Loan Mortgage Corp. maturing 01/30/04, market value $28,170,211 (repurchase proceeds $27,617,580) (cost of $27,616,000) 27,616,000 27,616,000 ------------ TOTAL INVESTMENTS--98.5% (cost of $255,057,728) (b) 255,057,728 ------------ OTHER ASSETS & LIABILITIES, NET--1.5% 3,844,999 ------------ NET ASSETS--100.0% $258,902,727 ============
NOTES TO INVESTMENT PORTFOLIO: (a) Represents private placement securities exempt from registration by Section 4(2) of the Securities Act of 1933. These securities generally are issued to investors who agree that they are purchasing the securities for investments and not for public distribution. Any resale by the Fund must be in an exempt transaction, normally to other institutional investors. At December 31, 2002, the aggregate amortized cost of the Fund's private placement securities was $111,384,835 which represents 43.0% of net assets. None of these securities were deemed illiquid. (b) Cost for both financial statement and federal income tax purposes is the same. The interest rates listed above reflect the effective rate at the date of purchase. See Notes to Financial Statements. 245 STATEMENT OF ASSETS AND LIABILITIES Stein Roe Money Market Fund, Variable Series / December 31, 2002 ASSETS: Investments, at cost (includes short-term obligation) $ 255,057,728 ------------- Investments, at value $ 227,441,728 Repurchase Agreement 27,616,000 Cash 788 Receivable for: Fund shares sold 3,542,994 Interest 551,624 Deferred Trustees' compensation plan 912 Other assets 2,670 ------------- TOTAL ASSETS 259,156,716 ------------- LIABILITIES: Payable for Fund shares repurchased 60,465 Management fee 72,528 Administration fee 31,012 Transfer agent fee 625 Pricing and bookkeeping fees 9,443 Trustees' fee 39 Audit fee 19,725 Reports to shareholders 56,053 Deferred Trustees' fee 912 Other liabilities 3,187 ------------- TOTAL LIABILITIES 253,989 ------------- NET ASSETS $ 258,902,727 ============= COMPOSITION OF NET ASSETS: Paid-in capital $ 258,902,727 ============= NET ASSETS $ 258,902,727 ============= Shares outstanding 258,943,876 ============= Net asset value per share $ 1.00 =============
See Notes to Financial Statements. 246 STATEMENT OF OPERATIONS Stein Roe Money Market Fund, Variable Series For the Year Ended December 31, 2002 INVESTMENT INCOME: Interest $ 5,001,852 ------------ EXPENSES: Management fee 930,449 Administration fee 398,764 Pricing and bookkeeping fees 114,852 Transfer agent fee 7,500 Trustees' fee 13,614 Custody fee 11,630 Reports to shareholders 137,349 Other expenses 108,311 ------------ Total Expenses 1,722,469 Custody earnings credit (1,916) ------------ Net Expenses 1,720,553 ------------ Net Investment Income $ 3,281,299 ------------ Increase in Net Assets from Operations $ 3,281,299 ============
See Notes to Financial Statements. 247 STATEMENT OF CHANGES IN NET ASSETS Stein Roe Money Market Fund, Variable Series
YEAR ENDED DECEMBER 31, ---------------------------------- INCREASE (DECREASE) IN NET ASSETS: 2002 2001 ---------------------------------- --------------- --------------- OPERATIONS: Net investment income $ 3,281,299 $ 8,513,184 --------------- --------------- DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (3,321,856) (8,513,184) --------------- --------------- SHARE TRANSACTIONS: Subscriptions 708,951,720 1,433,463,692 Distributions reinvested 3,321,856 8,513,184 Redemptions (720,315,374) (1,387,308,976) --------------- --------------- Net Increase (Decrease) from Share Transactions (8,041,798) 54,667,900 --------------- --------------- Total Increase (Decrease) in Net Assets (8,082,355) 54,667,900 NET ASSETS: Beginning of period 266,985,082 212,317,182 --------------- --------------- End of period $ 258,902,727 $ 266,985,082 =============== =============== CHANGES IN SHARES: Subscriptions 708,951,720 1,433,463,691 Issued for distributions reinvested 3,321,856 8,513,184 Redemptions (720,313,147) (1,387,314,814) --------------- --------------- Net Increase (Decrease) (8,039,571) 54,662,061 --------------- ---------------
See Notes to Financial Statements. 248 NOTES TO FINANCIAL STATEMENTS Stein Roe Money Market Fund, Variable Series / December 31, 2002 NOTE 1. ORGANIZATION AND ACCOUNTING POLICIES ORGANIZATION--Stein Roe Money Market Fund, Variable Series (the "Fund"), a series of SteinRoe Variable Investment Trust (the "Trust"), is a diversified portfolio of a Massachusetts business trust, registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The Fund's investment goal is to seek high current income consistent with capital preservation and maintenance of liquidity. The Fund's capitalization consists of an unlimited number of shares of beneficial interest without par value that represent a separate series of the Trust. Each share of the Fund represents an equal proportionate beneficial interest in the Fund and, when issued and outstanding, is fully paid and nonassessable. Shareholders would be entitled to share proportionally in the net assets of the Fund available for distribution to shareholders upon liquidation of the Fund. Shares of the Fund are available and are being marketed exclusively as a pooled funding vehicle for variable annuity contracts ("VA contracts") and Variable Life Insurance Policies ("VLI Policies") offered by the separate accounts of certain life insurance companies ("Participating Insurance Companies"). The Participating Insurance Companies and their separate accounts own all the shares of the Fund. Stein Roe & Farnham Incorporated (the "Manager") ("Stein Roe"), provides investment management, administrative and advisory services to the Fund pursuant to its Management Agreement with the Fund. The Manager also provides pricing and bookkeeping services to the Fund. Liberty Funds Distributor, Inc. ("LFD"), an affiliate of the Manager, serves as the principal underwriter of the Fund. The Manager and LFD are wholly-owned indirect subsidiaries of FleetBoston Financial Corporation ("FleetBoston"). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. SECURITY VALUATION AND TRANSACTIONS--The Fund values securities utilizing the amortized cost valuation technique permitted in accordance with Rule 2a-7 under the Investment Company Act of 1940, which requires the Fund to comply with certain conditions. This technique involves valuing a portfolio security initially at its cost and thereafter assuming a constant amortization to maturity of any discount or premium. 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. INTEREST INCOME, DEBT DISCOUNT AND PREMIUM-- Interest income, including discount accretion and premium amortization, is recorded daily on the accrual basis. DISTRIBUTIONS TO SHAREHOLDERS--The Fund declares dividends daily and reinvests all dividends declared monthly in additional shares at net asset value. OTHER--The Fund's custodian takes possession through the federal book-entry system of securities collateralizing repurchase agreements. Collateral is marked-to-market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund. The Fund may experience costs and delays in liquidating the collateral if the issuer defaults or enters bankruptcy. NOTE 2. FEDERAL TAX INFORMATION Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from generally accepted accounting principles. Reclassifications are made to the Fund's capital accounts to reflect income and gains available for distribution under income tax regulations. For the year ended December 31, 2002, permanent items identified and reclassified among the components of net assets are as follows:
UNDISTRIBUTED NET INVESTMENT INCOME PAID-IN CAPITAL ----------------------------------- --------------- $40,557 $(40,557)
Net investment income, net realized gains (losses) and net assets were not affected by this reclassification. The tax character of distributions paid during 2002 and 2001 was as follows:
2002 2001 -------- -------- Distributions paid from: Ordinary income $3,321,856 $8,513,184
NOTE 3. FEES AND COMPENSATION PAID TO AFFILIATES MANAGEMENT AND ADMINISTRATIVE FEES--The Manager receives monthly fees equal to 0.35% and 0.15% annually of the Fund's average daily net assets for management and administrative services, respectively. 249 PRICING AND BOOKKEEPING FEES--The Manager is responsible for providing pricing and bookkeeping services to the Fund under a Pricing and Bookkeeping Agreement. Under a separate agreement (the "Outsourcing Agreement"), the Manager has delegated those functions to State Street Bank & Trust Company ("State Street"). The Manager pays fees to State Street under the Outsourcing Agreement. Under its pricing and bookkeeping agreement with the Fund, the Manager 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 December 31, 2002, the net asset based fee rate was 0.036%. The Fund also pays out-of-pocket costs for pricing services. TRANSFER AGENT FEE--Liberty Funds Services, Inc. (the "Transfer Agent"), an affiliate of the Manager, provides shareholder services for an annual rate of $7,500. EXPENSE LIMITS--The Manager has voluntarily agreed to reimburse all expenses, including management fees, but excluding interest, taxes, brokerage and extraordinary expenses of the Fund in excess of 0.65% annually of the Fund's average daily net assets. OTHER--The Fund pays no compensation to its officers, all of whom are employees of Stein Roe 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 $1,916 of custody fees were reduced by balance credits for the year ended December 31, 2002. The Fund could have invested a portion of the assets utilized in connection with the expense offset arrangement in an income-producing asset if it had not entered into such an agreement. 250 FINANCIAL HIGHLIGHTS Stein Roe Money Market Fund, Variable Series Selected data for a share outstanding throughout each period is as follows:
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 ------------ ------------ ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 ------------ ------------ ------------ ------------ ------------ INCOME FROM INVESTMENT OPERATIONS: Net investment income (a) 0.012 0.036 0.059 0.047 0.050 ------------ ------------ ------------ ------------ ------------ LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.012) (0.036) (0.059) (0.047) (0.050) ------------ ------------ ------------ ------------ ------------ NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 ============ ============ ============ ============ ============ Total return (b)(c) 1.23% 3.64% 6.05% 4.79% 5.17% RATIOS TO AVERAGE NET ASSETS/ SUPPLEMENTAL DATA: Expenses (d) 0.65% 0.56% 0.56% 0.52%(e) 0.62% Net investment income (d) 1.25% 3.45% 5.90% 4.75%(e) 4.99% Net assets, end of period (000's) $ 258,903 $ 266,985 $ 212,317 $ 170,539 $ 101,340
(a) Per share data was calculated using average shares outstanding during the period. (b) Total return at net asset value assuming all distributions reinvested. (c) Total return figure does not include any insurance company charges associated with a variable annuity. If included, total return would be reduced. (d) The benefits derived from custody credits and directed brokerage arrangements, if applicable, had an impact of less than 0.01%. (e) During the year ended December 31, 1999, the Fund experienced a one-time reduction in its expenses of two basis points as a result of expenses accrued in a prior period. The Fund's ratios disclosed above reflect the actual rate at which expenses were incurred throughout the fiscal year without the reduction. 251 REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of SteinRoe Variable Investment Trust and the Shareholders of Stein Roe Money Market Fund, Variable Series In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Stein Roe Money Market Fund, Variable Series(the "Fund") (a series of SteinRoe Variable Investment Trust) at December 31, 2002, and the results of its operations for the year then ended, the changes in its net assets for the two years then ended, and the financial highlights for the four years then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2002 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. The financial highlights for the year ended December 31, 1998 were audited by other independent accountants whose report dated February 12, 1999 expressed an unqualified opinion on those financial highlights. PricewaterhouseCoopers LLP Boston, Massachusetts February 12, 2003 252 TRUSTEES SteinRoe Variable Investment Trust The Trustees serve terms of indefinite duration. The names, addresses and ages of the Trustees and officers of 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.
YEAR FIRST NUMBER OF ELECTED OR PORTFOLIOS IN FUND OTHER POSITION WITH APPOINTED PRINCIPAL OCCUPATION(S) COMPLEX OVERSEEN DIRECTORSHIPS NAME, ADDRESS AND AGE LIBERTY FUNDS(1) TO OFFICE DURING PAST FIVE YEARS BY TRUSTEE HELD ---------------------------------------------------------------------------------------------------------------------------------- DISINTERESTED TRUSTEES Douglas A. Hacker (age 47) Trustee 1996 Executive Vice 103 None c/o Liberty Funds Group LLC President-Strategy of One Financial Center United Airlines (airline) Boston, MA 02111 since December 2002 (formerly President of UAL Loyalty Services (airline) from September 2001 to December 2002; (Executive Vice President and Chief Financial Officer from March, 1993 to September 2001 of United Airlines); Senior Vice President and Chief Financial Officer of UAL, Inc. prior thereto Janet Langford Kelly (age 45) Trustee 1996 Executive Vice 103 None c/o Liberty Funds Group LLC President-Corporate One Financial Center Development and Boston, MA 02111 Administration, General Counsel and Secretary, Kellogg Company (food manufacturer), since September 1999; Senior Vice President, Secretary and General Counsel, Sara Lee Corporation (branded, packaged, consumer-products manufacturer) prior thereto Richard W. Lowry (age 66) Trustee 1995 Private Investor since 1987 105*** None c/o Liberty Funds Group LLC (formerly Chairman and One Financial Center Chief Executive Officer, Boston, MA 02111 U.S. Plywood Corporation (building)) products manufacturer Salvatore Macera (age 71) Trustee 1998 Private Investor since 1981 103 None c/o Liberty Funds Group LLC (formerly Executive Vice One Financial Center President and Director of Boston, MA 02111 Itek Corporation (electronics) from 1975 to 1981) Charles R. Nelson (age 60) Trustee 1981 Professor of Economics, 118* None c/o Liberty Funds Group LLC University of Washington, One Financial Center since January 1976; Ford Boston, MA 02111 and Louisa Van Voorhis Professor of Political Economy, University of 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; Trustee, Columbia Funds since July 2002; consultant on econometric and statistical matters John J. Neuhauser (age 59) Trustee 1985 Academic Vice President and 105*** Saucony, Inc. c/o Liberty Funds Group LLC Dean of Faculties since (athletic One Financial Center August 1999, Boston College footwear) Boston, MA 02111 (formerly Dean, Boston and SkillSoft College School of Corp. Management from (e-learning) September 1977 to September 1999) Thomas E. Stitzel (age 67) Trustee 1998 Business Consultant since 103 None c/o Liberty Funds Group LLC 1999 (formerly Professor of One Financial Center Finance from 1975 to 1999) Boston, MA 02111 and Dean from 1977 to 1991, College of Business, Boise State University); Chartered Financial Analyst
253
YEAR FIRST NUMBER OF ELECTED OR PORTFOLIOS IN FUND OTHER POSITION WITH APPOINTED PRINCIPAL OCCUPATION(S) COMPLEX OVERSEEN DIRECTORSHIPS NAME, ADDRESS AND AGE LIBERTY FUNDS(1) TO OFFICE DURING PAST FIVE YEARS BY TRUSTEE HELD ----------------------------------------------------------------------------------------------------------------------------------- DISINTERESTED TRUSTEES (CONTINUED) Thomas C. Theobald (age 65) Trustee 1998 Managing Director, William 103 Anixter c/o Liberty Funds Group LLC Blair Capital Partners International One Financial Center (private equity investing) (network support Boston, MA 02111 since September 1994 equipment (formerly Chief Executive distributor, Officer and Chairman of the Jones Lang Board of Directors, LaSalle (real Continental Bank estate management Corporation prior thereto) services) and MONY Group (life insurance) Anne-Lee Verville (age 57) Trustee 1998 Author and speaker on 103 Chairman of the c/o Liberty Funds Group LLC educational systems needs Board of One Financial Center (formerly General Manager, Directors, Enesco Boston, MA 02111 Global Education Industry Group, Inc. from 1994 to 1997, and (designer, President, Applications importer and Solutions Division from distributor of 1991 to 1994, IBM giftware and Corporation (global collectibles) education and global applications)) INTERESTED TRUSTEES William E. Mayer** (age 62) Trustee 1994 Managing Partner, Park 105 Lee Enterprises c/o Liberty Funds Group LLC Avenue Equity Partners (print media), WR One Financial Center (private equity) since Hambrecht + Co. Boston, MA 02111 February 1999 (formerly (financial Founding Partner, service provider) Development Capital LLC and First Health from November 1996 to (health care) February 1999; Dean and Professor, College of Business and Management, University of Maryland from October 1992 to November 1996) Joseph R. Palombo** (age 49) Trustee and 2000 Cheif Operating Officer of 103 None One Financial Center Chairman of the Columbia Management Group, Boston, MA 02111 Board Inc. (Columbia Management Group since November 2001; 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) since April 1999; Executive Vice President and Director of Colonial Management Associates, Inc. since April 1999; Director of Stein Roe since September 2000; Trustee and Chairman of the Board of Stein Roe Mutual Funds since October 2000; Manager of Stein Roe Floating Rate Limited Liability Company since October 2000; Vice President of Galaxy Funds since September 2002; (formerly Vice President of 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 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. * In addition to serving as a disinterested trustee of Liberty Funds, Mr. Nelson serves as a disinterested director of Columbia Funds, currently consisting of 15 funds, which are advised by an affiliate of the Advisor. ** 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., a registered broker-dealer. Mr. Palombo is an interested person as an employee of an affiliate of the Advisor. *** In addition to serving as a trustee of Liberty Funds, Mr. Lowry, Mr. Neuhauser and Mr. Mayer each serve as a director/trustee of Liberty All-Star Funds, currently consisting of 2 funds, which are advised by an affiliate of the Advisor. 254 OFFICERS SteinRoe Variable Investment Trust
YEAR FIRST ELECTED OR POSITION WITH APPOINTED NAME, ADDRESS AND AGE LIBERTY FUNDS(1) TO OFFICE PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS ---------------------------------------------------------------------------------------------------------------------------------- Keith T. Banks (age 47) President 2001 President of Liberty Funds since November 2001; Columbia Management Group, Inc. President, Chief Investment Officer and Chief Executive 590 Madison Avenue, 36th Floor Officer of Columbia Management Group or its predecessor New York, NY 10022 since August 2000 (formerly Managing Director and Head of U.S. Equity, J.P. Morgan Investment Management from November 1996 to August 2000); President of Galaxy Funds since September 2002 Vicki L. Benjamin (age 41) Chief 2001 Controller of Liberty Funds, Stein Roe Funds and Liberty One Financial Center Accounting All-Star Funds since May 2002; Chief Accounting Officer Boston, MA 02111 Officer of Liberty Funds, Stein Roe Funds and Liberty All-Star and Controller Funds since June 2001; Controller and Chief Accounting Officer of 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 38) Treasurer 2000 Treasurer of Liberty Funds and Liberty All-Star Funds One Financial Center since December 2000 (formerly Controller of the Liberty Boston, MA 02111 Funds and Liberty All-Star Funds from February 1998 to October 2000); Treasurer of Stein Roe Funds since February 2001 (formerly Controller from May 2000 to February 2001); Treasurer of Galaxy Funds since September 2002 (formerly Vice President from April 2000 to January 2001; Vice President of Colonial Management Associates, Inc. from February 1998 to October 2000; Senior Tax Manager, Coopers & Lybrand, LLP from April 1996 to January 1998) Jean S. Loewenberg (age 57) Secretary 2002 Secretary of Liberty Funds, Stein Roe Funds and Liberty One Financial Center All-Star Funds since February 2002; General Counsel of Boston, MA 02111 Columbia Management Group since December 2001; Senior Vice President since November 1996, Assistant General Counsel since September 2002 of Fleet National Bank (formerly Senior Vice President and Group Senior Counsel of Fleet National Bank from November 1996 to September 2002)
255 STEINROE VARIABLE INVESTMENT TRUST INVESTMENT MANAGER AND ADMINISTRATOR Stein Roe & Farnham Incorporated One South Wacker Drive Chicago, IL 60606 TRANSFER AGENT Liberty Funds Services, Inc. PO Box 8081 Boston, MA 02266-8081 256 WANGER ADVISORS TRUST Wanger Advisors Trust 2002 Annual Report [GRAPHIC] PLASTICS The movie "The Graduate" came out in 1967. There were several famous lines in the film, including Dustin Hoffman as Ben Braddock telling Anne Bancroft, "Mrs. Robinson, you're trying to seduce me." (Good forecast!) Another was a poolside conversation between a Mr. McGuire and Ben. Mr. McGuire: "Ben, I want to say just one word to you - just one word." Ben: "Yes sir." Mr. McGuire, gravely: "Plastics." Ben: "Exactly how do you mean?" Mr. McGuire: "There's a great future in plastics. Think about it. Will you think about it?"(1) This instantly became the best one-liner of the decade. The question is, why was it funny? At the time, guitarist and potter were respected vocations. Looking for a means to make real money, perhaps by making plastics, was considered selling out. There was no shortage of musicians or artisans in the 60s. Most ended up stowing the guitar in an attic when a prospective spouse said, "Yeah, you're cool, but no way will I shack up with somebody who doesn't have a job. How do you intend to support our family?" How good was the advice about plastics? In fact, from 1980 to 2001 the plastics industry expanded steadily at a rate of 3.7%, a very satisfactory growth rate. The value of shipments for the plastics industry in 2000 was $132 billion and still growing. The amount of plastic use per person in the United States has more than doubled over the last 20 years, and the rest of the world is starting to catch up. Plastics technology has improved too. The LEXAN polycarbonate shell for your laptop or cell phone is a highly sophisticated component. So, there was nothing wrong with Mr. McGuire's idea. It was a whole lot better than telling Ben to look for work in the steel, textile or coal industries. Making good long-term forecasts is quite complicated. It's interesting to go back and find those who attempted to predict what the future might bring and see how they did. One guy who was brave enough to make a 100-year forecast was the famous economist John Maynard Keynes. He wrote an essay in 1930 called, "Economic Possibilities for our Grandchildren"(2) that was bold, interesting and likely to be correct. 1930 was not a happy year. The boom of the Twenties turned into the Great Depression. The banking system was collapsing. For the next half dozen years, the problems of unemployment, stagnation and poverty seemed overwhelming. Political revolution, either fascist or communist, was a real threat. Still, Keynes looked across the decades to a time of prosperity. Using the power of compound interest, he calculated that in the year 2030 per capita GDP might well be eight times what it was in 1930, assuming stable population and no important wars. The assumption of a stable population proved to be fairly accurate in Europe, North America and Japan, and generally incorrect for most of the rest of the world. The assumption of no important wars was violated in the late 1930s but despite that unfortunate event, the 2030 projections are still on target. Per capita GDP in the United States ($22,000) is four times what it was in 1929 and another doubling in the next 28 years is certainly plausible. Keynes' belief in future economic growth developed a concept barely over a century old at that time. He saw the great age of scientific and technological innovations as a harbinger of even greater things to come. He listed 15 areas that he believed would drive future economic growth. Power generation (coal, steam, electricity and petroleum) and materials (steel, rubber, cotton and the chemical industries) dominated his list, taking eight spots. Another three focused on machinery (automatic machinery, mass production and printing). Communication, in the form of the wireless, received just one position in the 15. He gave credit for recent advances to scientists such as Newton, Darwin and Einstein and "thousands of other things and men." He thought that future discoveries and inventions, in a peaceful society without excessive population growth, would be able to solve the economic problem of scarcity that had plagued mankind forever. There were some interesting industries on Keynes' list that were and are important but are not areas that anyone invests in anymore, such as coal, steam, rubber and cotton. (Steam power is now confined to the innards of electrical generating plants.) The chemical industry has continued to be crucial, including the sub-sectors of pharmaceuticals, fertilizers and, of course, plastics. However, the great chemical companies of Keynes' era -- DuPont, Dow, Rohm & Haas -- have gone from being at the forefront of growth to becoming commodity-producing companies barely earning their cost of capital. FORBES recently wrote on DuPont, describing it as a low-return, 258 struggling company.(3) Keynes would have undoubtedly been surprised to see the vast expansion of electronics and computers. Today when one talks about technology stocks one means primarily the computer industry, and plastics don't count. However, there are strong signs that many high-tech categories are becoming commodities too (cell phones, DRAMs, PCs). Keynes gave very good advice. The long-term future of the world was excellent despite the horrid short-term problems of the Great Depression. Mr. McGuire was right. Plastics was a fine growth industry. Still, advising Ben to go to work for IBM would have been even better advice. Rotation continues. Once-great companies have disappeared or have become relatively unimportant - Pennsylvania Railroad, U.S. Steel, A&P, and (alas) FAO Schwartz. The total economy grows steadily, but industries and companies go through a life cycle of birth, growth, maturity and decay. The objective of small-cap and mid-cap investing is to find companies in the growth stage and get out as they mature. Sounds easy enough. [PHOTO OF RALPH WANGER] RALPH WANGER CHIEF INVESTMENT OFFICER, LIBERTY WANGER ASSET MANAGEMENT, L.P. ---------- (1) "The Graduate" is based on a book by the same name, written by Charles Webb and first published in 1963. (2) Keynes, John Maynard, ESSAYS IN PERSUASION, Harcourt, Brace and Company, New York, 1932, pgs. 358 - 373. (3) FORBES, February 3, 2003, pgs. 54-60. WHO SHOULD PAY THE TAX ON DIVIDENDS? In January, the Bush administration proposed a series of tax changes including changing the taxation of dividends. There is a plausible theory of taxation that says every stream of income should be taxed, but only once. Single-taxation is true for corporate bond interest, but not true for dividends, which are taxed first at the corporate level and then at the shareholder level. Most other countries tax dividends only once. Bush suggested eliminating the tax to the shareholder, which we believe is better than the current approach, but not the correct solution. We feel the right way to do it is to make dividends deductible to the corporation (paid out of pre-tax income, the same way bond interest is handled). Then the shareholder getting the dividend would pay tax at his own tax rate. The administration plan to eliminate the tax at the shareholder level has some undesirable side effects. First, corporate managers have no incentive to increase dividends since their economics have not changed. Second, there would be unwelcome competition for income with the municipal bond community, the REIT industry, etc. In order to cure some of these defects, Bush's tax proposal then added on a cost-basis adjustment for undistributed profits. This would cause every shareholder to have to perform some arcane bookkeeping adjustments each year. The tax code should be simplified, not made more complex. However, it's our opinion that the basic idea of increasing dividends is terrific. Why do we want to see more dividends? From the shareholder's point of view, a dollar of certain dividend income is more valuable than the riskier prospects for a dollar in capital gains. Second, we believe leaving the cash in the corporate treasury is unwise. In certain cases, the money is either wasted repurchasing stock at bloated prices, used for foolish capital investments, or taken by management in the form of excessive stock option grants. Returning the money to the shareholders would reduce waste and mishandling. 259 Wanger Advisors Trust 2002 Annual Report [GRAPHIC] PERFORMANCE REVIEW WANGER U.S. SMALLER COMPANIES Wanger U.S. Smaller Companies ended the year on a strong note. The Fund was up 9.59% for the fourth quarter, strongly outperforming the 6.16% gain of the Russell 2000. The fourth quarter rally was not enough to undo the declines of earlier quarters but Wanger U.S. Smaller Companies did perform better than the benchmark for the year. The Fund was off 16.81% vs. a 20.48% decline for the Russell 2000. Annual winners for the Fund's portfolio included security company Wackenhut, which increased over 73% when acquired by Group 4 Falck early the year. ITT Educational Services gained 28%, benefiting from growing enrollment as people looked for ways to increase job skills in this tight economy. Steris, a manufacturer of equipment sterilization devices, enjoyed a 33% gain thanks to strong growth in its hospital sales and building sales momentum in the scientific and industrial sectors. Coach, designer and retailer of leather accessories, benefited from well-received extensions to its product line, increasing 63% in 2002. Chelsea Property, an owner and operator of outlet malls, increased 45% as a joint venture in Japan took off. Retailer Steven Madden posted a 28% gain on strong sales of its trend-setting footwear. The worst performer for the year was auto-lender AmeriCredit. While we believe company fundamentals are sound, industry-wide concerns and the negative impact of a stock offering late in the year crushed its stock price. Dynegy, a competitor of Enron's in the energy trading business, collapsed mid-year to nearly nothing. We took our losses and sold the stock. Nursing home operator Beverly Enterprises declined as lawsuit furor in the industry made it necessary to build liability reserves, hurting the company's bottom line. Fearing continued lawsuit pressure, we sold the Fund's position. JDA software dropped as orders for its retailing software slowed in response to the weak economy. NDCHealth, a provider of drug marketing services, suffered along with pharmaceutical manufacturers as pharmaceutical sales slowed in the year. In December 1999, Amazon.com CEO Jeff Bezos was named TIME magazine's Person of the Year. Talk about bad 'Timing!' One year later, the NASDAQ was 39% lower and Amazon's own stock price had tumbled 80%. This past December, TIME selected three corporate whistle blowers as its Persons of the Year 2002. Hmm... We already learned the lesson that when CEOs ruled the world and graced the covers of our national newsmagazines, it was a bad time to buy stocks. Is it possible that today, when CEOs are doing perp walks and corporate vigilantes are our new cover girls, we all should be buying stocks? SMALL-CAP STOCKS ARE OFTEN MORE VOLATILE AND LESS LIQUID THAN THE STOCKS OF LARGER COMPANIES. SMALL COMPANIES MAY HAVE A SHORTER HISTORY OF OPERATIONS THAN LARGER COMPANIES AND MAY HAVE A LESS DIVERSIFIED PRODUCT LINE, MAKING THEM MORE SUSCEPTIBLE TO MARKET PRESSURE. AS OF 12/31/02, THE FUND'S POSITIONS IN THE HOLDINGS MENTIONED WERE: WACKENHUT, 0.0%; ITT EDUCATIONAL SERVICES, 5.3%; STERIS, 3.3%; COACH, 0.9%; CHELSEA PROPERTY, 1.1%; STEVEN MADDEN, 1.8%; AMERICREDIT, 1.5%; DYNEGY, 0.0%; BEVERLY ENTERPRISES, 0.0%; JDA SOFTWARE, 1.9%; NDCHEALTH, 1.5%. [PHOTO OF ROBERT A. MOHN] ROBERT A. MOHN PORTFOLIO MANAGER 260 [CHART] VALUE OF A $10,000 INVESTMENT IN WANGER U.S. SMALLER COMPANIES* TOTAL RETURN FOR EACH PERIOD MAY 3, 1995 THROUGH DECEMBER 31, 2002 AVERAGE ANNUAL TOTAL RETURN
1 YEAR 3 YEARS 5 YEARS LIFE OF FUND -16.81% -5.23% 2.95% 12.96%
This graph compares the results of $10,000 invested in Wanger U.S. Smaller Companies on May 3, 1995 (the date the Fund began operations) through December 31, 2002 with the Russell 2000. Dividends and capital gains are reinvested. The performance data quoted is past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that investors' shares, when redeemed, may be worth more or less than their original cost. DUE TO ONGOING MARKET VOLATILITY, PERFORMANCE IS SUBJECT TO SUBSTANTIAL SHORT-TERM FLUCTUATIONs. Wanger U.S. Smaller Companies is a diversified fund that invests primarily in the stocks of small- and medium-size U.S. companies. Smaller company stocks are often more volatile or less liquid than the stocks of larger companies. MUTUAL FUND PERFORMANCE CHANGES OVER TIME. CURRENT RETURNS FOR THE FUND MAY BE DIFFERENT THAN THAT SHOWN. RESULTS AS OF DECEMBER 31, 2002
4TH QUARTER 1 YEAR WANGER U.S. SMALLER COMPANIES 9.59% -16.81% Russell 2000 6.16 -20.48 S&P MidCap 400 5.83 -14.51 S&P 500 8.44 -22.10
N.A.V. AS OF 12/31/02: $18.51 *Wanger U.S. Small Cap was renamed Wanger U.S. Smaller Companies on May 1, 2002. The Russell 2000 is formed by taking the 3,000 largest U.S. companies and then eliminating the largest 1,000, leaving a mainly small company index. The S&P MidCap 400 is a market value-weighted index of 400 U.S. stocks that are in the next tier down from the S&P 500. The S&P 500 is a broad market-weighted average of blue-chip U.S. companies. All indexes are unmanaged and include reinvested dividends. It is not possible to invest directly in an index. Performance numbers reflect all Fund expenses but do not include any insurance charge imposed by your insurance company's separate accounts. If performance included the effect of these additional charges, it would be lower. Portfolio holdings will vary in the future. TOP 5 INDUSTRIES As a % of net assets, as of 12/31/02 Information 32.2% Health Care 20.7 Consumer Goods/Services 13.7 Finance 11.2 Industrial Goods/Services 6.2
TOP 10 HOLDINGS As a % of net assets, as of 12/31/02 1. Lincare Holdings 5.8% HOME HEALTH CARE SERVICES 2. ITT Educational Services 5.3% TECHNOLOGY-ORIENTED POST SECONDARY DEGREE PROGRAMS 3. First Health Group 4.5% PPO NETWORK 4. Kronos 3.6% LABOR MANAGEMENT SOLUTIONS 5. Steris 3.3% STERILIZATION DEVICES 6. Commonwealth Telephone 2.7% RURAL PHONE FRANCHISES & CLEC 7. Micros Systems 2.1% INFORMATION SYSTEMS FOR RESTAURANTS & HOTELS 8. Salem Communications 2.1% RADIO STATIONS FOR RELIGIOUS PROGRAMMING 9. Equitable Resources 1.9% NATURAL GAS UTILITY & PRODUCER 10. JDA Software 1.9% APPLICATION/SOFTWARE & SERVICES FOR RETAILERS
261 [GRAPHIC] PERFORMANCE REVIEW WANGER INTERNATIONAL SMALL CAP Wanger International Small Cap closed 2002 with a 6.67% bounce for the fourth quarter. Making some money was welcome after the unrelenting market declines of last summer, and the bounce trimmed the Fund's loss for the year a bit as well. The Fund's 13.83% drop for the annual period was better than the large-cap oriented MSCI EAFE Index, off 15.94%, but worse than the Fund's smaller cap benchmark, the SSB EMI Global ex-U.S. Index, which only slid 6.89%. Of the best performing stocks in the Fund this year, two of the top three were from Canada. AltaGas Services, a natural gas gatherer and processor, has benefited from the rise in power prices and strong earnings and sales growth. The stock price was up 33% for the year. Patheon, a contract manufacturer of pharmaceuticals, was another good Canadian holding for the Fund, up 30% on both strong earnings and well-received acquisition efforts. Outside of Canada, topping the list this year was Anglo Irish Bank, a small business and middle-market bank in Ireland, up 85%. The share price has benefited from the strong mortgage market and savings incentives initiated by the Irish government. Instrumentarium, a manufacturer of anesthesia and critical care equipment in Finland, was acquired in late December and finished the year up 80%. The biggest detractors from Fund performance for the year were good quality stocks caught in weak markets. Off 71%, ASE Test, a packaging and test services company for the semiconductor industry, was down with the market for semiconductors. St. James Place, a company that specializes in life insurance policies and equity savings products in the UK, was off 50% due to the weak financial markets. Investors were less inclined to invest in equity savings products, causing the share price to fall. Fininfo, a provider of data feeds to banks and brokers in France, was down 54% on both the weak demand for business information in the down markets and weak business spending. In many respects, we consider the current environment to be a mirror image of 1999. Our mood then was ebullient and our valuation models were stretched. Today our mood is muted and our valuation models have room for error. We don't expect the bull's return anytime soon, but we think the bear must be getting tired by now. We continue to believe that discipline and teamwork should pay off in a world where stock picking is king. INVESTMENTS IN FOREIGN SECURITIES HAVE SPECIAL RISKS, INCLUDING POLITICAL OR ECONOMIC INSTABILITY, HIGHER COSTS, DIFFERENT REGULATIONS, ACCOUNTING STANDARDS, TRADING PRACTICES AND LEVELS OF INFORMATION, AND CURRENCY EXCHANGE RATE FLUCTUATIONS. SMALL-CAP STOCKS ARE OFTEN MORE VOLATILE AND LESS LIQUID THAN THE STOCKS OF LARGER COMPANIES. SMALL COMPANIES MAY HAVE A SHORTER HISTORY OF OPERATIONS THAN LARGER COMPANIES AND MAY HAVE A LESS DIVERSIFIED PRODUCT LINE, MAKING THEM MORE SUSCEPTIBLE TO MARKET PRESSURE. AS OF 12/31/02 THE FUND'S POSITIONS IN THE HOLDINGS MENTIONED WERE: ALTAGAS SERVICES, 1.5%; PATHEON, 1.4%; ANGLO IRISH BANK, 1.0%; INSTRUMENTARIUM, 0.6%; ASE TEST, 1.0%; ST. JAMES PLACE, 0.0%; FININFO, 0.7%. [PHOTO OF TODD M. NARTER] TODD M. NARTER CO-PORTFOLIO MANAGER [PHOTO OF CHRISTOPHER J. OLSON] CHRISTOPHER J. OLSON CO-PORTFOLIO MANAGER 262 [CHART] VALUE OF A $10,000 INVESTMENT IN WANGER INTERNATIONAL SMALL CAP TOTAL RETURN FOR EACH PERIOD MAY 3, 1995 THROUGH DECEMBER 31, 2002 AVERAGE ANNUAL TOTAL RETURN
1 YEAR 3 YEARS 5 YEARS LIFE OF FUND -13.83% -21.19% 5.21% 11.19%
This graph compares the results of $10,000 invested in Wanger International Small Cap on May 3,1995 (the date the Fund began operations) through December 31, 2002 with the SSB EMI Global ex US. Dividends and capital gains are reinvested. The performance data quoted is past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that investors' shares, when redeemed, may be worth more or less than their original cost. DUE TO ONGOING MARKET VOLATILITY, PERFORMANCE IS SUBJECT TO SUBSTANTIAL SHORT-TERM FLUCTUATIONs. Wanger International Small Cap is a diversified fund that invests primarily in the stocks of non-U.S. companies with capitalizations of less than $2 billion. Smaller company stocks are often more volatile or less liquid than the stocks of larger companies. Investments in foreign securities have special risks, including political or economic instability, higher costs, different regulations, accounting standards, trading practices and levels of information and currency exchange rate fluctuations. MUTUAL FUND PERFORMANCE CHANGES OVER TIME. CURRENT RETURNS FOR THE FUND MAY BE DIFFERENT THAN THAT SHOWN. RESULTS TO DECEMBER 31, 2002
4TH QUARTER 1 YEAR WANGER INTERNATIONAL SMALL CAP 6.67% -13.83% SSB EMI Global ex-US 4.82 -6.89 MSCI EAFE 6.45 -15.94 Lipper International Small Cap Funds Index 3.02 -7.95 Lipper International Funds Index 6.64 -13.83
N.A.V. AS OF 12/31/02: $13.27 The SSB EMI Global ex-US is an index of the bottom 20% of institutionally investable capital of developed and emerging countries, selected by index sponsor, outside the U.S. MSCI EAFE is Morgan Stanley's Europe, Australasia and Far East Index, an index of companies throughout the world in proportion to world stock market capitalization, excluding the U.S. and Canada. Lipper Indexes include the largest funds tracked by Lipper, Inc. in the named category. The Lipper International Small Cap Funds Index is made up of the 10 largest non-U.S. funds investing in small-cap companies. The Lipper International Funds Index consists of the 30 largest non-U.S. funds, not including non-U.S. small cap funds. All indexes are unmanaged and returns include reinvested dividends. It is not possible to invest directly in an index. Performance numbers reflect all Fund expenses but do not include any insurance charge imposed by your insurance company's separate accounts. If performance included the effect of these additional charges, it would be lower. Portfolio holdings will vary in the future. TOP 5 COUNTRIES As a % of net assets, as of 12/31/02 United Kingdom 14.3% Japan 12.2 Germany 8.3 Netherlands 7.9 Hong Kong 7.1
TOP 10 HOLDINGS As a % of net assets, as of 12/31/02 1. Central European Distribution 1.6% SPIRITS & WINE DISTRIBUTION - UNITED STATES 2. Fuji Seal 1.6% PACKAGING MATERIALS & MACHINERY - JAPAN 3. Fugro 1.6% SURVEY & GPS SERVICES - NETHERLANDS 4. Zapf Creation 1.5% TOY MANUFACTURER - GERMANY 5. AltaGas Services 1.5% NATURAL GAS GATHERER & PROCESSOR - CANADA 6. Bacou Dalloz 1.5% SAFETY EQUIPMENT - FRANCE 7. Patheon 1.4% PHARMACEUTICALS - CANADA 8. ARRK 1.4% PROTOTYPES & MOULDS - JAPAN 9. OPG Groep 1.4% PHARMACEUTICAL WHOLESALER & RETAILER - NETHERLANDS 10. Lindex 1.4% LADIES & CHILDREN'S WEAR - SWEDEN
263 [GRAPHIC] PERFORMANCE REVIEW WANGER TWENTY Wanger Twenty gained 5.97% during the quarter, ahead of the S&P MidCap 400's 5.83% return but behind the S&P 500's 8.44% increase. For 2002, the Fund finished a difficult year down 7.62%, considerably ahead of the S&P MidCap 400's 14.51% loss and the S&P 500's 22.10% drop. We are never happy with a losing year, but on a relative basis the Fund did quite well. Boston Scientific followed 2001's 75% return with a 76% gain in 2002. Favorable legal rulings solidified its position in the emerging drug-eluting stent market. Boston Scientific should see explosive growth in sales and earnings in 2004. The stock's current valuation reflects a scenario with little room for error, and after nearly tripling the Fund's money since August 2000, we sold the stock in early 2003 to search for new stocks with better risk/return characteristics. Fidelity National Financial, the country's largest title insurer, returned 26% for the Fund since our purchase early last year due to robust growth in home purchases and mortgage refinancings given the current low interest rate environment. Like Boston Scientific, we believe the stock is fully valued and have sold the Fund's position in the new year. During the fourth quarter, the Fund sold its long held position in H&R Block for a 17% year-to-sale loss. H&R Block's business has been increasingly targeted for class action lawsuits surrounding its controversial refund anticipation loan program. While these lawsuits today appear manageable, our initial analysis dramatically underestimated the magnitude and frequency of possible future adverse judgements. In addition, our confidence in management diminished considerably following their limited, initial disclosure of pending class action lawsuits against the company. The other significant dollar loss in the Fund came from Liberty Media, down 36% for the year. In Liberty's case, we have high conviction that management will continue to build business value through both private and public investments. We consider the stock at current levels to be one of the most attractively valued securities in the Fund and accordingly, it is Wanger Twenty's second largest position. It is never easy to take a loss, but our outstanding team of analysts is working hard to provide positive returns over a long period with, most importantly, below average risk. I am very grateful to Ralph Wanger, Chuck McQuaid, Rob Mohn, Jason Selch, Ben Andrews, Susie Hultquist, Harold Lichtenstein, Grant McKay, Rob Chalupnik, Todd Griesbach, and David Frank for all their help with the Fund and for providing compelling stock ideas. Thanks also to traders Deb Wolfe, Shelley Maish, and Mike Olah. Finally, we thank you for your continued investment in Wanger Twenty. WANGER TWENTY IS A NON-DIVERSIFIED FUND. THE PERFORMANCE OF EACH OF ITS HOLDINGS WILL HAVE A GREATER IMPACT ON THE FUND'S TOTAL RETURN, AND MAY MAKE THE FUND'S RETURNS MORE VOLATILE THAN A MORE DIVERSIFIED FUND. MID-CAP STOCKS TEND TO BE MORE VOLATILE AND MAY BE LESS LIQUID THAN THE STOCKS OF LARGER COMPANIES. AS OF 12/31/02, THE FUND'S POSITIONS IN THE HOLDINGS MENTIONED WERE: BOSTON SCIENTIFIC, 3.3%; FIDELITY NATIONAL FINANCIAL, 2.9%; H&R BLOCK, 0.0%; LIBERTY MEDIA, 7.1%. [PHOTO OF JOHN H. PARK] JOHN H. PARK PORTFOLIO MANAGER 264 [CHART] VALUE OF A $10,000 INVESTMENT IN WANGER TWENTY TOTAL RETURN FOR THE PERIOD FEBRUARY 1, 1999 THROUGH DECEMBER 31, 2002 AVERAGE ANNUAL TOTAL RETURN
1 YEAR 3 YEARS LIFE OF FUND -7.62% 3.32% 10.56%
This graph compares the results of $10,000 invested in Wanger Twenty on February 1, 1999 (the date the Fund began operations) through December 31, 2002, to the S&P MidCap 400 Index, with dividends and capital gains reinvested. The performance data quoted is past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that investors' shares, when redeemed, may be worth more or less than their original cost. DUE TO ONGOING MARKET VOLATILITY, PERFORMANCE IS SUBJECT TO SUBSTANTIAL SHORT-TERM FLUCTUATIONS. Part of the performance shown is due to the Fund's purchase of securities in IPOs. The impact of IPO purchases declines as a Fund grows large. Wanger Twenty is a non-diversified fund that invests primarily in the stocks of medium- to larger-size U.S. companies. Each stock may represent a significant part of its overall portfolio. The performance of each of these larger holdings will have a greater impact on Wanger Twenty's total return and may make the fund's returns more volatile than a more diversified fund. Mid-cap stocks are more volatile and may be less liquid than large-cap stocks. MUTUAL FUND PERFORMANCE CHANGES OVER TIME. CURRENT RETURNS FOR THE FUND MAY BE DIFFERENT THAN THAT SHOWN. Performance results reflect any voluntary waivers or reimbursements of Fund expenses by the Advisor or its affiliates. Absent these waivers or reimbursement arrangements, performance results would have been lower. RESULTS TO DECEMBER 31, 2002
4TH QUARTER 1 YEAR WANGER TWENTY 5.97% -7.62% S&P MidCap 400 5.83 -14.51 S&P 500 8.44 -22.10 Lipper Mid-Cap Growth Funds Index 4.70 -28.47
N.A.V. AS OF 12/31/02: $14.19 The S&P MidCap 400 is a market value-weighted index of 400 U.S. stocks that are in the next tier down from the S&P 500. The S&P 500 is a broad market-weighted average of blue-chip U.S. companies. The Lipper Mid-Cap Growth Funds Index measures the performance of the 30 largest mid-cap growth funds tracked by Lipper. All indexes are unmanaged and include reinvested dividends. It is not possible to invest directly in an index. Performance numbers reflect all Fund expenses but do not include any insurance charge imposed by your insurance company's separate accounts. If performance included the effect of these additional charges, it would be lower. Portfolio holdings will vary in the future. TOP 5 INDUSTRIES As a % of net assets, as of 12/31/02 Information 29.4% Health Care 26.3 Finance 20.2 Consumer Goods/Services 13.2 Industrial Goods 6.0
TOP 10 HOLDINGS As a % of net assets, as of 12/31/02 1. First Health Group 7.5% PPO NETWORK 2. Liberty Media 7.1% CATV & SATELLITE DISH PROGRAMMING 3. International Game Technology 6.4% SLOT MACHINES & PROGRESSIVE JACKPOTS 4. Expeditors International of Washington 6.0% INTERNATIONAL FREIGHT FORWARDER 5. Synopsys 5.7% SOFTWARE FOR DESIGNING SEMICONDUCTOR CHIPS 6. Markel 5.5% SPECIALTY INSURANCE 7. TCF Financial 5.0% GREAT LAKES BANK 8. Associated Banc-Corp 4.8% MIDWEST BANK 9. Guidant 4.7% STENTS, DEFIBRILLATORS & OTHER CARDIAC MEDICAL DEVICES 10. IMS Health 4.3% PRESCRIPTION DATA TO PHARMACEUTICAL INDUSTRY
265 [GRAPHIC] PERFORMANCE REVIEW WANGER FOREIGN FORTY Wanger Foreign Forty ended the year on a positive note, up 3.57% for the fourth quarter. The Fund's benchmark, the SSB World ex-US Cap Range $2-$10B Index, was up 3.95% and the MSCI EAFE Index increased 6.45% in the quarter. The Fund finished the year down 15.29%, ahead of MSCI EAFE, off 15.94%, but behind the SSB World ex-US Cap Range $2-$10B's 9.18% decline. Business spending continued to be down in 2002 but consumer spending remained strong and helped offset some of the weakness in equity markets. Mortgage activity, especially in the UK and Ireland, reached historic highs as refinancings and new home purchases showed no signs of slowing down. One major beneficiary of this was Irish Life & Permanent. The strong mortgage market and new savings incentives initiated by the Irish government helped push the share price up 9%. The company has also been buying back shares. The Fund's best performer this year was another Irish financial name, Anglo Irish Bank. This niche, small business bank continues to take market share away from its larger competitors. For the year, the share price increased 83%. The rapid deceleration in telecommunications spending took its toll on Amdocs, the Fund's biggest loser for the year. Amdocs has a 20-year track record of providing excellent billing software and customer care services to communications providers around the globe. However, the company's substantial cash position and solid technology were not enough to combat the weak spending environment. Shortly after management preannounced weak earnings, the share price declined 79%. Other stocks that dragged down performance included Computershare, a share registry service based in Australia. The company was hurt by a decrease in corporate actions during the year and fell 50% after a profit warning. Nintendo, a manufacturer of video games and equipment in Japan, was down 47% for the year. The yen strengthened against the dollar, which translated into higher costs and lower revenues for Nintendo. The share price was also hurt by the company's slow release of new game titles. It's impossible to say when the equity markets will recover. While valuations look reasonable, especially in Europe, the uncertainty created by possible military action in the Middle East will likely result in more market volatility. We will continue to look for opportunities to upgrade the holdings in the portfolio with stocks that represent better values. AS OF 2/1/02 WANGER FOREIGN FORTY BECAME A DIVERSIFIED FUND. PRIOR TO THAT, WANGER FOREIGN FORTY WAS A NON-DIVERSIFIED FUND, MEANING THAT THE PERFORMANCE OF ITS HOLDINGS WOULD HAVE A GREATER IMPACT ON ITS TOTAL RETURN, AND MAY MAKE THE FUND'S RETURNS MORE VOLATILE THAN A MORE DIVERSIFIED FUND. MID-CAP STOCKS TEND TO BE MORE VOLATILE AND MAY BE LESS LIQUID THAN THE STOCKS OF LARGER COMPANIES. INVESTMENTS IN FOREIGN SECURITIES HAVE SPECIAL RISKS, INCLUDING POLITICAL OR ECONOMIC INSTABILITY, HIGHER COSTS, DIFFERENT REGULATIONS, ACCOUNTING STANDARDS, TRADING PRACTICES AND LEVELS OF INFORMATION, AND CURRENCY EXCHANGE RATE FLUCTUATIONS. AS OF 12/31/02, THE FUND'S POSITIONS IN THE HOLDINGS MENTIONED WERE: IRISH LIFE & PERMANENT, 1.5%; ANGLO IRISH BANK, 3.0%; AMDOCS, 0.0%; COMPUTERSHARE, 0.0%; NINTENDO, 0.0%. [PHOTO OF TODD M. NARTER] TODD M. NARTER CO-PORTFOLIO MANAGER [PHOTO OF CHRISTOPHER J. OLSON] CHRISTOPHER J. OLSON CO-PORTFOLIO MANAGER 266 [CHART] VALUE OF A $10,000 INVESTMENT IN WANGER FOREIGN FORTY TOTAL RETURN FOR THE PERIOD FEBRUARY 1, 1999 THROUGH DECEMBER 31, 2002 AVERAGE ANNUAL TOTAL RETURN
1 YEAR 3 YEARS LIFE OF FUND -15.29% -15.10% 3.06%
This graph compares the results of $10,000 invested in Wanger Foreign Forty on February 1, 1999 (the date the Fund began operations) through December 31, 2002, to the SSB World ex US Cap Range $2-$10B Index, with dividends and capital gains reinvested. The performance data quoted is past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that investors' shares, when redeemed, may be worth more or less than their original cost. DUE TO ONGOING MARKET VOLATILITY, PERFORMANCE IS SUBJECT TO SUBSTANTIAL SHORT-TERM FLUCTUATIONS. Wanger Foreign Forty is a non-diversified fund that invests in the stocks of medium- to larger-size companies with market capitalizations of $2 to $25 billion. Prior to 2/1/02, Wanger Foreign Forty was a non-diversified fund, meaning that the performance of its holdings would have a greater impact on Wanger Foreign Forty's total return and may make the fund's returns more volatile than a more diversified international fund. Mid-cap stocks are more volatile and may be less liquid than large-cap stocks. Investments in foreign securities have special risks, including political or economic instability, higher costs, different regulations, accounting standards, trading practices and levels of information, and currency exchange rate fluctuations. MUTUAL FUND PERFORMANCE CHANGES OVER TIME. CURRENT RETURNS FOR THE FUND MAY BE DIFFERENT THAN THAT SHOWN. Performance results reflect any voluntary waivers or reimbursements of Fund expenses by the Advisor or its affiliates. Absent these waivers or reimbursement arrangements, performance results would have been lower. RESULTS TO DECEMBER 31, 2002
4TH QUARTER 1 YEAR WANGER FOREIGN FORTY 3.57% -15.29% SSB World ex U.S. Cap Range $2-10B 3.95 -9.18 MSCI EAFE 6.45 -15.94
N.A.V. AS OF 12/31/02: $9.86 MSCI EAFE is Morgan Stanley's Europe, Australasia and Far East Index, a widely recognized international benchmark that comprises 20 major markets in Europe, Australia and the Far East. The SSB World ex U.S. Cap Range $2-10B Index is a subset of Salomon Smith Barney's Broad Market Index, representing a mid-cap developed market index excluding the U.S. All indexes are unmanaged and returns include reinvested dividends. It is not possible to invest directly in an index. Performance numbers reflect all Fund expenses but do not include any insurance charge imposed by your insurance company's separate accounts. If performance included the effect of these additional charges, it would be lower. Portfolio holdings will vary in the future. TOP 5 COUNTRIES As a % of net assets, as of 12/31/02 United Kingdom 17.6% Switzerland 14.5 Japan 9.3 Ireland 9.3 France 8.1
TOP 10 HOLDINGS As a % of net assets, as of 12/31/02 1. Synthes-Stratec 4.9% PRODUCTS FOR ORTHOPEDIC SURGERY - SWITZERLAND 2. Kerry Group 4.7% SPECIALTY FOOD INGREDIENT COMPANY - IRELAND 3. Rhoen-Klinikum 4.1% HOSPITAL MANAGEMENT - GERMANY 4. Orkla 4.1% DIVERSIFIED CONSUMER GOODS - NORWAY 5. Oriental Land 4.0% DISNEY THEME PARK OPERATOR - JAPAN 6. Kaba Holdings 3.8% BUILDING SECURITY SYSTEMS - SWITZERLAND 7. Talisman Energy 3.5% OIL & GAS PRODUCER - CANADA 8. Lion Nathan 3.4% BEER BREWER/DISTRIBUTOR - AUSTRALIA 9. Exel 3.1% GLOBAL FREIGHT FORWARDING - UNITED KINGDOM 10. Anglo Irish Bank 3.0% CORPORATE LENDING & PRIVATE BANKING - IRELAND
267 WANGER U.S. SMALLER COMPANIES STATEMENT OF INVESTMENTS DECEMBER 31, 2002
NUMBER OF VALUE SHARES COMMON STOCKS-91.6% INFORMATION-32.2% TELEVISION PROGRAMMING-1.5% 620,000 Mediacom Communications(b) $ 5,462,200 CABLE TELEVISION FRANCHISES 138,500 Gray Television 1,350,375 MID MARKET AFFILIATED TV STATIONS ------------------------------------------------------------------------------------ 6,812,575 ------------------------------------------------------------------------------------ RADIO-2.3% 395,900 Salem Communications(b) 9,885,623 RADIO STATIONS FOR RELIGIOUS PROGRAMMING 80,000 Cumulus Media, Cl. A(b) 1,189,600 RADIO STATIONS IN SMALL CITIES ------------------------------------------------------------------------------------ 11,075,223 ------------------------------------------------------------------------------------ TELECOMMUNICATIONS/WIRELINE COMMUNICATIONS-2.7% 356,300 Commonwealth Telephone(b) 12,769,792 RURAL PHONE FRANCHISES & CLEC MOBILE COMMUNICATIONS-2.2% 660,000 Western Wireless(b) 3,498,000 RURAL CELLULAR PHONE FRANCHISES 351,750 COMARCO(b) 3,042,638 WIRELESS NETWORK TESTING 56,000 Telephone and Data Systems 2,633,120 CELLULAR & TELEPHONE SERVICES 355,000 Crown Castle International(b) 1,331,250 COMMUNICATION TOWERS IN USA & UK ------------------------------------------------------------------------------------ 10,505,008 ------------------------------------------------------------------------------------ TELECOMMUNICATIONS EQUIPMENT-0.2% 347,800 Aspect Telecommunications(b) 987,752 CALL CENTER EQUIPMENT BUSINESS INFORMATION/MARKETING SERVICES/ MARKETING-2.6% 153,700 Getty Images(b) 4,695,535 PHOTOGRAPHS FOR PUBLICATIONS & ELECTRONIC MEDIA 580,000 Navigant Consulting(b) 3,422,000 CONSULTING FIRM 192,900 Information Holdings(b) 2,993,808 SCIENTIFIC & MEDICAL PUBLICATIONS, PATENT INFORMATION 125,000 Rainbow Technologies(b) $ 896,250 COMPUTER NETWORK SECURITY PRODUCTS 54,100 InfoUSA(b) 268,877 BUSINESS DATA FOR SALES LEADS ------------------------------------------------------------------------------------ 12,276,470 ------------------------------------------------------------------------------------ BUSINESS/CONSUMER SOFTWARE-13.0% 455,550 Kronos(b) 16,850,795 LABOR MANAGEMENT SOLUTIONS 442,900 Micros Systems(b) 9,929,818 INFORMATION SYSTEMS FOR RESTAURANTS & HOTELS 920,000 JDA Software(b) 8,887,200 APPLICATIONS/SOFTWARE & SERVICES FOR RETAILERS 425,000 JD Edwards(b) 4,794,000 MID MARKET ERP & SUPPLY CHAIN SOFTWARE 1,320,000 Novell(b) 4,408,800 DIRECTORY, IDENTITY MANAGEMENT & AUTHORIZATION SOFTWARE 334,800 MRO Software(b) 4,066,146 ENTERPRISE MANAGEMENT SOFTWARE 450,000 Mapics(b) 3,127,500 MID MARKET ERP SOFTWARE 535,000 Multex.Com(b) 2,247,000 PROVIDER OF INVESTMENT INFO TO INSTITUTIONS & INDIVIDUALS 480,000 E.Piphany(b) 2,001,600 CRM SOFTWARE 141,800 Group 1 Software(b) 1,694,510 ADDRESS VERIFICATION SOFTWARE 90,000 SPSS(b) 1,259,100 STATISTICAL ANALYSIS SOFTWARE 68,000 Activision(b) 992,120 ENTERTAINMENT SOFTWARE 72,500 THQ(b) 960,625 ENTERTAINMENT SOFTWARE ------------------------------------------------------------------------------------ 61,219,214 ------------------------------------------------------------------------------------ TRANSACTION PROCESSORS-2.2% 273,440 Global Payments 8,752,814 CREDIT CARD PROCESSOR
See accompanying notes to financial statements. 268
NUMBER OF VALUE SHARES TRANSACTION PROCESSORS-2.2% (CONT) 206,000 Euronet Worldwide(b) $ 1,547,060 ATM PROCESSOR ------------------------------------------------------------------------------------ 10,299,874 ------------------------------------------------------------------------------------ COMPUTER HARDWARE/RELATED SYSTEMS-1.3% 415,800 Seachange International(b) 2,557,170 SYSTEMS FOR VIDEO ON DEMAND & AD INSERTION 31,600 Zebra Technologies(b) 1,810,680 BAR CODE PRINTING HARDWARE, SUPPLIES & SOFTWARE 301,205 SensAble Technologies(b) 1,000,001 SENSORY DEVICES FOR COMPUTER BASED SCULPTING 35,000 Applied Films(b) 699,650 THIN-FILM GLASS COATING EQUIPMENT ------------------------------------------------------------------------------------ 6,067,501 ------------------------------------------------------------------------------------ SEMICONDUCTORS/RELATED EQUIPMENT-0.8% 135,000 Integrated Circuit Systems(b) 2,463,750 SILICON TIMING DEVICES 95,900 IXYS(b) 677,054 POWER SEMICONDUCTORS 68,600 Microsemi(b) 417,774 ANALOG/MIXED SIGNAL SEMICONDUCTORS ------------------------------------------------------------------------------------ 3,558,578 ------------------------------------------------------------------------------------ GAMING EQUIPMENT-0.1% 35,000 Shuffle Master(b) 668,850 CARD SHUFFLERS, CASINO GAMES & SLOT MACHINES INSTRUMENTATION-1.3% 288,000 Tektronix(b) 5,238,720 ANALYTICAL INSTRUMENTS 25,000 Mettler Toledo(b) 801,500 LABORATORY EQUIPMENT ------------------------------------------------------------------------------------ 6,040,220 ------------------------------------------------------------------------------------ COMPUTER SERVICES-2.0% 753,000 RCM Technologies(b) (c) 2,944,230 TECHNOLOGY STAFFING SERVICES 170,000 Pomeroy Computer Resources(b) 1,989,000 NETWORK INTEGRATION SERVICES 670,000 AnswerThink Consulting(b) $ 1,675,000 IT INTEGRATOR FOR FORTUNE 2000 137,000 American Management Systems(b) 1,642,630 SOFTWARE DEVELOPMENT SERVICES 149,700 Ciber(b) 770,955 SOFTWARE SERVICES & STAFFING 256,600 Analysts International(b) 508,068 TECHNOLOGY STAFFING SERVICES ------------------------------------------------------------------------------------ 9,529,883 ------------------------------------------------------------------------------------ INFORMATION-TOTAL 151,810,940 HEALTH CARE-20.7% BIOTECHNOLOGY/DRUG DELIVERY-2.1% 540,000 Inhale Therapeutic Systems(b) 4,363,200 PULMONARY DRUG DELIVERY 198,000 Enzon(b) 3,310,560 POLYMER DELIVERY TECHNOLOGY FOR IMPROVED DRUGS 250,000 Locus Discovery, Series D. 1,000,000 Pfd.(b) HIGH THROUGHPUT RATIONAL DRUG DESIGN 42,000 Myriad Genetics(b) 613,200 GENE DISCOVERY & DIAGNOSTIC PRODUCTS 154,231 SYRRX, Series C(b) 539,809 X-RAY CRYSTALLOGRAPHY ------------------------------------------------------------------------------------ 9,826,769 ------------------------------------------------------------------------------------ MEDICAL EQUIPMENT-6.2% 646,000 Steris(b) 15,665,500 STERILIZATION DEVICES 219,000 Edwards Lifesciences(b) 5,577,930 HEART VALVES 136,000 Orthofix International(b) 3,814,800 BONE FIXATION & STIMULATION DEVICES 338,000 Novoste(b) 2,440,360 RADIATION CATHETERS FOR IN-STENT RESTENOSIS 213,600 Visx(b) 2,046,288 LASER EYE SURGERY ------------------------------------------------------------------------------------ 29,544,878
See accompanying notes to financial statements. 269
NUMBER OF VALUE SHARES MEDICAL SUPPLIES-0.4% 60,700 Techne(b) $ 1,734,078 CYTOKINES, ANTIBODIES, OTHER REAGENTS FOR LIFE SCIENCES SERVICES-12.0% 866,000 Lincare Holdings(b) 27,382,920 HOME HEALTH CARE SERVICES 873,000 First Health Group(b) 21,257,550 PPO NETWORK 356,300 NDCHealth Group 7,090,370 HEALTH CLAIMS PROCESSING & DRUG MARKETING SERVICES 44,000 Medquist(b) 891,440 MEDICAL TRANSCRIPTION SERVICES ------------------------------------------------------------------------------------ 56,622,280 ------------------------------------------------------------------------------------ HEALTH CARE-TOTAL 97,728,005 CONSUMER GOODS/SERVICES-13.7% RETAIL-3.0% 172,000 Christopher & Banks(b) 3,569,000 SPECIALTY WOMEN'S RETAILER AT MODERATE PRICE LEVELS 99,000 Zale Corp(b) 3,158,100 SPECIALTY RETAILER OF JEWELRY 143,000 Genesco(b) 2,664,090 MULTI-CONCEPT BRANDED FOOTWEAR RETAILER 80,500 Hot Topic(b) 1,841,840 MUSIC INSPIRED RETAILER OF APPAREL, ACCESSORIES & GIFTS 110,500 Aeropostale(b) 1,167,985 MALL BASED TEEN RETAILER 67,000 Borders(b) 1,078,700 BOOKSTORES 105,000 Gadzooks(b) 493,500 TEEN APPAREL RETAILER ------------------------------------------------------------------------------------ 13,973,215 ------------------------------------------------------------------------------------ APPAREL-3.2% 470,000 Steven Madden(b) 8,492,900 WHOLESALER/RETAILER OF FASHION FOOTWEAR 136,000 Coach(b) 4,477,120 DESIGNER & RETAILER OF BRANDED LEATHER ACCESSORIES 39,480 Jones Apparel(b) $ 1,399,171 WOMEN'S APPAREL 108,000 Skechers USA(b) 916,920 FOOTWEAR DESIGNER & MARKETER ------------------------------------------------------------------------------------ 15,286,111 ------------------------------------------------------------------------------------ ENTERTAINMENT-0.7% 51,300 International Speedway Motors 1,912,977 LARGEST MOTORSPORT RACETRACK OWNER & OPERATOR 45,000 Speedway Motors 1,160,100 MOTORSPORT RACETRACK OWNER & OPERATOR 80,000 Six Flags(b) 456,800 WORLDWIDE THEME PARK OPERATOR ------------------------------------------------------------------------------------ 3,529,877 ------------------------------------------------------------------------------------ CASINOS-0.6% 107,700 Monarch Casino & Resort(b) 1,478,721 CASINO/HOTEL IN RENO 75,000 Alliance Gaming(b) 1,277,250 DIVERSIFIED GAMING COMPANY ------------------------------------------------------------------------------------ 2,755,971 ------------------------------------------------------------------------------------ TEXTILES-0.3% 23,000 Mohawk Industries(b) 1,309,850 CARPET & FLOORING MANUFACTURER NON-DURABLES-0.5% 47,000 Scotts Company(b) 2,304,880 CONSUMER LAWN & GARDEN PRODUCTS TRAVEL-0.1% 150,000 LaQuinta(b) 660,000 OWNER/FRANCHISER OF MID-PRICED HOTELS CONSUMER SERVICES-5.3% 1,060,000 ITT Educational Services(b) 24,963,000 TECHNOLOGY-ORIENTED POST SECONDARY DEGREE PROGRAMS CONSUMER GOODS/SERVICES-TOTAL 64,782,904
See accompanying notes to financial statements. 270
NUMBER OF VALUE SHARES FINANCE-11.2% BANKS/SAVINGS & LOANS-2.9% 128,500 Texas Regional Bancshares $ 4,567,019 TEXMEX BANK 105,500 Chittenden 2,688,140 VERMONT & WESTERN MASSACHUSETTS BANK 52,000 TCF Financial 2,271,880 GREAT LAKES BANK 85,200 Anchor Bancorp Wisconsin 1,767,900 WISCONSIN THRIFT 40,000 Downey Financial 1,560,000 CALIFORNIA HOME LENDER 34,800 Peoples Bank Bridgeport 874,871 CONNECTICUT SAVINGS & LOAN ------------------------------------------------------------------------------------ 13,729,810 ------------------------------------------------------------------------------------ FINANCE COMPANIES-1.8% 890,400 AmeriCredit(b) 6,891,696 AUTO LENDING 232,000 World Acceptance(b) 1,765,520 PERSONAL LOANS ------------------------------------------------------------------------------------ 8,657,216 ------------------------------------------------------------------------------------ INSURANCE-4.1% 43,000 Markel(b) 8,836,500 SPECIALTY INSURANCE 287,000 HCC Insurance Holdings 7,060,200 AVIATION INSURANCE 92,000 Leucadia National 3,432,520 INSURANCE HOLDING COMPANY ------------------------------------------------------------------------------------ 19,329,220 ------------------------------------------------------------------------------------ MONEY MANAGEMENT-2.4% 321,000 SEI Investments 8,724,780 MUTUAL FUND ADMINISTRATION 60,900 Neuberger Berman 2,039,541 MAJOR ASSET MANAGEMENT COMPANY 24,800 BKF Capital Group(b) 437,720 INSTITUTIONAL MONEY MANAGER ------------------------------------------------------------------------------------ 11,202,041 ------------------------------------------------------------------------------------ FINANCE-TOTAL 52,918,287 INDUSTRIAL GOODS/SERVICES-6.2% INDUSTRIAL GOODS-0.8% 98,000 Clarcor $ 3,162,460 MOBILE & INDUSTRIAL FILTERS 25,100 Mine Safety Appliances 809,475 SAFETY EQUIPMENT ------------------------------------------------------------------------------------ 3,971,935 ------------------------------------------------------------------------------------ MACHINERY-0.9% 58,100 Esco Technologies(b) 2,149,700 FILTRATION & TEST EQUIPMENT 50,000 Ametek 1,924,500 AEROSPACE/INDUSTRIAL INSTRUMENTS ------------------------------------------------------------------------------------ 4,074,200 ------------------------------------------------------------------------------------ WATER-1.3% 133,000 Cuno(b) 4,404,960 FILTRATION & FLUIDS CLARIFICATION 70,000 Insituform Technologies(b) 1,193,500 WATER/SEWER PIPE REPAIR 18,000 Osmonics(b) 304,920 FILTRATION & FLUIDS CLARIFICATION ------------------------------------------------------------------------------------ 5,903,380 ------------------------------------------------------------------------------------ CONSTRUCTION-0.2% 30,000 Florida Rock Industries 1,141,500 CONCRETE & AGGREGATES SPECIALTY CHEMICALS & INDUSTRIAL MATERIALS-0.6% 95,000 Spartech 1,959,850 PLASTICS DISTRIBUTION & COMPOUNDING 100,000 NuCo2(b) 805,000 BULK CO2 GAS DISTRIBUTION TO RESTAURANTS ------------------------------------------------------------------------------------ 2,764,850 ------------------------------------------------------------------------------------ LOGISTICS-0.4% 59,600 Forward Air(b) 1,156,836 FREIGHT TRANSPORTATION BETWEEN AIRPORTS 174,000 Hub Group(b) 835,200 TRUCK & RAIL FREIGHT FORWARDER ------------------------------------------------------------------------------------ 1,992,036
See accompanying notes to financial statements. 271
NUMBER OF VALUE SHARES OTHER INDUSTRIAL SERVICES-2.0% 412,100 Insurance Auto Auctions(b) $ 6,836,739 AUTO SALVAGE SERVICES 125,000 Clark/Bardes Consulting(b) 2,406,250 EXECUTIVE COMPENSATION & BENEFITS CONSULTING ------------------------------------------------------------------------------------ 9,242,989 ------------------------------------------------------------------------------------ INDUSTRIAL GOODS/SERVICES-TOTAL 29,090,890 ENERGY/MINERALS-5.3% OIL/GAS PRODUCERS-1.0% 185,000 Ultra Petroleum (Canada)(b) 1,831,500 NATURAL GAS PRODUCER 30,000 Western Gas 1,105,500 OIL & COAL SEAM GAS PRODUCER 20,000 Evergreen Resources(b) 897,000 COAL SEAM GAS PRODUCER 73,400 Southwestern Energy(b) 840,430 OIL & GAS EXPLORATION/PRODUCTION ------------------------------------------------------------------------------------ 4,674,430 ------------------------------------------------------------------------------------ OIL SERVICES-1.5% 941,000 Newpark Resources(b) 4,093,350 OILFIELD FLUID MANAGEMENT & EQUIPMENT RENTAL 139,700 FMC Technologies(b) 2,854,071 DEEP WATER OIL & GAS WELL HEAD MANUFACTURER ------------------------------------------------------------------------------------ 6,947,421 ------------------------------------------------------------------------------------ DISTRIBUTION/MARKETING/REFINING-2.8% 259,000 Equitable Resources 9,075,360 NATURAL GAS UTILITY & PRODUCER 168,000 Atmos Energy 3,917,760 NATURAL GAS UTILITY 115,000 Aquila(b) 418,600 ELECTRIC UTILITY HOLDING COMPANY ------------------------------------------------------------------------------------ 13,411,720 ------------------------------------------------------------------------------------ ENERGY/MINERALS-TOTAL 25,033,571 PRINCIPAL AMOUNT OR VALUE NUMBER OF SHARES OTHER INDUSTRIES-2.3% REAL ESTATE-1.6% 152,000 Chelsea Property Group $ 5,063,120 OUTLET MALLS 47,000 The Rouse Company 1,489,900 REGIONAL SHOPPING MALLS 66,700 Crescent Real Estate Equities 1,109,887 CLASS A OFFICE BUILDINGS ------------------------------------------------------------------------------------ 7,662,907 ------------------------------------------------------------------------------------ REGULATED UTILITIES-0.7% 175,000 Unisource Energy 3,025,750 ELECTRIC UTILITY IN ARIZONA ------------------------------------------------------------------------------------ OTHER INDUSTRIES-TOTAL 10,688,657 TOTAL COMMON STOCKS (COST: $380,197,747)-91.6% 432,053,254 ------------------------------------------------------------------------------------ SHORT-TERM OBLIGATIONS-8.6% $20,000,000 American Express Credit, 1.350%, due 1/02/03 19,999,250 20,393,000 Repurchase agreement with State Street Bank & Trust Co., dated 12/31/02, due 1/02/03 at 1.000%, collateralized by Federal Home Loan Bank Notes maturing 1/16/04, market value $20,805,000 (repurchase proceeds $20,394,133) 20,393,000 ------------------------------------------------------------------------------------ (AMORTIZED COST: $40,392,250) 40,392,250 TOTAL INVESTMENTS (COST: $420,589,997)-100.2%(a) 472,445,504 ------------------------------------------------------------------------------------ CASH AND OTHER ASSETS LESS LIABILITIES-(0.2%) (719,510) ------------------------------------------------------------------------------------ TOTAL NET ASSETS-100% $ 471,725,994 ====================================================================================
NOTES TO STATEMENT OF INVESTMENTS: (a) At December 31, 2002, cost for federal income tax purposes is $420,972,121 and net unrealized depreciation was $51,473,383 consisting of gross unrealized appreciation of $113,327,724 and gross unrealized depreciation of $61,854,341. (b) Non-income producing security. (c) On December 31, 2002, the fund held the following percentages of the outstanding voting shares of the companies listed below: RCM Technologies 7.10% The aggregate cost and value of these companies at December 31, 2002, was $5,475,000 and $2,944,000 respectively. Investments in affiliate companies represent 0.62% of total net assets at December 31, 2002. The change in unrealized gain (loss) in these companies amounted to $(595,000) during the year ended December 31, 2002. There was no other investment activity during the year. See accompanying notes to financial statements. 272 WANGER INTERNATIONAL SMALL CAP STATEMENT OF INVESTMENTS DECEMBER 31, 2002
NUMBER OF VALUE SHARES COMMON STOCKS-95.1% EUROPE-56.6% GERMANY-8.3% 123,000 Zapf Creation $ 3,294,405 TOY MANUFACTURER 125,000 DIS - Deutscher Industrie 2,005,638 Services TEMPORARY EMPLOYMENT 43,574 Beru 1,964,929 AUTO PARTS & ELECTRONICS 135,000 GFK 1,813,568 MARKET RESEARCH SERVICES 150,000 Jenoptik 1,541,588 HIGH TECH CONSTRUCTION & ELECTRICAL COMPONENTS 50,000 Rhoen-Klinikum 1,432,524 HOSPITAL MANAGEMENT 383,000 Takkt 1,409,798 MAIL ORDER RETAILER OF OFFICE WAREHOUSE DURABLES 112,000 Norddeutsche Affinerie 1,192,162 COPPER SMELTER 91,000 Hugo Boss Designs 957,180 FASHION APPAREL 50,000 Kali & Salz 909,747 POTASH PRODUCTS, FERTILIZERS, SALT & WASTE MANAGEMENT 80,000 Software AG 755,903 DATABASE SOFTWARE 32,877 Pfeiffer Vacuum Technologies 659,221 VACUUM PUMP MANUFACTURER ------------------------------------------------------------------------------------ 17,936,663 ------------------------------------------------------------------------------------ DENMARK-0.8% 24,500 Kobenhavns Lufthavne 1,763,797 COPENHAGEN AIRPORT MANAGER NORWAY-0.9% 153,000 Ekornes 1,853,235 RECLINERS & SOFAS NETHERLANDS-7.9% 76,128 Fugro 3,443,301 SURVEY & GPS SERVICES 87,400 OPG Groep 3,006,328 PHARMACEUTICAL WHOLESALER & RETAILER 320,000 Hagemeyer $ 2,315,529 B2B DISTRIBUTOR TO INDUSTRIAL & CONSTRUCTION END MARKETS 141,000 Aalberts Industries 2,188,426 FLOW CONTROL & HEAT TREATMENT 161,000 IM Tech 2,122,327 TECHNICAL ENGINEERING 66,370 Hunter Douglas 1,987,142 DECORATIVE WINDOW COVERINGS 174,548 United Services Goup 1,951,296 TEMPORARY STAFFING SERVICES ------------------------------------------------------------------------------------ 17,014,349 ------------------------------------------------------------------------------------ FINLAND-1.9% 52,000 Amer Group 1,903,180 BRANDED OUTDOOR SPORTING GOODS 32,000 Instrumentarium 1,281,259 ANESTHESIA & CRITICAL CARE MEDICAL EQUIPMENT 64,600 Jaakko Poyry 1,016,190 ENGINEERING CONSULTANTS IN FORESTRY, ENERGY ------------------------------------------------------------------------------------ 4,200,629 ------------------------------------------------------------------------------------ SWEDEN-3.4% 152,800 Lindex 2,987,808 LADIES & CHILDREN'S WEAR 144,500 Hexagon 2,293,651 DIVERSIFIED ENGINEERING 202,000 Intrum Justitia(b) 940,994 RECEIVABLES MANAGEMENT & DEBT COLLECTION 51,000 Perbio Science(b) 580,745 CONSUMABLES TO BIOTECH/PHARMACEUTICAL INDUSTRIES 34,500 Castellum 484,127 OFFICE, WAREHOUSE & RETAIL PROPERTY COMPANY ------------------------------------------------------------------------------------ 7,287,325 ------------------------------------------------------------------------------------ FRANCE/BELGIUM-6.2% 35,000 Bacou Dalloz(b) 3,156,586 SAFETY EQUIPMENT 100,000 Rubis 2,621,749 TANK STORAGE & LPG SUPPLIER
See accompanying notes to financial statements. 273
NUMBER OF VALUE SHARES FRANCE/BELGIUM-6.2% (CONT) 75,500 Omega Pharma (Belgium) $ 2,163,111 OTC PRODUCTS, PHARMACY & DENTAL SUPPLIES 120,000 Fininfo 1,609,544 DATA FEEDS FOR FRENCH BANKS & BROKERS 16,000 Ipsos 947,185 MARKET RESEARCH 21,278 Cegedim 914,883 MEDICAL MARKET RESEARCH 43,417 Grandvision 860,543 EUROPEAN EYEGLASS RETAILER 95,000 Cerep(b) 816,937 HEALTH CARE 10,000 Camaieu 377,532 WOMEN'S APPAREL RETAILER 38,342 Prosodie(b) 24,126 AUTOMATED CALL CENTERS ------------------------------------------------------------------------------------ 13,492,196 ------------------------------------------------------------------------------------ UNITED KINGDOM/IRELAND-17.2% 450,000 Expro International 2,679,817 OFFSHORE OIL FIELD SERVICES 550,000 Spectris 2,505,187 ELECTRONIC INSTRUMENTS & CONTROLS 150,000 French Connection 2,259,738 CLOTHING WHOLESALER & RETAILER 300,000 Anglo Irish Bank (Ireland) 2,133,055 CORPORATE LENDING & PRIVATE BANKING 600,000 Weir Group 2,047,284 MANUFACTURER OF INDUSTRIAL PUMPS & VALVES 160,000 Bloomsbury Publishing 1,685,468 PUBLISHING 1,050,000 Tullow Oil(b) 1,662,090 OIL & GAS PRODUCER 455,000 International Greetings 1,633,079 PRIVATE LABEL GREETING PRODUCTS 405,000 Charles Taylor Group 1,629,619 INSURANCE 450,000 Hit Entertainment 1,548,138 CHILDREN'S TELEVISION SHOWS 3,006,500 Waterford Wedgwood (Ireland) $ 1,544,928 CRYSTAL, TABLEWARE & COOKWARE 300,000 Torex 1,540,291 APPLICATION SOFTWARE FOR HOSPITAL MANAGEMENT & RETAIL 430,000 Nestor Healthcare Group 1,473,795 HEALTHCARE STAFFING SOLUTIONS 800,000 RPS Group 1,422,798 ENVIRONMENTAL CONSULTING 790,000 Care UK 1,360,510 NURSING HOME & PSYCHIATRIC CARE FACILITIES 350,000 Grafton Group (Ireland) 1,321,361 DIY & WHOLESALING OF CONSTRUCTION MATERIALS 300,000 Ricardo 1,318,180 AUTO ENGINE DESIGN 200,000 Business Post Group 1,251,772 UK PARCEL & EXPRESS POSTAL SERVICE 101,500 Arnotts (Ireland) 1,234,739 DEPARTMENT STORE 100,000 Xstrata(b) 1,044,565 SMELTING 250,000 SSL International 1,031,086 MEDICAL & FOOTCARE PRODUCTS 220,000 Umeco 966,666 AEROSPACE PARTS DISTRIBUTOR 340,000 TDG Group 824,949 LOGISTICS & STORAGE COMPANY 2,000,000 Incepta Group 510,854 BUSINESS INFORMATION & MARKETING SERVICES 106,900 Homestyle Group 280,451 RETAILER OF CURTAINS, UPHOLSTERY & RELATED FURNITURE 120,000 Edinburgh Fund Managers 247,219 INVESTMENT MANAGEMENT ------------------------------------------------------------------------------------ 37,157,639 ------------------------------------------------------------------------------------ ITALY-1.5% 90,691 Amplifon 1,609,221 HEARING AID RETAILER 65,000 Permasteelisa 1,021,800 CURTAIN WALLS 278,111 Ducati Motor(b) 523,520 MOTORCYCLES & RELATED MERCHANDISE ------------------------------------------------------------------------------------ 3,154,541
See accompanying notes to financial statements. 274
NUMBER OF VALUE SHARES SPAIN/PORTUGAL-5.0% 211,750 Zardoya Otis $ 2,786,880 ELEVATOR MAINTENANCE & SERVICE PROVIDER 200,000 Red Electrica 2,021,893 POWER GRID 115,000 Gamesa(b) 1,882,573 WIND TURBINES 356,000 Cortefiel 1,624,016 APPAREL RETAILER 244,100 Abengoa 1,433,530 ENGINEERING & CONSTRUCTION 95,000 Prosegur 966,377 SECURITY GUARDS ------------------------------------------------------------------------------------ 10,715,269 ------------------------------------------------------------------------------------ SWITZERLAND-3.5% 8,000 Geberit International 2,302,075 PLUMBING SUPPLIES 10,200 Kaba Holdings 1,895,308 BUILDING SECURITY SYSTEMS 8,000 Hiestand Holding 1,850,915 BAKERY GOODS 3,409 Saia Burgess Electronics 838,016 ELECTRICAL COMPONENTS MANUFACTURING 6,730 Feintool International 729,882 ENGINEERING & MACHINERY 2,223 Bachem 104,472 DRUG MANUFACTURER ------------------------------------------------------------------------------------ 7,720,668 ------------------------------------------------------------------------------------ EUROPE-TOTAL 122,296,311 ASIA-28.0% HONG KONG-7.1% 3,490,000 JCG Holding 1,711,761 CONSUMER FINANCE 6,200,000 Global Bio-Chem Technology 1,649,666 Group CORN-BASED FOOD PRODUCTS 500,000 Wing Hang Bank $ 1,599,656 CONSUMER & COMMERCIAL BANKING 2,000,000 Travelsky Technology 1,384,873 ONLINE AIR TRAVEL BOOKINGS IN CHINA 7,000,000 Lerado Group 1,122,003 BABY PARAPHERNALIA 4,116,000 Ngai Lik Industrial 1,045,025 CHINA BASED A/V CONTRACT MANUFACTURER 3,800,000 Tingyi Holding 986,722 INSTANT NOODLES 1,000,000 Techtronic Industries 948,894 POWER TOOL MANUFACTURER 2,714,000 Aeon Credit Service 922,236 CREDIT CARD ISSUER 2,250,000 Zhejiang Expressway 865,546 TOLL ROAD BUILDER & OPERATOR 2,874,000 Jiangsu Express 847,619 TOLL ROAD BUILDER & OPERATOR 1,500,000 Hainan Meilan Airport(b) 716,479 AIRPORT OPERATOR 3,000,000 Linmark 673,202 APPAREL/HARD GOODS SOURCING AGENT 1,768,000 Harbin Brewery(b) 464,753 CHINA BREWERY 1,295,000 China Oilfield Services(b) 315,507 OFFSHORE OILFIELD SERVICES ------------------------------------------------------------------------------------ 15,253,942 ------------------------------------------------------------------------------------ JAPAN-12.2% 75,000 Fuji Seal 3,479,707 PACKAGING MATERIALS & MACHINERY 82,000 ARRK 3,038,060 PROTOTYPES & MOULDS 70,000 Eneserve 2,717,245 IN-HOUSE POWER GENERATORS 230,000 NIFCO 2,498,316 INDUSTRIAL FASTENERS 60,000 Drake Beam Morin 2,202,762 EMPLOYMENT OUTPLACEMENT SERVICES
See accompanying notes to financial statements. 275
NUMBER OF VALUE SHARES JAPAN-12.2% (CONT) 825,000 OMC Card(b) $ 2,049,301 CREDIT CARDS 50,000 Sugi Pharmacy 1,844,055 DRUGSTORES 220,000 Tenma 1,796,901 MOLDED PLASTIC PRODUCTS 185,000 Toyo Technica 1,666,807 VALUE ADDED RESELLER OF IMPORTED INSTRUMENTATION 75,000 C-Two Network 1,588,287 DISCOUNT FOOD RETAILER 63,000 Goldcrest 1,392,514 DEVELOPER/SELLER OF APARTMENTS 75,000 BML 1,376,726 CLINICAL TESTING 4,000 Bellsystem 24 780,397 CALL CENTERS ------------------------------------------------------------------------------------ 26,431,078 ------------------------------------------------------------------------------------ TAIWAN-3.3% 525,000 ASE Test(b) 2,100,000 SEMICONDUCTOR PACKAGING MANUFACTURER 2,460,000 Phoenixtec Power 1,867,186 UNINTERRUPTABLE POWER SUPPLIES 951,600 Advantech 1,716,450 COMPUTER BASED INDUSTRIAL AUTOMATION 2,461,000 Chroma Ate 1,484,413 TEST & MEASUREMENT INSTRUMENTS ------------------------------------------------------------------------------------ 7,168,049 ------------------------------------------------------------------------------------ SINGAPORE-1.1% 1,000,000 Sembcorp Logistics 905,082 LOGISTIC SERVICES FOR MARINE TRANSPORT 2,000,000 Comfort Group 899,317 TAXI SERVICE 500,000 Delgro 619,722 BUS & TAXI SERVICE ------------------------------------------------------------------------------------ 2,424,121 THAILAND-0.4% 2,000,000 Thai Union Frozen Products $ 787,949 CANNED TUNA FISH INDIA-1.1% 160,000 Housing Development Finance 1,195,245 MORTGAGE LOAN PROVIDER IN INDIA 200,000 Hero Honda Motors 1,132,013 MOTORCYCLE MANUFACTURER ------------------------------------------------------------------------------------ 2,327,258 ------------------------------------------------------------------------------------ SOUTH KOREA-2.8% 52,505 Yuhan 2,297,550 ETHICAL DRUG PRODUCER 130,000 S1 Corporation 2,279,836 HOME/BUSINESS SECURITY SERVICES 160,000 Samyoung Heat Exchange 1,591,838 POWER PLANT RELATED MACHINERY ------------------------------------------------------------------------------------ 6,169,224 ------------------------------------------------------------------------------------ ASIA-TOTAL 60,561,621 LATIN AMERICA-1.2% MEXICO-1.0% 750,000 Consorcio ARA(b) 1,115,643 LOW/MEDIUM INCOME HOUSE BUILDER 90,000 Grupo Aeroportuario 1,057,500 MEXICAN AIRPORT AUTHORITY ------------------------------------------------------------------------------------ 2,173,143 ------------------------------------------------------------------------------------ BRAZIL-0.2% 182,700 Cia De Consessoes Rodoviaria(b) 381,915 BRAZILIAN TOLLROADS ------------------------------------------------------------------------------------ LATIN AMERICA-TOTAL 2,555,058 OTHER COUNTRIES-9.3% AUSTRALIA-1.7% 400,000 Jupiters 1,251,556 CASINO 250,000 The Warehouse Group 958,280 WAREHOUSE CLUB
See accompanying notes to financial statements. 276
NUMBER OF VALUE SHARES AUSTRALIA-1.7% (CONT) 800,000 Computershare $ 832,870 FINANCIAL SOFTWARE/SERVICES 700,000 Goodman Fielder 701,187 CONSUMER GOODS ------------------------------------------------------------------------------------ 3,743,893 ------------------------------------------------------------------------------------ CANADA-6.0% 533,100 AltaGas Services 3,236,329 NATURAL GAS GATHERER & PROCESSOR 300,000 Patheon(b) 3,076,534 PHARMACEUTICALS 1,330,000 Canadian 88(b) 2,138,507 NATURAL GAS PRODUCER 135,000 Corus Entertainment(b) 1,619,453 CATV PROGRAMMING & RADIO STATIONS 120,000 Shawcor 1,059,695 OIL & GAS PIPELINE PRODUCTS 199,998 Silent Witness(b) 810,272 99,999 Silent Witness Warrants(b) -- SECURITY CAMERA MANUFACTURER 75,000 Kingsway Financial(b) 649,965 AUTO & SPECIALTY INSURANCE 96,300 Descartes Systems Group(b) 295,661 LOGISTICS SOFTWARE & DATA SERVICES ------------------------------------------------------------------------------------ 12,886,416 ------------------------------------------------------------------------------------ UNITED STATES-1.6% 191,000 Central European Distribution(b) 3,535,410 SPIRITS & WINE DISTRIBUTION OTHER-TOTAL 20,165,719 TOTAL COMMON STOCKS (COST: $234,359,392)-95.1% 205,578,709 ------------------------------------------------------------------------------------ PRINCIPAL VALUE AMOUNT SHORT-TERM OBLIGATIONS-3.3% $ 7,023,000 Repurchase agreement with State Street Bank & Trust Co., dated 12/31/02 due 1/02/03 at 1.000%, collateralized by Federal Home Loan Bank Notes maturing 1/16/04, market value $7,165,000 (repurchase proceeds $7,023,390) $ 7,023,000 ------------------------------------------------------------------------------------ (AMORTIZED COST: $7,023,000) 7,023,000 TOTAL INVESTMENTS (COST: $241,382,392)-98.4%(a) 212,601,709 ------------------------------------------------------------------------------------ CASH AND OTHER ASSETS LESS LIABILITIES-1.6% 3,481,855 ------------------------------------------------------------------------------------ TOTAL NET ASSETS-100% $ 216,083,564 ====================================================================================
NOTES TO STATEMENT OF INVESTMENTS: (a) At December 31, 2002, cost for federal income tax purposes is $241,450,992 and net unrealized depreciation was $28,849,283 consisting of gross unrealized appreciation of $21,178,750 and gross unrealized depreciation of $50,028,033. (b) Non-income producing security. (c) At December 31, 2002, $72,747,728 or 33.7% of the Fund's net assets was denominated in the Euro currency. See accompanying notes to financial statements. 277 WANGER INTERNATIONAL SMALL CAP PORTFOLIO DIVERSIFICATION DECEMBER 31, 2002 AT DECEMBER 31, 2002, THE FUND'S PORTFOLIO INVESTMENTS AS A PERCENT OF NET ASSETS WAS DIVERSIFIED AS FOLLOWS:
VALUE PERCENT ------------------------------------------------------------- INFORMATION TECHNOLOGY Business Information & Marketing Services $ 7,084,346 3.3% Instrumentation 6,466,679 3.0 Computer Hardware 3,583,636 1.6 Television Programming 3,167,591 1.5 Computer Services 2,455,174 1.1 Transaction Processors 2,217,743 1.0 Semiconductors and Related Equipment 2,100,000 1.0 Publishing 1,685,468 0.8 Business Software 1,051,564 0.5 Contract Manufacturing 1,045,025 0.5 Internet Related 24,126 0.0 ------------------------------------------------------------- 30,881,352 14.3 ------------------------------------------------------------- HEALTH CARE Services 9,380,470 4.3 Pharmaceuticals 6,405,170 3.0 Biotechnology/ Drug Delivery 1,502,154 0.7 Hospital Management 1,432,524 0.7 Medical Equipment 1,281,259 0.6 ------------------------------------------------------------- 20,001,577 9.3 ------------------------------------------------------------- CONSUMER GOODS/SERVICES Retail 14,015,449 6.5 Durable Goods 7,723,505 3.6 Food 5,976,439 2.8 Furniture and Textiles 3,840,377 1.8 Goods Distribution 3,535,410 1.6 Entertainment 3,294,405 1.5 Leisure Products 1,903,180 0.9 Non Durable Goods 1,633,079 0.8 Apparels 1,630,382 0.7 Casinos 1,251,556 0.6 Consumer Services 1,122,003 0.5 Beverage 464,753 0.2 ------------------------------------------------------------- 46,390,538 21.5 FINANCE Savings & Loans $ 3,717,137 1.7% Finance Companies 2,652,755 1.2 Insurance 2,279,584 1.1 Banks 2,133,055 1.0 Credit Cards 2,049,301 0.9 Money Management 247,219 0.1 ------------------------------------------------------------- 13,079,051 6.0 ------------------------------------------------------------- INDUSTRIAL GOODS/SERVICES Industrial Services 19,388,700 8.9 Industrial Materials 13,126,426 6.1 Machinery 7,085,223 3.3 Outsourcing & Training Services 6,932,550 3.2 Conglomerates 6,023,665 2.8 Construction 5,671,999 2.6 Electrical Components 838,016 0.4 ------------------------------------------------------------- 59,066,579 27.3 ------------------------------------------------------------- ENERGY/MINERALS Oil Services 7,498,320 3.5 Oil Refining/Marketing/Distribution 5,858,078 2.7 Independent Power 4,599,818 2.1 Oil/Gas Producers 3,800,597 1.8 Non-Ferrous Metals 2,236,727 1.0 ------------------------------------------------------------- 23,993,540 11.1 ------------------------------------------------------------- OTHER Transportation 7,151,895 3.3 Real Estate 2,992,284 1.4 Regulated Utilities 2,021,893 0.9 ------------------------------------------------------------- 12,166,072 5.6 ------------------------------------------------------------- TOTAL COMMON STOCKS AND OTHER EQUITY-LIKE SECURITIES 205,578,709 95.1 ------------------------------------------------------------- SHORT-TERM OBLIGATIONS 7,023,000 3.3 ------------------------------------------------------------- TOTAL INVESTMENTS 212,601,709 98.4 ------------------------------------------------------------- CASH AND OTHER ASSETS LESS LIABILITIES 3,481,855 1.6 ------------------------------------------------------------- NET ASSETS $ 216,083,56 100.0% =============================================================
See accompanying notes to financial statements. 278 WANGER TWENTY STATEMENT OF INVESTMENTS DECEMBER 31, 2002
NUMBER OF VALUE SHARES COMMON STOCKS-95.1% INFORMATION-29.4% TELEVISION PROGRAMMING-7.1% 208,000 Liberty Media(b) $ 1,859,520 CATV & SATELLITE DISH PROGRAMMING BUSINESS INFORMATION/MARKETING SERVICES/PUBLISHING-3.2% 20,000 Moody's 825,800 RATINGS SERVICE FOR CREDIT OBLIGATIONS BUSINESS SOFTWARE-8.5% 32,000 Synopsys(b) 1,476,800 SOFTWARE FOR DESIGNING SEMICONDUCTOR CHIPS 67,000 JD Edwards(b) 755,760 MID MARKET ERP & SUPPLY CHAIN SOFTWARE ------------------------------------------------------------------------------------ 2,232,560 ------------------------------------------------------------------------------------ GAMING EQUIPMENT-6.4% 22,000 International Game Technology(b) 1,670,240 SLOT MACHINES & PROGRESSIVE JACKPOTS INSTRUMENTATION-4.2% 30,000 Tektronix(b) 545,700 ANALYTICAL INSTRUMENTS 25,000 Waters(b) 544,500 CHROMATOGRAPHY, MASS SPECTROMETRY, THERMAL ANALYSIS ------------------------------------------------------------------------------------ 1,090,200 ------------------------------------------------------------------------------------ INFORMATION-TOTAL 7,678,320 HEALTH CARE-26.3% HOSPITAL/LABORATORY SUPPLIES-2.7% 25,000 Techne(b) 714,200 CYTOKINES, ANTIBODIES, OTHER REAGENTS FOR LIFE SCIENCES MEDICAL EQUIPMENT-8.0% 40,000 Guidant(b) 1,234,000 STENTS, DEFIBRILLATORS & OTHER CARDIAC MEDICAL DEVICES 20,000 Boston Scientific(b) 850,400 STENTS & CATHETERS 2,084,400 ------------------------------------------------------------------------------------ SERVICES-15.6% 80,000 First Health(b) $ 1,948,000 PPO NETWORK 70,000 IMS Health 1,120,000 PRESCRIPTION DATA TO PHARMACEUTICAL INDUSTRY 32,000 Lincare Holdings(b) 1,011,840 HOME HEALTH CARE SERVICES ------------------------------------------------------------------------------------ 4,079,840 ------------------------------------------------------------------------------------ HEALTH CARE-TOTAL 6,878,440 CONSUMER GOODS/SERVICES-13.2% ENTERTAINMENT-2.4% 17,000 International Speedway Motors 633,930 LARGEST MOTORSPORT RACETRACK OWNER & OPERATOR RETAIL-3.5% 33,000 Costco(b) 925,980 WAREHOUSE SUPERSTORES APPAREL-4.1% 30,000 Jones Apparel(b) 1,063,200 WOMEN'S APPAREL LEISURE VEHICLES-3.2% 18,000 Harley-Davidson 831,600 MOTORCYCLES & RELATED MERCHANDISE CONSUMER GOODS/SERVICES-TOTAL 3,454,710 FINANCE-20.2% MONEY MANAGEMENT-2.0% 19,000 SEI Investments 516,420 MUTUAL FUND ADMINISTRATION
See accompanying notes to financial statements. 279
NUMBER OF VALUE SHARES INSURANCE-8.4% 7,000 Markel(b) $ 1,438,500 SPECIALTY INSURANCE 23,000 Fidelity National Financial 755,090 TITLE INSURANCE & OTHER SERVICES ------------------------------------------------------------------------------------ 2,193,590 ------------------------------------------------------------------------------------ BANKS-9.8% 30,000 TCF Financial 1,310,700 GREAT LAKES BANK 37,000 Associated Banc-Corp 1,255,780 MIDWEST BANK ------------------------------------------------------------------------------------ 2,566,480 ------------------------------------------------------------------------------------ FINANCE-TOTAL 5,276,490 INDUSTRIAL GOODS/SERVICES-6.0% LOGISTICS-6.0% 48,000 Expeditors International of 1,567,200 Washington INTERNATIONAL FREIGHT FORWARDER INDUSTRIAL GOODS/SERVICES-TOTAL 1,567,200 TOTAL COMMON STOCKS (COST: $22,700,502)-95.1% 24,855,160 ------------------------------------------------------------------------------------ PRINCIPAL VALUE AMOUNT SHORT-TERM OBLIGATIONS-4.7% $ 1,000,000 Toyota Motor Credit 1.10%, due $ 999,969 1/02/03 228,000 Repurchase agreement with State Street Bank & Trust Co., dated 12/31/02, due 1/02/03 at 1.00%, collateralized by Federal Home Loan Bank Notes maturing 1/16/04, market value $235,000 (repurchase proceeds $228,013) 228,000 ------------------------------------------------------------------------------------ (AMORTIZED COST: $1,227,969) 1,227,969 TOTAL INVESTMENTS (COST: $23,928,471)-99.8%(a) 26,083,129 ------------------------------------------------------------------------------------ CASH AND OTHER ASSETS LESS LIABILITIES-0.2% 40,791 ------------------------------------------------------------------------------------ TOTAL NET ASSETS-100% $ 26,123,920 ====================================================================================
NOTES TO STATEMENT OF INVESTMENTS: (a) At December 31, 2002, cost for federal income tax purposes is the same and net unrealized appreciation was $2,154,658 consisting of gross unrealized appreciation of $3,427,545 and gross unrealized depreciation of $1,272,887. (b) Non-income producing security. See accompanying notes to financial statements. 280 Wanger Advisors Trust 2002 Annual Report WANGER FOREIGN FORTY STATEMENT OF INVESTMENTS DECEMBER 31, 2002
NUMBER OF VALUE SHARES COMMON STOCKS-89.4% EUROPE-65.9% GERMANY-6.5% 17,800 Rhoen-Klinikum $ 578,673 HOSPITAL MANAGEMENT 4,900 Deutsche Boerse 196,090 TRADING, CLEARING & SETTLEMENT SERVICES FOR FINANCIAL MARKETS 2,200 Henkel 139,696 CHEMICALS, DETERGENTS & NON-FOOD CONSUMER BRANDS ------------------------------------------------------------------------------------ 914,459 ------------------------------------------------------------------------------------ DENMARK-1.9% 10,000 Jyske Bank(b) 271,028 RETAIL & CORPORATE BANKING NORWAY-6.8% 33,650 Orkla 572,568 DIVERSIFIED CONSUMER GOODS 80,300 DNB Holding 377,479 BANK ------------------------------------------------------------------------------------ 950,047 ------------------------------------------------------------------------------------ FRANCE-8.1% 10,300 Neopost(b) 331,609 POSTAGE METER MACHINES 4,000 Technip-Coflexip 286,085 GLOBAL OIL ENGINEERING & CONSTRUCTION 7,000 AGF 234,175 LIFE & HEALTH INSURANCE 7,400 Euronext 160,717 TRADING, CLEARING & SETTLEMENT SERVICES FOR FINANCIAL MARKETS 3,200 Essilor International 131,717 EYEGLASS LENSES ------------------------------------------------------------------------------------ 1,144,303 ------------------------------------------------------------------------------------ UNITED KINGDOM/IRELAND-26.9% 50,000 Kerry Group (Ireland) 668,546 SPECIALTY FOOD INGREDIENT COMPANY 40,000 Exel 442,934 GLOBAL FREIGHT FORWARDING 60,000 Anglo Irish Bank (Ireland) $ 426,611 CORPORATE LENDING & PRIVATE BANKING 65,000 Compass Group 345,238 INTERNATIONAL CONCESSION & CONTRACT CATERER 30,000 Standard Chartered 340,892 UNITED KINGDOM BANK 35,000 Reed Elsevier 299,689 SCIENTIFIC, LEGAL, EDUCATION & BUSINESS PUBLISHER 45,000 Bunzl 275,224 SUPPLIER OF BUSINESS TO BUSINESS CONSUMABLES 25,000 Xstrata(b) 261,141 DIVERSIFIED MINING HOLDING COMPANY 60,000 BG Group 258,808 OIL & GAS PRODUCER 20,000 Irish Life & Permanent (Ireland) 216,032 SAVINGS PRODUCTS 10,000 Cobham 162,559 AEROSPACE 10,000 Smith & Nephew 61,241 MEDICAL EQUIPMENT & SUPPLIES 2,000 Man Group 28,553 HEDGE FUND MANAGER ------------------------------------------------------------------------------------ 3,787,468 ------------------------------------------------------------------------------------ SWITZERLAND-14.5% 1,115 Synthes-Stratec 683,624 PRODUCTS FOR ORTHOPEDIC SURGERY 2,850 Kaba Holdings 529,571 BUILDING SECURITY SYSTEMS 850 Givaudan 381,028 INDUSTRIAL FRAGRANCES & FLAVORS 1,200 Schindler 233,823 ELEVATOR MANUFACTURER & MAINTENANCE 750 Geberit International 215,820 PLUMBING SUPPLIES ------------------------------------------------------------------------------------ 2,043,866 ------------------------------------------------------------------------------------ ITALY-1.2% 21,000 Autogrill(b) 163,408 RESTAURANTS & CATERING FOR TRAVELERS EUROPE-TOTAL 9,274,579
See accompanying notes to financial statements. 281
NUMBER OF VALUE SHARES ASIA-12.1% HONG KONG-2.5% 110,000 TVB $ 346,988 TELEVISION PROGRAMMING & BROADCASTING JAPAN-9.3% 9,300 Oriental Land 563,043 DISNEY THEME PARK OPERATOR 6,000 Orix 386,494 FINANCE LEASING 23,000 Terumo 318,003 MEDICAL SUPPLIES 800 Nidec 49,848 HARD DISK DRIVE SPINDLE MOTOR MANUFACTURER ------------------------------------------------------------------------------------ 1,317,388 ------------------------------------------------------------------------------------ SINGAPORE-0.3% 40,000 Singapore Technical Engineering 38,048 DEFENSE SUPPLIER ASIA-TOTAL 1,702,424 OTHER COUNTRIES-11.4% AUSTRALIA-3.4% 150,000 Lion Nathan 478,619 BEER BREWER/DISTRIBUTOR PRINCIPAL AMOUNT OR VALUE NUMBER OF SHARES CANADA-8.0% 13,600 Talisman Energy $ 489,435 OIL & GAS PRODUCER 15,000 Power Financial 344,686 LIFE INSURANCE & MUTUAL FUNDS 25,000 Corus Entertainment(b) 299,899 TELEVISION PROGRAMMING & RADIO STATIONS ------------------------------------------------------------------------------------ 1,134,020 ------------------------------------------------------------------------------------ OTHER-TOTAL 1,612,639 TOTAL COMMON STOCKS (COST: $12,966,509)-89.4% 12,589,642 ------------------------------------------------------------------------------------ SHORT-TERM OBLIGATIONS-10.1% $ 1,425,000 Repurchase agreement with State Street Bank & Trust Co., dated 12/31/02, due 1/02/03 at 1.000%, collateralized by Federal Home Loan Bank Notes maturing 1/16/04, market value $1,455,000 (repurchase proceeds $1,425,079) 1,425,000 ------------------------------------------------------------------------------------ (AMORTIZED COST: $1,425,000) 1,425,000 TOTAL INVESTMENTS (COST: $14,391,509)-99.5%(a) 14,014,642 ------------------------------------------------------------------------------------ CASH AND OTHER ASSETS LESS LIABILITIES-0.5% 68,166 ------------------------------------------------------------------------------------ TOTAL NET ASSETS-100% $ 14,082,808 ====================================================================================
NOTES TO STATEMENT OF INVESTMENTS: (a) At December 31, 2002, cost for federal income tax purposes is $14,422,783 and net unrealized depreciation was $408,141 consisting of gross unrealized appreciation of $855,185 and gross unrealized depreciation of $1,263,326. (b) Non-income producing security. (c) At December 31, 2002, $3,533,360 or 25.1% of the Fund's net assets were denominated in the Euro currency. See accompanying notes to financial statements. 282 Wanger Advisors Trust 2002 Annual Report WANGER FOREIGN FORTY PORTFOLIO DIVERSIFICATION DECEMBER 31, 2002 AT DECEMBER 31, 2002, THE FUND'S PORTFOLIO INVESTMENTS AS A PERCENT OF NET ASSETS WAS DIVERSIFIED AS FOLLOWS:
VALUE PERCENT ------------------------------------------------------------- INFORMATION TECHNOLOGY COMPUTER RELATED HARDWARE Computer Hardware $ 381,457 2.7% ------------------------------------------------------------- 381,457 2.7 MEDIA TV Broadcasting 346,988 2.5 TV Programming 299,899 2.1 ------------------------------------------------------------- 646,887 4.6 SOFTWARE AND SERVICES Transaction Processors 356,807 2.6 Publishing 299,689 2.1 ------------------------------------------------------------- 656,496 4.7 ------------------------------------------------------------- 1,684,840 12.0 ------------------------------------------------------------- HEALTH CARE Medical Equipment 876,582 6.2 Hospital Management 578,673 4.1 Hospital/ Laboratory Supplies 318,003 2.3 ------------------------------------------------------------- 1,773,258 12.6 ------------------------------------------------------------- CONSUMER GOODS/SERVICES Food 1,241,114 8.8 Entertainment 563,043 4.0 Restaurants 508,646 3.6 Beverage 478,619 3.4 Nondurables 139,696 1.0 ------------------------------------------------------------- 2,931,118 20.8 FINANCE Banks $ 1,416,010 10.1% Insurance 450,207 3.2 Finance Companies 386,494 2.7 Money Management 373,239 2.7 ------------------------------------------------------------- 2,625,950 18.7 ------------------------------------------------------------- INDUSTRIAL GOODS/SERVICES Construction 529,571 3.8 Speciality Chemicals 381,028 2.7 Outsourcing & Training Services 275,224 2.0 Industrial Services 271,871 1.9 Industrial Materials 215,820 1.5 Electrical Components 162,559 1.1 ------------------------------------------------------------- 1,836,073 13.0 ------------------------------------------------------------- ENERGY/MINERALS Oil/Gas Producers 748,243 5.3 Oil Services 286,085 2.0 Non-Ferrous Metals 261,141 1.9 ------------------------------------------------------------- 1,295,469 9.2 ------------------------------------------------------------- OTHER Transportation 442,934 3.1 ------------------------------------------------------------- 442,934 3.1 ------------------------------------------------------------- TOTAL COMMON STOCKS 12,589,642 89.4 ------------------------------------------------------------- SHORT-TERM OBLIGATIONS 1,425,000 10.1 ------------------------------------------------------------- TOTAL INVESTMENTS 14,014,642 99.5 ------------------------------------------------------------- CASH AND OTHER ASSETS LESS LIABILITIES 68,166 0.5 ------------------------------------------------------------- NET ASSETS $ 14,082,808 100.0% =============================================================
See accompanying notes to financial statements. 283 Wanger Advisors Trust 2002 Annual Report This page intentionally left blank 284 Wanger Advisors Trust 2002 Annual Report WANGER ADVISORS FUNDS - STATEMENTS OF ASSETS AND LIABILITIES - STATEMENTS OF OPERATIONS - STATEMENTS OF CHANGES IN NET ASSETS - FINANCIAL HIGHLIGHTS - NOTES TO FINANCIAL STATEMENTS 285 Wanger Advisors Trust 2002 Annual Report STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 2002
WANGER WANGER WANGER WANGER U.S. SMALLER INTERNATIONAL TWENTY FOREIGN COMPANIES SMALL CAP FORTY =================================================================================================================================== ASSETS Investments, at value (cost: Wanger U.S. Smaller Companies $ 472,445,504 $ 212,601,709 $ 26,083,12 $ 14,014,642 $420,589,997; Wanger International Small Cap $241,382,392; Wanger Twenty $23,928,471; Wanger Foreign Forty $14,391,509) Cash 10 804 808 616 Foreign currency (cost: Wanger International Small Cap $3,549,776; Wanger Foreign Forty $2,308) -- 3,564,497 -- 2,310 Receivable for: Investments sold -- 243,000 3,333 -- Fund shares sold 386,063 268,980 82,356 114,268 Dividends and interest 67,901 299,524 1,146 36,308 Other assets 8,121 2,931 119 10 ----------------------------------------------------------------------------------------------------------------------------------- Total Assets 472,907,599 216,981,445 26,170,891 14,168,154 LIABILITIES Payable for: Investments purchased 125,919 368,108 -- -- Fund shares repurchased 907,267 384,494 21,361 49,708 Transfer agent fee 1,594 1,766 1,627 1,635 Custody fee 3,406 54,019 687 5,937 Reports to shareholders 109,104 61,508 2,620 5,629 Legal and audit fee 27,000 23,709 11,363 11,214 Foreign capital gains tax -- 3,105 -- -- Other liabilities 7,315 1,172 9,313 11,223 ----------------------------------------------------------------------------------------------------------------------------------- Total Liabilities 1,181,605 897,881 46,971 85,346 ----------------------------------------------------------------------------------------------------------------------------------- Net Assets $ 471,725,994 $ 216,083,564 $ 26,123,920 $ 14,082,808 =================================================================================================================================== COMPOSITION OF NET ASSETS Paid in capital $ 471,694,163 $ 336,194,212 $ 24,481,48 $ 21,739,027 Undistributed net investment income 13,289 774,792 -- 49,697 Accumulated net realized loss (51,836,965) (92,135,543) (512,219) (7,331,728) Net unrealized appreciation (depreciation) on: Investments 51,855,507 (28,780,683) 2,154,658 (376,867) Foreign currency transactions -- 30,786 -- 2,679 ----------------------------------------------------------------------------------------------------------------------------------- Net Assets $ 471,725,994 $ 216,083,564 $ 26,123,92 $ 14,082,808 =================================================================================================================================== Fund shares outstanding 25,479,144 16,282,165 1,841,521 1,428,174 =================================================================================================================================== Net asset value, offering price and redemption price per share $ 18.51 $ 13.27 $ 14.19 $ 9.86 ===================================================================================================================================
See accompanying notes to financial statements. 286 Wanger Advisors Trust 2002 Annual Report STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2002
WANGER WANGER WANGER WANGER U.S. SMALLER INTERNATIONAL TWENTY FOREIGN COMPANIES SMALL CAP FORTY =================================================================================================================================== INVESTMENT INCOME: Dividend income (net of foreign taxes of $527,368 for $ 2,109,604 $ 4,220,702 $ 105,050 $ 249,783 Wanger International Small Cap and $27,426 for Wanger Foreign Forty) Interest income 763,710 240,419 28,798 20,037 ----------------------------------------------------------------------------------------------------------------------------------- Total investment income 2,873,314 4,461,121 133,848 269,820 EXPENSES: Management fees 4,624,010 2,867,268 227,389 150,207 Custody fees 20,970 243,388 4,451 32,194 Legal and audit fees 104,004 62,463 18,474 17,647 Reports to shareholders 319,198 132,066 7,343 8,791 Transfer agent fees 21,134 20,903 18,806 18,747 Trustees' fees 70,151 33,206 3,747 3,034 Other expenses 34,539 33,451 1,863 1,845 ----------------------------------------------------------------------------------------------------------------------------------- Total Expenses 5,194,006 3,392,745 282,073 232,465 Less custody fees paid indirectly (681) (463) (57) (25) Less expenses reimbursed by Advisor -- -- -- (14,574) ----------------------------------------------------------------------------------------------------------------------------------- Net Expenses 5,193,325 3,392,282 282,016 217,866 ----------------------------------------------------------------------------------------------------------------------------------- Net Investment Income (Loss) (2,320,011) 1,068,839 (148,168) 51,954 NET REALIZED AND UNREALIZED GAIN (LOSS) ON PORTFOLIO POSITIONS: Net realized gain (loss) on: Investments (17,795,068) (29,132,085 726,558 (2,981,319) Foreign currency transactions -- (249,204) -- (1,450) ----------------------------------------------------------------------------------------------------------------------------------- Net realized gain (loss) (17,795,068) (29,381,289) 726,558 (2,982,769) ----------------------------------------------------------------------------------------------------------------------------------- Net change in unrealized appreciation (depreciation) on: Investments (74,506,422) (4,123,273) (2,604,955) 633,816 Foreign currency transactions -- 266,370 -- 1,465 ----------------------------------------------------------------------------------------------------------------------------------- Net change in unrealized appreciation (depreciation) (74,506,422) (3,856,903) (2,604,955) 635,281 ----------------------------------------------------------------------------------------------------------------------------------- Net Loss (92,301,490) (33,238,192) (1,878,397) (2,347,488) ----------------------------------------------------------------------------------------------------------------------------------- Net Decrease in Net Assets from Operations $ (94,621,501) $ (32,169,353) $ (2,026,565) $ (2,295,534) ===================================================================================================================================
See accompanying notes to financial statements. 287 Wanger Advisors Trust 2002 Annual Report STATEMENTS OF CHANGES IN NET ASSETS
WANGER U.S. SMALLER COMPANIES WANGER INTERNATIONAL SMALL CAP YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED INCREASE (DECREASE) IN NET ASSETS DECEMBER 31,2002 DECEMBER 31,2001 DECEMBER 31,2002 DECEMBER 31,2001 =================================================================================================================================== FROM OPERATIONS: Net investment income (loss) $ (2,320,011) $ (884,329) $ 1,068,839 $ 238,615 Net realized gain (loss) on investments and foreign currency transactions (17,795,068) (25,956,670) (29,381,289) (55,961,150) Net change in unrealized appreciation (depreciation) on investments and foreign currency transactions (74,506,422) 74,197,950 (3,856,903) (1,436,144) ----------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations (94,621,501) 47,356,951 (32,169,353) (57,158,679) DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income -- (275,386) -- -- Net realized gain -- -- -- (78,693,586) ----------------------------------------------------------------------------------------------------------------------------------- Total distributions to shareholders -- (275,386) -- (78,693,586) SHARE TRANSACTIONS: Subscriptions 140,977,765 108,000,641 334,085,769 517,577,408 Distributions reinvested -- 275,386 -- 78,693,586 Redemptions (72,816,413) (60,476,971) (316,459,265) (501,467,052) ----------------------------------------------------------------------------------------------------------------------------------- Net Increase from Share Transactions 68,161,352 47,799,056 17,626,504 94,803,942 ----------------------------------------------------------------------------------------------------------------------------------- Total Increase (Decrease) in Net Assets (26,460,149) 94,880,621 (14,542,849) (41,048,323) NET ASSETS: Beginning of period 498,186,143 403,305,522 230,626,413 271,674,736 ----------------------------------------------------------------------------------------------------------------------------------- End of period $ 471,725,994 $ 498,186,143 $ 216,083,564 $ 230,626,413 ----------------------------------------------------------------------------------------------------------------------------------- UNDISTRIBUTED NET INVESTMENT INCOME (ACCUMULATED NET INVESTMENT LOSS) $ 13,289 -- $ 774,792 $ (44,843) ===================================================================================================================================
See accompanying notes to financial statements. 288 Wanger Advisors Trust 2002 Annual Report STATEMENTS OF CHANGES IN NET ASSETS
WANGER TWENTY WANGER FOREIGN FORTY YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED INCREASE (DECREASE) IN NET ASSETS DECEMBER 31, 2002 DECEMBER 31, 2001 DECEMBER 31, 2002 DECEMBER 31, 2001 =================================================================================================================================== FROM OPERATIONS: Net investment income (loss) $ (148,168) $ (54,495) $ 51,954 $ (32,650) Net realized gain (loss) on investments and foreign currency transactions 726,558 (613,846) (2,982,769) Net change in unrealized appreciation (depreciation) investments and foreign currency transactions (2,604,955) 2,426,419 635,281 (860,223) ----------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations (2,026,565) 1,758,078 (2,295,534) (4,653,894) DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income -- -- -- (20,439) Net realized gain -- -- -- (1,311,409) ----------------------------------------------------------------------------------------------------------------------------------- Total distributions to shareholders -- -- -- (1,331,848) SHARE TRANSACTIONS: Subscriptions 12,257,973 10,836,793 32,503,614 66,745,612 Distributions reinvested -- -- -- 1,331,848 Redemptions (5,536,933) (3,294,809) (31,556,395) (62,156,191) ----------------------------------------------------------------------------------------------------------------------------------- Net Increase from Share Transactions 6,721,040 7,541,984 947,219 5,921,269 ----------------------------------------------------------------------------------------------------------------------------------- Total Increase (Decrease) in Net Assets 4,694,475 9,300,062 (1,348,315) (64,473) NET ASSETS: Beginning of period 21,429,445 12,129,383 15,431,123 15,495,596 ----------------------------------------------------------------------------------------------------------------------------------- End of period $ 26,123,920 $ 21,429,445 $ 14,082,808 $ 15,431,123 ----------------------------------------------------------------------------------------------------------------------------------- UNDISTRIBUTED NET INVESTMENT INCOME (ACCUMULATED NET INVESTMENT LOSS) -- -- $ 49,697 $ (807) ===================================================================================================================================
289 Wanger Advisors Trust 2002 Annual Report WANGER U.S. SMALLER COMPANIES FINANCIAL HIGHLIGHTS
YEAR ENDED DECEMBER 31, SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 2002 2001 2000 1999 1998 ========================================================================================================================= NET ASSET VALUE, BEGINNING OF PERIOD $ 22.25 $ 19.99 $ 24.88 $ 22.18 $ 21.46 ------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) (a) (0.10) (0.04) 0.02 0.03 (0.05) Net realized and unrealized gain (loss) on investments (3.64) 2.31 (1.82) 4.79 1.93 ------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (3.74) 2.27 (1.80) 4.82 1.88 ------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income -- (0.01) (0.03) -- -- From net realized capital gains -- -- (3.06) (2.12) (1.16) ------------------------------------------------------------------------------------------------------------------------- Total Distributions Declared to Shareholders -- (0.01) (3.09) (2.12) (1.16) ------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 18.51 $ 22.25 $ 19.99 $ 24.88 $ 22.18 ========================================================================================================================= Total Return(b) (16.81)% 11.39% (8.16)% 25.06% 8.68% ------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: Expenses 1.05%(c) 0.99% 1.00%(c) 1.02%(c) 1.02%(c) Net investment income (loss) (0.47)%(c) (0.20)% 0.07%(c) 0.14%(c) (0.25)%(c) Portfolio turnover rate 16% 18% 36% 35% 34% Net assets, end of period (000's) $ 471,726 $ 498,186 $ 403,306 $ 390,709 $ 339,119
---------- (a) Net investment income (loss) per share was based upon the average shares outstanding during the period. (b) Total return at net asset value assuming all distributions are reinvested. (c) The benefits derived from custody fees paid indirectly had no impact. See accompanying notes to financial statements. 290 Wanger Advisors Trust 2002 Annual Report WANGER INTERNATIONAL SMALL CAP FINANCIAL HIGHLIGHTS
YEAR ENDED DECEMBER 31, SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 2002 2001 2000 1999 1998 ========================================================================================================================= NET ASSET VALUE, BEGINNING OF PERIOD $ 15.40 $ 28.53 $ 43.67 $ 19.62 $ 17.05 ------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) (a) 0.07 0.02 (0.26) (0.13) 0.03 Net realized and unrealized gain (loss) on investments and foreign currency transactions (2.20) (5.12) (9.75) 24.52 2.76 ------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (2.13) (5.10) (10.01) 24.39 2.79 ------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income -- -- -- (0.34) From net realized gain and unrealized gain reportable for federal income taxes -- (8.03) (5.13) -- -- ------------------------------------------------------------------------------------------------------------------------- Total Distributions Declared to Shareholders -- (8.03) (5.13) (0.34) (0.22) ------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 13.27 $ 15.40 $ 28.53 $ 43.67 $ 19.62 ========================================================================================================================= Total Return(b) (13.83)% (21.27)% (27.84)% 126.37% 16.33% ------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: Expenses (c) 1.47% 1.43% 1.41% 1.49% 1.55% Net investment income (loss) (c) 0.46% 0.10% (0.68)% (0.49)% 0.16% Portfolio turnover rate 54% 56% 67% 75% 56% Net assets, end of period (000's) $ 216,084 $ 230,626 $ 271,675 $ 311,331 $ 141,253
---------- (a) Net investment income (loss) per share was based upon the average shares outstanding during the period. (b) Total return at net asset value assuming all distributions are reinvested. (c) The benefits derived from custody fees paid indirectly had no impact. See accompanying notes to financial statements. 291 Wanger Advisors Trust 2002 Annual Report WANGER TWENTY FINANCIAL HIGHLIGHTS
FEBRUARY 1, 19THROUGH YEAR ENDED DECEMBER 31, DECEMBER 31, SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 2002 2001 2000 1999 =================================================================================================================== NET ASSET VALUE, BEGINNING OF PERIOD $ 15.36 $ 14.08 $ 13.43 $ 10.00 ------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment loss (a) (0.09) (0.05) (0.03) (0.08) Net realized and unrealized gain (loss) on investments (1.08) 1.33 1.23 3.51 ------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (1.17) 1.28 1.20 3.43 ------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net realized capital gains -- -- (0.55) -- ------------------------------------------------------------------------------------------------------------------- Total Distributions Declared to Shareholders -- -- (0.55) -- ------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 14.19 $ 15.36 $ 14.08 $ 13.43 =================================================================================================================== Total Return(b) (7.62)% 9.09% 9.45%(c) 34.30%(c)(d) ------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: Expenses 1.18%(e) 1.33%(e) 1.39%(f) 1.41%(f)(g) Net investment loss (0.62)%(e) (0.34)%(e) (0.24)%(f) (0.77)%(f)(g) Reimbursement -- -- 0.21% 0.71%(g) Portfolio turnover rate 45% 76% 86% 113%(g) Net assets, end of period (000's) $ 26,124 $ 21,429 $ 12,129 $ 6,570
---------- (a) Net investment loss per share was based upon the average shares outstanding during the period. (b) Total return at net asset value assuming all distributions reinvested. (c) Had the Advisor not reimbursed a portion of its expenses, total return would have been reduced. (d) Not annualized. (e) The benefits derived from custody fees paid indirectly had no impact. (f) In accordance with a requirement of the Securities and Exchange Commission, this ratio reflects total expenses prior to the reduction of custody fees for cash balances it maintains with the custodian ("custody fees paid indirectly"). The ratios of expenses to average daily net assets and net investment income to average daily net assets net of custody fees paid indirectly would have been 1.35% and (0.20%), respectively, for the year ended December 31, 2000 and 1.35% and (0.71%), respectively, for the period ended December 31, 1999. (g) Annualized. See accompanying notes to financial statements. 292 Wanger Advisors Trust 2002 Annual Report WANGER FOREIGN FORTY FINANCIAL HIGHLIGHTS
FEBRUARY 1, 1999 THROUGH YEAR ENDED DECEMBER 31, DECEMBER 31, SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 2002 2001 2000 1999 =================================================================================================================== NET ASSET VALUE, BEGINNING OF PERIOD $ 11.64 $ 17.29 $ 18.39 $ 10.00 ------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) (a) 0.04 (0.03) (0.04) (0.01) Net realized and unrealized gain (loss) on investments and foreign currency transactions (1.82) (4.46) (0.10) 8.40 ------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (1.78) (4.49) (0.14) 8.39 ------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income -- (0.02) (0.01) -- From net realized capital gains -- (1.14) (0.95) -- ------------------------------------------------------------------------------------------------------------------- Total Distributions Declared to Shareholders -- (1.16) (0.96) -- ------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 9.86 $ 11.64 $ 17.29 $ 18.39 =================================================================================================================== Total Return(b) (15.29)%(c) (26.61)% (1.58)%(c) 83.90%(c)(d) RATIOS TO AVERAGE NET ASSETS: Expenses 1.45%(e) 1.45%(e) 1.45%(e) 1.59%(f)(g) Net investment income (loss) 0.35%(e) (0.20)%(e) (0.20)%(e) (0.10)%(f)(g) Reimbursement 0.10% -- 0.23% 1.86%(g) Portfolio turnover rate 113% 72% 96% 91%(g) Net assets, end of period (000's) $ 14,083 $ 15,431 $ 15,496 $ 5,826
---------- (a) Net investment income (loss) per share was based upon the average shares outstanding during the period. (b) Total return at net asset value assuming all distributions reinvested. (c) Had the Advisor not reimbursed a portion of expenses, total return would be reduced. (d) Not annualized. (e) The benefits derived from custody fees paid indirectly had no impact. (f) In accordance with a requirement of the Securities and Exchange Commission, this ratio reflects total expenses prior to the reduction of custody fees for cash balances it maintains with the custodian ("custody fees paid indirectly"). The ratios of expenses to average daily net assets and net investment income to average daily net assets net of custody fees paid indirectly would have been 1.45% and 0.04%, respectively, for the period ended December 31, 1999. (g) Annualized. See accompanying notes to financial statements. 293 Wanger Advisors Trust 2002 Annual Report NOTES TO FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS Wanger U.S. Smaller Companies (known prior to May 1, 2002 as Wanger U.S. Small Cap), Wanger International Small Cap, Wanger Twenty and Wanger Foreign Forty (the "Funds") are series of Wanger Advisors Trust (the "Trust"), an open-end management investment company organized as a Massachusetts business trust. The investment objective of each Fund is to seek long-term growth of capital. The Funds are available only for allocation to certain life insurance company separate accounts established for the purpose of funding qualified and non-qualified variable annuity contracts, and may also be offered directly to certain types of pension plans and retirement arrangements. 2. SIGNIFICANT ACCOUNTING POLICIES SECURITY VALUATION Investments are stated at fair value. Securities traded on securities exchanges or in over-the-counter markets in which transaction prices are reported are valued at the last sales price at the time of valuation. Securities for which there are no reported sales on the valuation date are valued at the latest bid quotation. Money market instruments having a maturity of 60 days or less from the valuation date are valued on an amortized cost basis. Securities for which quotations are not readily available and any other assets are valued as determined in good faith by the Board of Trustees. REPURCHASE AGREEMENTS The Funds may engage in repurchase agreement transactions. The Funds, through their custodians, receive delivery of underlying securities collateralizing repurchase agreements. The Funds' investment advisor determines that the value of the underlying securities is at all times at least equal to the resale price. In the event of default or bankruptcy by the other party to the agreement, realization and/or retention of the collateral may be subject to legal proceedings. FOREIGN CURRENCY TRANSLATIONS Values of investments denominated in foreign currencies are converted into U.S. dollars using the spot market rate of exchange at the time of valuation. Purchases and sales of investments and dividend and interest income are translated into U.S. dollars using the spot market rate of exchange prevailing on the respective dates of such transactions. The gain or loss resulting from changes in foreign exchange rates is included with net realized and unrealized gain or loss from investments, as appropriate. SECURITY TRANSACTIONS AND INVESTMENT INCOME Security transactions are accounted for on the trade date (date the order to buy or sell is executed) and dividend income is recorded on the ex-dividend date, except that certain dividends from foreign securities are recorded as soon as the information is available to the Fund. Interest income is recorded on the accrual basis and includes amortization of discounts on money market instruments and on long-term debt instruments when required for federal income tax purposes. Realized gains and losses from security transactions are reported on an identified cost basis. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimated. FUND SHARE VALUATION Fund shares are sold and redeemed on a continuing basis at net asset value. Net asset value per share is determined daily as of the close of trading on the New York Stock Exchange on each day the Exchange is open for trading by dividing the total value of the Fund's investments and other assets, less liabilities, by the number of Fund shares outstanding. CUSTODY FEES Custody fees are reduced based on each Fund's cash balances maintained with the custodian. The amount is disclosed as a reduction of total expenses in the Statement of Operations. FEDERAL INCOME TAXES The Funds have complied with the special provisions of the Internal Revenue Code available to regulated investment companies and, in the manner provided therein, distribute all their taxable income, as well as any net realized gain on sales of investments and foreign currency transactions reportable for federal income tax purposes. Accordingly, the Funds paid no federal income taxes and no federal income tax provision was required. DISTRIBUTIONS TO SHAREHOLDERS Distributions to shareholders are recorded on the ex-date. 3. FEDERAL TAX INFORMATION The amount and character of income and gains to be distributed are determined in accordance with income tax regulations, which may differ from generally accepted accounting principles. These differences are primarily due to differing treatments for; income from Real Estate Investment Trusts ("REITs"), deferral of losses from wash sales, foreign currency transactions, net operating losses, treatment of passive foreign investment company ("PFIC's") gains, capital loss carryforwards, non-deductible expenses and post-October losses. Reclassifications are made to the Funds' capital accounts to reflect income and gains available for distribution (or available capital loss carryforwards) under income tax regulations. For the year ended December 31, 2002, permanent items identified and reclassified among the components of net assets are as follows:
UNDISTRIBUTED ACCUMULATED UNREALIZED NET INVESTMENT NET REALIZED PAID-IN APPRECIATION INCOME LOSS CAPITAL (DEPRECIATION) -------------- ------------ ------- -------------- Wanger U.S. Smaller Companies $ 2,333,30 $ 34,913 $ (2,368,213 $ -- Wanger International Small Cap (249,204) (1,517,720) -- 1,766,924 Wanger Twenty 148,168 -- (148,168) -- Wanger Foreign Forty (1,450) (8,935) -- 10,385
294 Net investment income, net realized gains (losses) and net assets were not affected by these reclassifications. The tax character of distributions paid during 2002 and 2001 was as follows:
YEARS ENDED DECEMBER 31, 2002 2001 ------------------------------------------------------------------ ORDINARY LONG-TERM ORDINARY LONG-TERM INCOME CAPITAL GAIN INCOME CAPITAL GAIN ------------------------------ ------------------------------ Wanger U.S. Smaller Companies -- -- $ 275,386 -- Wanger International Small Cap -- -- 25,006,153 53,687,433 Wanger Twenty -- -- -- -- Wanger Foreign Forty -- -- 876,913 454,935
As of December 31, 2002, the components of distributable earnings on a tax basis were as follows:
UNDISTRIBUTED UNDISTRIBUTED UNREALIZED ORDINARY LONG-TERM APPRECIATION/ INCOME CAPITAL GAINS DEPRECIATION ------------- -------------- -------------- Wanger U.S. Smaller Companies $ -- $ -- $ 51,473,383 Wanger International Small Cap 774,792 -- (28,818,497) Wanger Twenty -- -- 2,154,658 Wanger Foreign Forty 49,697 -- (405,462)
The difference between book-basis and tax-basis unrealized appreciation (depreciation), if applicable, is attributable primarily to the tax deferral of losses on certain securities (wash sales), recognition of unrealized gains on certain PFIC's and foreign currency transactions and return of capital on REITs. The following capital loss carryforwards are available to reduce taxable income arising from future net realized gains on investments, if any, to the extent permitted by the Internal Revenue Code:
WANGER WANGER U.S. SMALLER INTERNATIONAL YEAR OF EXPIRATION COMPANIES SMALL CAP ------------ ------------- 2008 $ 7,245,899 $ -- 2009 23,984,483 55,963,354 2010 12,034,012 36,103,589 ------------ ------------- Total $ 43,264,394 $ 92,066,943 WANGER WANGER YEAR OF EXPIRATION TWENTY FOREIGN FORTY ------------ ------------- 2009 $ 512,219 $ 3,168,366 2010 -- 3,638,146 ------------ ------------- Total $ 512,219 $ 6,806,512
Expired capital loss carryforwards, if any, are recorded as a reduction of paid-in capital. Under current tax rules, certain capital losses realized after October 31 may be deferred and treated as occurring on the first day of the following fiscal year. As of December 31, 2002, for federal income tax purposes, post-October losses were deferred to January 1, 2003 as follows: Wanger U.S. Smaller Companies $ 8,177,158 Wanger International Small Cap -- Wanger Twenty -- Wanger Foreign Forty 493,942
Wanger International Small Cap and Wanger Foreign Forty Funds have elected to mark-to-market their investments in PFIC's for federal income tax purposes. Gains relating to PFIC's are treated as ordinary income for federal income tax purposes. A summary of transactions relating to PFIC's is as follows:
WANGER WANGER INTERNATIONAL FOREIGN SMALL CAP FORTY ------------- --------- Cumulative unrealized appreciation on PFIC's recognized in prior years at December 31, 2001 $ 1,766,924 $ 10,385 Unrealized appreciation on PFIC's recognized for federal income tax purposes during 2002 -- -- Unrealized appreciation recognized in prior years on PFIC's sold during 2002 (1,766,924) (10,385) ------------- --------- Cumulative unrealized appreciation on PFIC's carried forward at December 31, 2002 $ -- $ -- ============= =========
4. TRANSACTIONS WITH AFFILIATES The Funds' investment advisor, Liberty Wanger Asset Management, L.P., ("Liberty WAM") an indirect wholly-owned subsidiary of Columbia Management Group, Inc., which in turn is a wholly-owned subsidiary of Fleet National Bank, which in turn is a wholly-owned subsidiary of FleetBoston Financial Corporation ("Fleet"), furnishes continuing investment supervision to each Fund and is responsible for overall management of each Fund's business affairs. Each Fund pays Liberty WAM a monthly advisory fee based upon average daily net assets at the following annual rates: WANGER U.S. SMALLER COMPANIES Average Daily Net Assets For the first $100 million 1.00% Next $150 million .95% In excess of $250 million .90%
WANGER INTERNATIONAL SMALL CAP Average Daily Net Assets For the first $100 million 1.30% Next $150 million 1.20% In excess of $250 million 1.10%
295 WANGER TWENTY On average daily net assets .95% WANGER FOREIGN FORTY On average daily net assets 1.00% The investment advisory agreement also provides that Liberty WAM will reimburse the Funds to the extent that ordinary operating expenses (computed based on net custodian fees) exceed an annual percentage of average daily net assets.
YEAR ENDED DECEMBER 31, 2002 Wanger U.S. Smaller Companies 2.00% Wanger International Small Cap 2.00% Wanger Twenty 1.35% Wanger Foreign Forty 1.45%
Certain officers and trustees of the Trust are also officers of Liberty WAM. The Trust makes no direct payments to its officers and trustees who are affiliated with Liberty WAM. The Fund paid the following trustees' fees and expenses to trustees not affiliated with Liberty WAM:
YEAR ENDED DECEMBER 31, 2002 Wanger U.S. Smaller Companies $ 70,151 Wanger International Small Cap 33,206 Wanger Twenty 3,747 Wanger Foreign Forty 3,034
Liberty Funds Distributor, Inc. ("LFD") an indirect subsidiary of Fleet serves as the principal underwriter of the Trust and receives no compensation for its services. During the year ended December 31, 2002, the Funds engaged in purchases and sales transactions with funds that have a common investment advisor (or affiliated investment advisors), common Directors/Trustees, and/or common Officers. These purchase and sale transactions complied with the provisions of Rule 17a-7 under the Investment Company Act of 1940 and were as follows:
PURCHASES SALES --------------------------------------------------------- Wanger U.S. Smaller Companies $ -- $ -- Wanger International Small Cap 2,448,735 8,277,631 Wanger Twenty 64,000 -- Wanger Foreign Forty 456,736 54,749
5. BORROWING ARRANGEMENTS The Trust participates in a $150,000,000 credit facility which was entered into to facilitate portfolio liquidity. No amounts were borrowed under this facility for the year ended December 31, 2002. 6. FUND SHARE TRANSACTIONS Proceeds and payments on Fund shares as shown in the statement of changes in net assets are in respect of the following numbers of shares:
WANGER U.S. SMALLER YEAR ENDED YEAR ENDED COMPANIES DECEMBER 31, 2002 DECEMBER 31, 2001 Shares sold 6,859,016 5,138,267 Shares issued in reinvestment of dividend and capital gain distributions -- 14,578 -------------------------------------------------------------------- 6,859,016 5,152,845 Less shares redeemed 3,775,228 2,930,905 -------------------------------------------------------------------- Net increase in shares 3,083,788 2,221,940 outstanding WANGER INTERNATIONAL YEAR ENDED YEAR ENDED SMALL CAP DECEMBER 31, 2002 DECEMBER 31, 2001 Shares sold 22,143,427 30,073,056 Shares issued in reinvestment of capital gain distributions -- 4,496,664 -------------------------------------------------------------------- 22,143,427 34,569,720 Less shares redeemed 20,832,143 29,121,025 -------------------------------------------------------------------- Net increase in shares outstanding 1,311,284 5,448,695 WANGER TWENTY YEAR ENDED YEAR ENDED DECEMBER 31, 2002 DECEMBER 31, 2001 Shares sold 842,336 770,791 -------------------------------------------------------------------- Less shares redeemed 395,508 237,578 -------------------------------------------------------------------- Net increase in shares outstanding 446,828 533,213 WANGER FOREIGN FORTY YEAR ENDED YEAR ENDED DECEMBER 31, 2002 DECEMBER 31, 2001 Shares sold 3,006,672 5,410,460 Shares issued in reinvestment of dividend and capital gain distributions -- 103,485 -------------------------------------------------------------------- 3,006,672 5,513,945 Less shares redeemed 2,904,415 5,084,229 -------------------------------------------------------------------- Net increase in shares outstanding 102,257 429,716
7. INVESTMENT TRANSACTIONS The aggregate cost of purchases and proceeds from sales other than short-term obligations for the year ended December 31, 2002 were:
WANGER U.S. WANGER WANGER WANGER SMALLER INTERNATIONAL TWENTY FOREIGN FORTY COMPANIES SMALL CAP PURCHASES $ 141,924,308 $ 138,723,445 $ 16,528,788 $ 15,962,421 SALES 74,522,553 117,011,596 10,031,771 15,512,886
296 Wanger Advisors Trust 2002 Annual Report REPORT OF INDEPENDENT AUDITORS To the Board of Trustees and Shareholders of Wanger Advisors Trust We have audited the accompanying statements of assets and liabilities, including the statements of investments of Wanger U.S. Smaller Companies, Wanger International Small Cap, Wanger Twenty and the Wanger Foreign Forty portfolios, comprising the Wanger Advisors Trust, as of December 31, 2002, the related statements of operations, changes in net assets, and the financial highlights for the periods indicated therein. These financial statements and financial highlights are the responsibility of the Funds' 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 investments owned as of December 31, 2002, 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 each of the respective Funds of the Wanger Advisors Trust as of December 31, 2002, the results of their operations and changes in their net assets and financial highlights for the periods indicated therein, in conformity with accounting principles generally acceptedin the United States. ERNST & YOUNG LLP Chicago, Illinois February 7, 2003 297 Wanger Advisors Trust 2002 Annual Report BOARD OF TRUSTEES AND MANAGEMENT OF WANGER ADVISORS TRUST The board of trustees serve indefinite terms of unlimited duration provided that a majority of trustees always has been elected by shareholders. The trustees appoint their own successors, provided that at least two-thirds of the trustees, after such appointment, have been elected by shareholders. Shareholders may remove a trustee, with or without cause, upon the vote of two-thirds of the Trust's outstanding shares at any meeting called for that purpose. A trustee may be removed, with or without cause, upon the vote of a majority of the trustees. The names of the trustees and officers of the Trust, the date each was first elected or appointed to office, their principal business occupations and other directorships they have held during at least the last five years, are shown below. Each trustee serves in such capacity for each of the four series of the Trust. Mr. Wanger also serves as a trustee for each of the six series of Liberty Acorn Trust.
NAME, POSITION(S) WITH YEAR FIRST WANGER ADVISORS TRUST ELECTED OR AND AGE AT APPOINTED TO PRINCIPAL OCCUPATION(S) DURING OTHER JANUARY 1, 2003 OFFICE PAST FIVE YEARS DIRECTORSHIPS --------------- ------------ ------------------------------ ------------- TRUSTEES WHO ARE NOT INTERESTED PERSONS OF WANGER ADVISORS TRUST: FRED D. HASSELBRING, 61, 1994 Retail industry, general project None. Trustee development and business computer systems consultant; voice over specialist for industrial and institutional applications. P. MICHAEL PHELPS, 69, 1994 Retired since January 31, 1998; None. Trustee prior thereto, vice president and corporate secretary, Morton International, Inc. PATRICIA H. WERHANE, 67, 1998 Ruffin Professor of Business Ethics, None. Trustee Darden Graduate School of Business Administration, University of Virginia, since 1993; Co-Director of the Olsson Center for Applied Ethics, Darden Graduate School of Business Administration, University of Virginia, since September 2001. TRUSTEES WHO ARE AN INTERESTED PERSON OF WANGER ADVISORS TRUST: RALPH WANGER, 68, 1994 President, chief investment officer and portfolio Liberty Trustee and President* manager, Acorn Liberty WAM since July 1992; president, Liberty Trust. Acorn Trust; principal, WAM from July 1992 until September 29, 2000; president, WAM Ltd. from July 1992 to September 29, 2000; president and director, WAM Acquisition GP, Inc. since September 29, 2000; director, Wanger Investment Company plc. OFFICERS OF WANGER ADVISORS TRUST: J. KEVIN CONNAUGHTON, 38, 2001 Treasurer of the Liberty Funds and of the Liberty None. Assistant Treasurer All-Star Funds since December 2000 (formerly controller of the Liberty Funds and of the Liberty All-Star Funds from February 1998 to October 2000); treasurer of the Stein Roe Funds since February 2001 (formerly controller from May 2000 to February 2001); Treasurer of the Galaxy Funds since September 2002; senior vice president of Liberty Funds Group since January 2001 (formerly vice president of Colonial Management Associates since February 1998 to October 2000); senior tax manager, Coopers & Lybrand, LLP from April 1996 to January 1998. KEVIN S. JACOBS, 41, 2001 Assistant vice president, Liberty Funds Group None. Assistant since Secretary June 2000; senior legal product manager, First Union Corp. September 1999 to June 2000; prior thereto, senior legal product manager, Colonial Management Associates. KENNETH A. KALINA, 43, 1995 Chief financial officer, Liberty WAM since April None. Assistant 2000; assistant Treasurer treasurer, Liberty Acorn Trust; fund controller, Liberty WAM since September 1995; director, New Americas Small Cap Fund.
298
NAME, POSITION(S) WITH YEAR FIRST WANGER ADVISORS TRUST ELECTED OR AND AGE AT APPOINTED TO PRINCIPAL OCCUPATION(S) DURING OTHER JANUARY 1, 2003 OFFICE PAST FIVE YEARS DIRECTORSHIPS ----------------------- ------------ ------------------------------ ------------- OFFICERS OF WANGER ADVISORS TRUST (CONTINUED): BRUCE H. LAUER, 45, 1995 Chief operating officer, Liberty WAM since None. Vice President, Secretary April 1995; and Treasurer principal, WAM from January 2000 to September 29, 2000; vice president, treasurer and secretary, Liberty Acorn Trust; director, Wanger Investment Company plc and New Americas Small Cap Fund. JEAN LOEWENBERG, 57, 2002 General counsel, Columbia Management Group, None. Assistant Secretary Inc. since December 2001; senior vice president since November 1996 and assistant general counsel since September 2002, Fleet National Bank. CHARLES P. MCQUAID, 49, 1994 Director of research, Liberty WAM since July Liberty Senior Vice President 1992; principal, WAM from July 1995 to September 29, 2000; Acorn trustee and senior vice president, Liberty Acorn Trust. Trust. ROBERT A. MOHN, 41, 1997 Analyst and portfolio manager, Liberty WAM None. Vice President since August 1992; principal, WAM from 1995 to September 29, 2000; vice president, Liberty Acorn Trust. TODD NARTER, 38, 2001 Analyst and portfolio manager, Liberty WAM None. Vice President since June 1997; vice president, Liberty Acorn Trust. CHRISTOPHER OLSON, 38, 2001 Analyst and portfolio manager, Liberty WAM None. Vice President since January 2001; vice president, Liberty Acorn Trust; prior thereto, director and portfolio strategy analyst with UBS Asset Management/Brinson Partners. JOHN H. PARK, 35, 1998 Analyst and portfolio manager, Liberty WAM None. Vice President since July 1993; principal, WAM from 1998 to September 29, 2000; vice president, Liberty Acorn Trust. VINCENT P. PIETROPAOLO, 37, 2001 Vice president and counsel, Liberty Funds Group None. Assistant Secretary since December 1999; Associate, Morgan Lewis & Bockius, October 1998 to December 1999; product manager, Putnam Investments from April 1997 to October 1998. JOSEPH TURO, 35, 2002 Assistant general counsel, Columbia Management None. Assistant Secretary Group, Inc. since January 2002; senior counsel, Fleet National Bank since August 1997; prior thereto, associate, Ropes & Gray. LEAH J. ZELL, 53, 1994 Analyst, and portfolio manager, Liberty WAM None. Vice President* since July 1992; vice president, Liberty Acorn Trust; director and managing member of trust committee, Chai Trust Company.
The address for the trustees and officers of the Trust is Liberty Wanger Asset Management, L.P., 227 West Monroe Street, Suite 3000, Chicago, Illinois 60606. Wanger's Statement of Additional Information includes additional information about Wanger's trustees and officers. You may obtain a free copy of the Statement of Additional Information, or request any other information and discuss your questions about us, by writing or calling toll-free: Liberty Wanger Asset Management, L.P. Shareholder Services Group 227 West Monroe, Suite 3000 Chicago, IL 60606 (800) 4-WANGER (800-492-6437) www.wanger.com * Mr. Wanger and Ms. Zell are married to each other. 299 [GRAPHIC] TRANSFER AGENT, DIVIDEND DISBURSING AGENT Liberty Funds Services, Inc. P.O. Box 8081 Boston, Massachusetts 02266-8081 DISTRIBUTOR Liberty Funds Distributor, Inc. One Financial Center Boston, Massachusetts 02111-2621 INVESTMENT ADVISOR Liberty Wanger Asset Management, L.P. 227 West Monroe Street Suite 3000 Chicago, Illinois 60606 1-800-4-WANGER (1-800-492-6437) LEGAL COUNSEL Bell, Boyd & Lloyd LLC Chicago, Illinois INDEPEDENT AUDITORS Ernst & Young LLP Chicago, Illinois This report, including the schedules of investments and financial statements, is submitted for the general information of the shareholders of the Wanger Advisors Trust. This report is not authorized for distribution unless preceded or accompanied by a prospectus. 300 [KEYPORT LOGO] P.O. Box 9133 Wellesley Hills, MA 02481 ANN-02/457M-0103 (02/03) 03/0306