AFBA Five Star Fund(SM)
100% pure no-load mutual funds
Annual Report
March 31, 1998
MESSAGE
To Our Shareholders
We are pleased to bring you the first AFBA Five Star Fund annual report for
the period ended March 31, 1998.
The ten months ended March 31, 1998 was a successful period for the Fund.
Since publication of our semiannual report dated September 30, 1997, the Fund
has grown to total assets of $9.6 million with an increase in shareholder
accounts of about 51%. Total distribution per share for the Fund for the
fiscal period are as follows:
Investment Short-Term
Income Capital Gains Total
Balanced $ .2343 $ .0357 $ .27
Equity $ .0465 $ .0635 $ .11
High Yield $ .3184 $ .0016 $ .32
USA Global $ .0498 $ .0012 $ .0510
The balance of this report will be the Portfolio Management Review, in which
the Fund's investment counsel, Kornitzer Capital Management, Inc. will discuss
Fund performance, stock market and economic trends, as well as other matters
of interest to our investors.
We welcome the new investors who have joined us, and look forward to
continuing our efforts to provide all of our shareholders with consistent,
favorable returns in the future.
Sincerely,
/s/C.C. Blanton
C.C. Blanton
Chairman
Portfolio Management Review
We are proud to be reporting to you in the first annual report for the AFBA
Five Star Fund. We want to thank all our fellow shareholders for their
support. In the September 1997 semiannual report to shareholders we spent time
discussing our investment philosophies and strategies for each Fund. In this
report we will share more information about our investment staff and how our
research and portfolio management process works. We will also spend time
discussing our outlook for the U.S. financial markets. After this discussion
we will update shareholders on the latest strategies, holdings and performance
of the AFBA Five Star Fund.
Kornitzer Capital Management, Inc. (KCM), the Fund's investment counsel, has a
unique breakdown of responsibilities in managing the AFBA Five Star Fund.
Each professional has a different background, having researched or worked in
various industries over time. Based on their area of expertise each individual
is responsible for closely covering certain industries and is empowered to
recommend the purchase/sale of both stocks and bonds in those industries for
the Funds. Each Fund has a lead manager whose job is to both contribute
research to the team and execute trades and allocate recommendations to the
proper Fund. In greater detail, individual backgrounds and responsibilities to
the Funds are as follows:
John Kornitzer - John is President, founder and Chief Investment Officer of
KCM. John created the USA Global investment concept. His investment career
spans some 35 years and includes experience in the bear markets of 1969-70 and
1973-74. John shaped the firm's basic investment philosophies and acts as a
research generalist having covered the broadest range of industries over his
career.
Kent Gasaway - Kent is Senior Vice President of KCM and acts as lead manager
for both the AFBA Five Star Balanced and High Yield Funds. Kent has over 15
years of stock and bond research and portfolio management experience. Kent's
major industry responsibilities include Oil & Gas, Metals, Autos, Capital
Goods, Paper and Healthcare Services.
Tom Laming - Tom is Senior Vice President of KCM and acts as lead manager for
both the AFBA Five Star Equity and USA Global Funds. Tom was instrumental in
creating the firm's proprietary equity screening discipline. Tom's areas of
industry expertise include Technology, Airlines, Chemicals, Railroads, Food &
Beverage and Pollution Control.
Robert Male - Bob is Vice President of KCM and has over 10 years of stock and
bond research experience. Bob's major industry responsibilities include
Retail, Banks, Insurance, Telecommunications, Household Products and Gaming.
Rich Rosenthal - Rich is a Senior Research Analyst at KCM. Rich's areas of
industry expertise include Aerospace, Defense, Technology, Drugs, Biotech and
Medical Supplies.
Stock selection by the research team is assisted by a proprietary screening
process which helps identify attractive companies in both the growth and value
categories. However, the final decision to purchase any security (stock or
bond) is based on rigorous fundamental research of the company. This includes
detailed analysis and modeling of company financial statements and often
includes visiting with company management. KCM anticipates there will be
further additions to the research team in coming years and will familiarize
shareholders with new names and responsibilities as they come on board.
Now let us talk about the financial markets. Much has happened over the past
six months. In our opinion, the U.S. escaped a serious problem by leading the
efforts to contain the Asian financial crisis. Had the collapse of currencies
and flight of capital spread to China, South America, Latin America and
possibly even Japan, U.S. markets would have fared much worse. Those Asian
countries most affected by the crisis are now experiencing economic
recessions. Without containment much of the world might now be headed for
recession. This was a close call, don't let anyone tell you it wasn't. There
still remains some risk that the crisis could repeat itself as both Japan and
Indonesia are resisting needed reforms. At present we believe the situation is
under control, but should be monitored closely.
While the International Monetary Fund (IMF) has been criticized for the strict
reforms it ordered on various Asian countries in exchange for monetary aid,
the speed of their actions and the strong role they played must be commended.
Influenced by the IMF, the U.S. Treasury Department and top officials of other
developed countries, major financial and regulatory reforms are now taking
place in Korea and Thailand. Some of the key reforms include the elimination
of government directed loans by private banks, the closing of bankrupt banks
and the ability of foreign companies to purchase majority stakes in Korean and
Thai companies. These reforms have restored confidence in the currencies and
stock markets of both countries with each having rebounded from their low
point. Long-term these reforms are positive for U.S. companies that wish to
enter these markets to do business. These markets should be more open to
foreign investment and foreign control with less political corruption.
Turning back to the U.S. we are witnessing nothing less than boom conditions.
The economy is booming - only the slowdown in exports is keeping Gross
Domestic Product (GDP) from growing in excess of 5%. The stock market is
booming. The real estate market is heating up. How much longer this party
lasts or with what vigor it will continue is now partly in the hands of the
Federal Reserve. With the Asian crisis now seemingly in the recovery stage the
Fed will likely redirect its attention back to the domestic economy.
The next move by the Fed will be very telling because it may signal whether
they believe there are structural changes taking place in the economy that
will allow for faster growth without increased inflation. This camp, which may
include Chairman Alan Greenspan, believes the economy is much less prone to
inflation than previously thought. Some of the reasons for this sustainable
change include the technology revolution, global competition, the decline of
unions, deregulation of most industries, managed healthcare and the continuing
high level of business investment. The traditional central banker argument
would be that it is dangerous to wait until inflation pressures build before
raising interest rates. Interest rates should be used as a preventive tool
when the economy is exhibiting signs of strength. No one knows which camp will
win, but a move to raise rates would likely lead to a short-term correction in
the stock market.
Over the past year KCM has remained committed to its philosophy of stressing
consistent returns and paying close attention to the risk profile of all the
Funds. As you will read in the upcoming paragraphs on each of the Funds, KCM
positioned the Funds in a more defensive position during the months leading up
to the Asian crisis. This meant a bit more cash than usual and less exposure
to companies doing business in Asia. Looking back, the U.S. market experienced
only a minor correction and bounced back with amazing speed. However, if we
faced the same situation today our strategy would be no different. The risk
level in the market was very high and the outcome was impossible to predict.
Stocks could have easily dropped 20% versus rising 20% as they eventually did.
With the world macroeconomic picture now more settled, our strategy as we move
forward in 1998 is to intensify our research efforts and focus on picking
attractive stocks and bonds. The KCM research team has recently embarked on an
effort to do in-depth reviews of industries with high growth potential. One
recent review was done on the genomics (study of human genes) industry - a
high technology industry which represents the next evolutionary step in
disease management and prevention. Our findings here may lead to numerous
investments in genomics issues for the AFBA Five Star Funds, which could add
strong growth potential (long-term). As the year progresses, we intend to
target other high growth industries for proprietary research to supplement our
ongoing efforts.
The following is a snapshot and comment on how each of the AFBA Five Star
Funds performed since inception.
AFBA Five Star Balanced Fund
AFBA Five Star Balanced Fund generated a total return (price change and
reinvested distributions) of 6.22% for the quarter ended March 31, 1998. It is
important to note that this performance for the Balanced Fund was achieved
despite an ending fund allocation of only 33% to common stocks during a strong
period for equities. This allocation is well below the average balanced fund
which typically invests over 50% of assets in common stocks according to
Morningstar, Inc.
The Balanced Fund's asset allocation continues to be driven by a philosophy
which emphasizes consistent performance and a low level of fund price
volatility. We continue to recommend this Fund for those investors wanting to
reduce, but not eliminate exposure to stocks. The Fund's current combination
of roughly 1/3 blue chip stocks, 1/3 high yield corporate bonds and 1/3 high
yield convertible securities produces a high level of current income and
positions the Fund for reasonable capital appreciation during a rising stock
market. The period was a perfect example. In addition to it's position in
equities, the Fund benefited from numerous large gains in convertible security
holdings. These included such issues as Kmart, Bethlehem Steel and Loral Space
& Communications. Strong equity performers for the period included companies
such as Beneficial Corp., Chase Manhattan Corp., McDermott International, PMI
Group and Texas Industries.
GRAPH -- AFBA Five Star Balanced Fund versus S&P 500 and Merrill Lynch Bond
Fund Index Weighted Average
Total return for the life of the Fund (inception June 3, 1997) as of March 31,
1998, was 16.64%. Performance data contained in this report is for past
periods only. Past performance is not predictive of future performance.
Investment return and share value will fluctuate, and redemption value may
be more or less than original cost.
AFBA Five Star Equity Fund
AFBA Five Star Equity Fund generated a total return (price change and
reinvested distributions) of 8.28% for the quarter ended March 31, 1998.
The Fund's performance during the period was impacted for two reasons. First,
the Fund was "under construction" during the initial months as it took some
time to get invested in its core holdings. Also, as explained earlier the Fund
at times held over 30% of assets in cash as a defensive measure to the threat
of the Asian crisis. The Fund also reduced holdings of companies with
significant business exposure to Asia.
Top stocks for the period included names such as Merck, A T & T, Sara Lee and
Bestfoods. The Fund now carries a modest cash position and is back to the core
focus of buying a combination of both growth and value stocks. Individual
stock-picking will be the key to performance for the coming year.
GRAPH -- AFBA Five Star Equity Fund versus S&P 500
Total return for the life of the Fund (inception June 3, 1997) as of March 31,
1998, was 18.81%. Performance data contained in this report is for past
periods only. Past performance is not predictive of future performance.
Investment return and share value will fluctuate, and redemption value may
be more or less than original cost.
AFBA Five Star High Yield Fund
AFBA Five Star High Yield Fund generated a total return (price change and
reinvested distributions) of 2.11% for the quarter ended March 31, 1998. Many
of the same convertible securities highlighted in our discussion of the
Balanced Fund were also deployed in the High Yield Fund. Other outperforming
issues over the past year included securities such as McDermott International
and Argosy Gaming.
The Fund continues to bolster its large holdings of high yielding convertible
bonds in the technology sector. Another area of recent interest is the copper
industry which is terribly out of favor, but showing early signs of a
turnaround in the supply/demand equation. New purchases here include Freeport
Copper & Gold and Cypress Amax Minerals. The Fund ended the period with a
large cash position. This position was not strategic, but was the result of a
large inflow of new cash. This cash is now being invested at a steady pace.
GRAPH -- AFBA Five Star High Yield Fund versus
Merrill Lynch High Yield Bond Fund Index
Total return for the life of the Fund (inception June 3, 1997) as of March 31,
1998, was 9.37%. Performance data contained in this report is for past
periods only. Past performance is not predictive of future performance.
Investment return and share value will fluctuate, and redemption value may
be more or less than original cost.
AFBA Five Star USA Global
AFBA Five Star USA Global Fund generated a total return (price change and
reinvested distributions) of 8.87% for the quarter ended March 31, 1998. The
Fund must be primarily compared to U.S. benchmarks because it owns only U.S.
stocks. However, the Fund has a strong international component since all
companies in the Fund must receive at least 40% of sales or net income from
outside the United States.
Much like the Equity Fund, the USA Global Fund suffered from the "under
construction" period and a larger than normal cash position during the
highest risk period of the Asian crisis. The Fund also restructured some of
its holdings in anticipation of the crisis.
We believe the companies in the Fund could be the biggest long-term
beneficiaries of the many positive reforms taking place throughout Asia. We
say this with confidence because the Fund concentrates on the type of U.S.
companies most likely to already have or soon will have major investments in
these countries. We have rarely been more optimistic about the long-term
prospects for U.S. multinational companies. Down the road we believe the Asian
crisis will be viewed as a precursor to freer markets throughout the region
and as a major buying opportunity for these companies.
Some of the Fund's top performers for the period included AFLAC, Bristol-Myers
Squibb, Cisco, Interface and Schering-Plough.
We look forward to reviewing all the Funds with you in future letters. All of
us on the KCM research team thank you for your confidence in our management of
the AFBA Five Star Fund. We are fully committed to helping you achieve your
financial success in the future.
GRAPH -- AFBA Five Star USA Global Fund versus S&P 500
Total return for the life of the Fund (inception June 3, 1997) as of March 31,
1998, was 12.16%. Performance data contained in this report is for past
periods only. Past performance is not predictive of future performance.
Investment return and share value will fluctuate, and redemption value may
be more or less than original cost.
Sincerely,
/s/John Kornitzer
John Kornitzer
President
/s/Kent Gasaway
Kent Gasaway
Sr. Vice President
/s/Tom Laming
Tom Laming
Sr. Vice President
AFBA FIVE STAR
BALANCED FUND
STATEMENT OF NET ASSETS
March 31, 1998
SHARES COMPANY COST MARKET VALUE
Common Stocks - 32.86%
Basic Materials - 2.81%
1,500 Republic Group, Inc. $ 30,216 $ 30,563
300 Texas Industries, Inc. 12,896 17,344
43,112 47,907
Capital Goods - 2.90%
1,000 Elcor Corp. 26,238 26,875
200 Lockheed Martin Corp. 19,971 22,500
46,209 49,375
Consumer Cyclical - 2.17%
1,000 Dillard's, Inc. Cl. A 37,006 36,937
Consumer Staples - 1.98%
800 Dial Corp. 13,490 19,150
1,000 Pilgram's Pride Corp. 12,925 14,562
26,415 33,712
Energy - 6.38%
300 Enron Corp. 11,771 13,912
500 McDermott (J. Ray) SA* 16,775 21,063
700 McDermott International, Inc. 22,810 28,919
500 Triton Energy Ltd. Cayman Islands Cl. A* 14,319 18,375
500 United Meridian Corp.* 18,306 15,125
1,500 Wainoco Oil Corp.* 11,602 11,344
95,583 108,738
Financial - 8.31%
200 Allstate Corp. 14,487 18,388
500 American Financial Group, Inc. 20,994 21,687
300 Beneficial Corp. 23,903 37,294
200 Chase Manhattan Corp. 21,529 26,975
250 Fleet Financial Group, Inc. 18,262 21,266
200 PMI Group, Inc. 11,910 16,150
111,085 141,760
Health Care - 1.12%
200 American Home Products Corp. 15,448 19,075
Technology - 5.46%
1,000 Diebold, Inc. 45,081 44,000
400 GTE Corp. 19,320 23,950
1,000 Seagate Technology, Inc.* 30,644 25,250
95,045 93,200
Transportation & Services - 1.73%
1,000 Southwest Airlines Co. 24,734 29,562
Total Common Stocks 494,637 560,266
Convertible Preferred Stocks - 11.98%
1,000 Bethlehem Steel Corp., $3.50, 144A 42,025 47,500
1,000 Cyprus Amax Minerals Co.,
$4, Series A* 49,625 48,500
1,700 ICO, Inc.,
dep. shrs. repstg. 1/4 pfd. cv. 38,687 37,719
500 Kmart Financing I,
7.750% tr. cv. pfd. secs. 27,786 31,375
300 Loral Space & Communications Ltd.,
Series C 15,362 22,575
400 McDermott International, Inc.,
Series A 13,530 16,550
Total Convertible Preferred Stocks 187,015 204,219
FACE
AMOUNT DESCRIPTION COST MARKET VALUE
Corporate Bonds - 12.89%
$ 30,000 Argosy Gaming Co.,
13.25% 1st. mtg. note,
due 6-1-04 30,093 33,450
40,000 CompUSA, Inc.,
9.50% gtd. sr. sub. note,
due 6-15-00 41,084 41,450
5,000 Giant Industries, Inc.,
9.75% gtd. sr. sub. note,
due 11-15-03 5,150 5,213
5,000 HS Resources, Inc.,
9.875% sr. sub. note,
due 12-1-03 5,100 5,200
20,000 Kmart Corp.,
8.25% note,
due 1-1-22 19,220 20,283
5,000 Nortek, Inc.,
9.875% sr. sub. note,
due 3-1-04 5,185 5,206
5,000 Pilgrim's Pride Corp.,
10.875% sr. sub. note,
due 8-1-03 5,200 5,262
5,000 United Refining Co.,
10.75% sr. note, Series A,
due 6-15-07 4,975 5,275
50,000 VLSI Technology, Inc.,
8.25% sub. note,
due 10-1-05 50,000 49,688
50,000 Wiser Oil Co. Delaware,
9.50% sr. sub. note,
due 5-15-07 49,600 48,875
Total Corporate Bonds 215,607 219,902
Convertible Corporate Bonds - 20.22%
$ 15,000 Air & Water Technologies Corp.,
8.00% sub. deb.,
due 5-15-15 12,650 12,469
30,000 Allwaste, Inc.,
7.25% sub. deb.,
due 6-1-14 29,869 27,675
25,000 Danka Business Systems PLC,
6.75% sub. note,
due 4-1-02 23,969 24,031
50,000 HMT Technology Corp.,
5.75% sub. note,
due 1-15-04 44,837 42,750
40,000 Integrated Device Technology, Inc.,
5.50% sub. note,
due 6-1-02 34,262 35,850
55,000 Intevac, Inc.,
6.50% sub. note 144A,
due 3-1-04 48,494 42,693
40,000 Key Energy Group, Inc.,
5.00% sub. note,
due 9-15-04 33,500 33,500
35,000 Micron Technology, Inc.,
7.00% sub. note,
due 7-1-04 35,000 33,731
10,000 Moran Energy, Inc.,
8.75% sub. deb.,
due 1-15-08 9,288 9,850
50,000 National Semiconductor Corp.,
6.50% sub. note 144A,
due 10-1-02 48,562 48,438
10,000 OHM Corp.,
8.00% sub. deb.,
due 10-1-06 9,650 9,775
10,000 Oryx Energy Co.,
7.50% sub. deb.,
due 5-15-14 9,963 10,025
5,000 Swift Energy Co.,
6.25% sub. note,
due 11-15-06 4,930 4,900
10,000 Weston (Roy F), Inc.,
7.00% sub. deb.,
due 4-15-02 8,800 9,038
Total Convertible Corporate Bonds 353,774 344,725
Repurchase Agreement - 19.94%
340,000 UMB Bank, n.a., 5.38%, due 4-1-98
(Collateralized by $347,203
U.S. Treasury Notes,
6.25%, due 4-30-01) 340,000 340,000
Total Investments - 97.89% $ 1,591,033 1,669,112
Other assets less liabilities - 2.11% 35,993
Total Net Assets - 100.00%
(equivalent to $11.39 per share;
10,000,000 shares of $1.00 par value
capital shares authorized;
149,658 shares outstanding) $ 1,705,105
For federal income tax purposes, the identified cost of investments owned at
March 31, 1998, was $1,591,033.
Net unrealized appreciation for federal income tax purposes was $78,079,
which is comprised of unrealized appreciation of $102,878 and unrealized
depreciation of $24,799.
*Non-income producing security
See accompanying Notes to Financial Statements.
AFBA FIVE STAR
EQUITY FUND
STATEMENT OF NET ASSETS
March 31, 1998
SHARES COMPANY COST MARKET VALUE
Common Stocks - 89.60%
Basic Materials - 4.89%
2,100 Georgia Gulf Corp. $ 65,843 $ 56,963
300 Praxair, Inc. 14,696 15,431
2,300 Sigma Aldrich Corp. 83,322 85,675
300 Texas Industries, Inc. 13,515 17,343
177,376 175,412
Capital Goods - 7.11%
800 Boeing Co. 45,228 41,700
1,400 Elcor Corp. 37,489 37,625
100 Lockheed Martin Corp. 10,686 11,250
100 Northrop Grumman Corp. 11,536 10,743
1,000 Rockwell International Corp. 59,050 57,375
1,600 Sundstrand Corp. 89,490 96,800
253,479 255,493
Consumer Cyclical - 10.84%
1,700 Cendant Corp.* 61,948 67,363
2,600 CompUSA, Inc.* 77,376 67,600
2,000 Dillard's, Inc. Cl. A 73,467 73,875
1,500 FDX Corp.* 96,050 101,156
600 Interface, Inc. Cl. A 24,450 24,450
3,300 Kmart Corp.* 49,342 55,069
382,633 389,513
Consumer Staples - 12.55%
700 Bestfoods, Inc. 64,557 81,813
500 Coca-Cola Co. 31,650 38,719
3,500 Dial Corp. 71,900 83,781
1,200 McDonald's Corp. 57,323 72,000
300 Reebok International Ltd.* 8,977 9,150
1,500 Sara Lee Corp. 78,181 92,438
3,000 Viad Corp. 61,231 72,750
373,819 450,651
Energy - 13.77%
700 Amoco Corp. 64,504 60,463
800 British Petroleum PLC Sh F ADR 65,452 68,850
700 Chevron Corp. 54,904 56,219
2,400 Enron Corp. 101,220 111,300
1,000 Mobil Corp. 70,050 76,625
3,300 Triton Energy Ltd. Cayman Islands Cl. A* 126,078 121,275
482,208 494,732
Financial - 16.93%
1,200 AFLAC, Inc. 66,710 75,900
1,000 Allstate Corp. 80,931 91,938
1,300 American Financial Group, Inc. 54,559 56,388
1,100 American Express Co. 98,174 100,994
500 Chase Manhattan Corp. 58,112 67,437
700 Chubb Corp. 51,818 54,863
1,100 Fleet Financial Group, Inc. 86,786 93,569
700 Golden West Financial Corp. Delaware 61,760 67,069
558,850 608,158
Health Care - 7.99%
800 ALZA Corp.* 26,284 35,850
1,300 Johnson & Johnson 87,121 95,306
600 Merck & Company, Inc. 57,055 77,025
300 Pfizer, Inc. 16,459 29,906
600 Schering-Plough Corp. 46,117 49,013
233,036 287,100
Miscellaneous - 0.26%
100 ISS Group, Inc.* 2,200 3,888
300 Melita International Corp.* 3,000 5,475
5,200 9,363
Technology - 13.28%
700 A T & T Corp. 27,791 45,937
500 Bay Networks, Inc.* 14,331 13,562
950 Cisco Systems, Inc.* 51,825 64,956
1,800 Diebold, Inc. 82,878 79,200
1,100 GTE Corp. 58,999 65,862
600 Hewlett-Packard Co. 37,905 38,025
1,200 Loral Space & Communications, Ltd.* 22,791 33,525
1,700 National Semiconductor Corp.* 52,998 35,593
500 Network Solutions, Inc. Cl. A* 9,000 18,562
1,900 Scientific-Atlanta, Inc. 39,326 37,169
500 Seagate Technology, Inc.* 16,113 12,625
1,000 Tracor, Inc.* 30,675 32,062
444,632 477,078
Transportation & Services - 1.98%
2,400 Southwest Airlines Co. 50,847 70,950
Total Common Stocks 2,962,080 3,218,450
FACE
AMOUNT DESCRIPTION COST MARKET VALUE
Repurchase Agreement - 17.68%
$ 635,000 UMB Bank, n.a., 5.38%, due 4-1-98
(Collateralized by $648,252
U.S. Treasury Notes,
6.25%, due 4-30-01) 635,000 635,000
Total Investments - 107.28% $ 3,597,080 3,853,450
Other assets less liabilities - (7.28%) (261,634)
Total Net Assets - 100.00%
(equivalent to $11.77 per share;
10,000,000 shares of $1.00 par value
capital shares authorized;
305,143 shares outstanding) $ 3,591,816
For federal income tax purposes, the identified cost of investments owned at
March 31, 1998, was $3,597,080.
Net unrealized appreciation for federal income tax purposes was $256,370,
which is comprised of unrealized appreciation of $317,363 and unrealized
depreciation of $60,993.
*Non-income producing security
See accompanying Notes to Financial Statements.
AFBA FIVE STAR
HIGH YIELD FUND
STATEMENT OF NET ASSETS
March 31, 1998
SHARES COMPANY COST MARKET VALUE
Common stock - 0.39%
1,022 Fedders Corp. Cl. A (non-voting) $ 6,275 $ 5,429
Convertible Preferred Stocks - 19.35%
1,000 Bethlehem Steel Corp.,
$3.50, 144A 42,025 47,500
1,000 Cyprus Amax Minerals Co.,
$4, Series A* 49,625 48,500
1,800 Freeport-McMoran Copper & Gold, Inc.,
dep. shrs. repstg. gold pfd. 37,957 41,062
1,700 ICO, Inc.,
dep. shrs. repstg. 1/4 pfd. cv. 38,687 37,719
500 Kmart Financing I,
7.750% tr. cv. pfd. secs. 27,786 31,375
300 Loral Space & Communications Ltd.,
Series C 15,363 22,575
1,000 McDermott International, Inc.,
Series A 35,121 41,375
Total Convertible Preferred Stocks 246,564 270,106
FACE
AMOUNT DESCRIPTION COST MARKET VALUE
Corporate Bonds - 11.83%
$ 30,000 Argosy Gaming Co.,
13.25% 1st. mtg. note,
due 6-1-04 29,911 33,450
35,000 CompUSA, Inc.,
9.50% gtd. sr. sub. note,
due 6-15-00 35,949 36,269
5,000 Giant Industries, Inc.,
9.75% gtd. sr. sub. note,
due 11-15-03 5,150 5,213
5,000 HS Resources, Inc.,
9.875% sr. sub. note,
due 12-1-03 5,100 5,200
20,000 Kmart Corp.,
8.25% note,
due 1-1-22 19,220 20,283
5,000 Nortek, Inc.,
9.875% sr. sub. note,
due 3-1-04 5,185 5,206
5,000 Pilgrim's Pride Corp.,
10.875% sr. sub. note,
due 8-1-03 5,200 5,262
5,000 United Refining Co.,
10.75% sr. note, Series B,
due 6-15-07 4,975 5,275
50,000 Wiser Oil Co. Delaware,
9.50% sr. sub. note,
due 5-15-07 49,463 48,875
Total Corporate Bonds 160,153 165,033
Convertible Corporate Bonds - 28.78%
15,000 Air & Water Technologies Corp.,
8.00% sub. deb.,
due 5-15-15 12,650 12,469
32,000 Allwaste, Inc.,
7.25% sub. deb.,
due 6-1-14 31,875 29,520
25,000 Danka Business Systems PLC,
6.75% sub. note,
due 4-1-02 23,969 24,031
50,000 HMT Technology Corp.
5.75% sub. note,
due 1-15-04 44,838 42,750
45,000 Integrated Device Technology, Inc.,
5.50% sub. note,
due 6-1-02 38,631 40,331
50,000 Intevac, Inc.,
6.50% sub. note 144A,
due 3-1-04 44,347 38,813
40,000 Key Energy Group, Inc.,
5.00% sub. note,
due 9-15-04 33,500 33,500
40,000 Micron Technology, Inc.,
7.00% sub. note,
due 7-1-04 40,000 38,550
10,000 Moran Energy Inc.,
8.75% sub. deb.,
due 1-15-08 9,288 9,850
50,000 National Semiconductor Corp.,
6.50% sub. note 144A,
due 10-1-02 48,562 48,437
10,000 OHM Corp., 8.00% sub. deb.,
due 10-1-06 9,650 9,775
10,000 Oryx Energy Co.,
7.50% sub. deb.,
due 5-15-14 9,962 10,025
5,000 Swift Energy Co.,
6.25% sub. note,
due 11-15-06 4,930 4,900
50,000 VLSI Technology, Inc.,
8.25% sub. note,
due 10-1-05 50,000 49,688
10,000 Weston (Roy F.), Inc.,
7.00% sub. deb.,
due 4-15-02 8,800 9,038
Total Convertible Corporate Bonds 411,002 401,677
Repurchase Agreement - 24.36%
340,000 UMB Bank, n.a., 5.38%, due 4-1-98
(Collateralized by $347,203
U.S. Treasury Notes,
6.25%, due 4-30-01) 340,000 340,000
Total Investments - 84.71% $ 1,163,994 1,182,245
Other assets less liabilities - 15.29% 213,335
Total Net Assets - 100.00%
(equivalent to $10.62 per share;
10,000,000 shares of $1.00 par value
capital shares authorized;
131,377 shares outstanding) $ 1,395,580
For federal income tax purposes, the identified cost of investments owned at
March 31, 1998, was $1,163,994.
Net unrealized appreciation for federal income tax purposes was $18,251,
which is comprised of unrealized appreciation of $33,853 and unrealized
depreciation of $15,602.
*Non-income producing security
See accompanying Notes to Financial Statements.
AFBA FIVE STAR
USA GLOBAL FUND
STATEMENT OF NET ASSETS
March 31, 1998
SHARES COMPANY COST MARKET VALUE
Common Stocks - 77.64%
Basic Materials - 1.75%
1,000 Praxair, Inc. $ 49,039 $ 51,438
Capital Goods - 12.87%
900 Air Products & Chemicals, Inc. 74,720 74,588
200 Applied Materials, Inc.* 9,431 7,063
1,000 Boeing Co. 55,775 52,125
1,200 Rockwell International Corp. 62,692 68,850
1,900 Teleflex, Inc. 64,507 79,800
1,100 TRW, Inc. 61,849 60,638
800 York International Corp. 37,384 36,000
366,358 379,064
Consumer Cyclical - 3.70%
1,400 Interface, Inc. 38,606 58,187
900 Lear Corp.* 39,989 50,738
78,595 108,925
Consumer Staples - 17.56%
900 Bestfoods, Inc. 86,495 105,187
800 Coca-Cola Co. 51,109 61,950
300 Gillette Co. 35,546 35,606
2,100 McDonald's Corp. 105,630 126,000
1,600 Sara Lee Corp. 76,799 98,600
1,100 Wrigley, (Wm.) Jr. Co. 81,830 89,925
437,409 517,268
Energy - 7.56%
1,000 McDermott International, Inc. 33,550 41,313
800 Mobil Corp. 59,862 61,300
300 Pride International, Inc.* 9,138 7,163
900 Texaco, Inc. 55,209 54,225
1,600 Triton Energy Ltd. Cayman Islands Cl. A* 59,130 58,800
216,889 222,801
Financial - 2.58%
1,200 AFLAC, Inc. 62,598 75,900
Health Care - 11.08%
300 American Home Products Corp. $ 23,190 $ 28,612
900 Bristol Myers-Squibb Co. 77,258 93,881
1,100 Johnson & Johnson 66,893 80,644
500 Pfizer, Inc. 31,112 49,844
900 Schering-Plough Corp. 46,295 73,519
244,748 326,500
Technology - 20.54%
1,400 AMP, Inc. 67,745 61,337
1,500 Analog Devices, Inc.* 47,431 49,875
250 Applied Micro Circuits Corp.* 2,000 5,625
1,200 Bay Networks, Inc.* 37,097 32,550
1,200 Cisco Systems, Inc.* 65,675 82,050
1,200 Hewlett-Packard Co. 79,297 76,050
3,800 HMT Technology Corp.* 50,849 49,162
1,600 Integrated Device Technology, Inc.* 19,287 22,500
3,500 Intevac, Inc.* 34,000 26,906
200 Microsoft Corp.* 13,675 17,900
500 Motorola, Inc. 38,444 30,312
1,900 National Semiconductor Corp.* 63,989 39,781
2,500 OSI Systems, Inc.* 33,750 29,062
1,200 Seagate Technology, Inc.* 42,685 30,300
1,300 Thermoquest Corp.* 20,215 23,400
1,600 Western Digital Corp.* 32,730 28,100
648,869 604,910
Total Common Stocks 2,104,505 2,286,806
Repurchase Agreement - 24.45%
$ 720,000 UMB Bank, n.a., 5.38%, due 4-1-98
(Collateralized by $735,315
U.S. Treasury Notes,
6.25%, due 4-30-01) $ 720,000 $ 720,000
Total Investments - 102.09% $ 2,824,505 3,006,806
Other assets less liabilities - (2.09%) (61,636)
Total Net Assets - 100.00%
(equivalent to $11.17 per share;
10,000,000 shares of $1.00 par value
capital shares authorized;
735,315 shares outstanding) $ 2,945,170
For federal income tax purposes, the identified cost of investments owned at
March 31, 1998, was $2,824,505.
Net unrealized appreciation for federal income tax purposes was $182,301,
which is comprised of unrealized appreciation
of $271,361 and unrealized depreciation of $89,060.
*Non-income producing security
See accompanying Notes to Financial Statements.
STATEMENT OF ASSETS
AND LIABILITIES
March 31, 1998
<TABLE>
<CAPTION>
BALANCED EQUITY HIGH YIELD USA GLOBAL
FUND FUND FUND FUND
</CAPTION>
<S> <C> <C> <C> <C>
ASSETS:
Investments, at value
(identified cost $1,591,033,
$3,597,080, $1,163,994, and
$2,824,505, respectively) $ 1,669,112 $ 3,853,450 $ 1,182,245 $ 3,006,806
Cash 20,574 - 198,141 31,248
Dividends receivable 924 2,803 551 1,372
Interest receivable 14,495 - 14,643 -
Total assets 1,705,105 3,856,253 1,395,580 3,039,426
LIABILITIES AND NET ASSETS:
Cash overdraft - 5,889 - -
Payable for investments purchased - 258,548 - 94,256
Total liabilities - 264,437 - 94,256
NET ASSETS $ 1,705,105 $ 3,591,816 $ 1,395,580 $ 2,945,170
NET ASSETS CONSIST OF:
Capital (capital stock and
paid-in capital) $ 1,615,664 $ 3,331,349 $ 1,365,908 $ 2,796,964
Accumulated undistributed net
investment income 2,676 5,024 2,569 5,253
Accumulated undistributed net
realized gain (loss)
on investment transactions 8,686 (927) 8,852 (39,348)
Net unrealized appreciation in
value of investments 78,079 256,370 18,251 182,301
NET ASSETS APPLICABLE TO
OUTSTANDING SHARES $ 1,705,105 $ 3,591,816 $ 1,395,580 $ 2,945,170
Capital shares, $1.00 par value
Authorized 10,000,000 10,000,000 10,000,000 10,000,000
Outstanding 149,658 305,143 131,377 263,704
NET ASSET VALUE PER SHARE $ 11.39 $ 11.77 $ 10.62 $ 11.17
</TABLE>
See accompanying Notes to Financial Statements.
STATEMENTS
OF OPERATIONS
Period from June 3, 1997 (inception)
to March 31, 1998
<TABLE>
<CAPTION>
BALANCED EQUITY HIGH YIELD USA GLOBAL
FUND FUND FUND FUND
</CAPTION>
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Income:
Dividends $ 8,109 $ 18,973 $ 6,114 $ 13,168
Interest 25,722 15,016 31,849 18,989
33,831 33,989 37,963 32,157
Expenses (Note 2):
Management fees 6,582 17,203 5,759 15,266
Registration fees and expenses 632 631 632 596
Total expenses before
reimbursement 7,214 17,834 6,391 15,862
Less: expense reimbursement (105) - (171) -
Net expenses 7,109 17,834 6,220 15,862
Net investment income 26,772 16,155 31,743 16,295
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain from
investment transactions
(excluding repurchase agreements):
Proceeds from sales of investments 376,992 1,301,197 127,134 587,005
Cost of investments sold 364,932 1,286,825 118,143 626,089
Net realized gain (loss) from
sales of investments 12,060 14,372 8,991 (39,084)
Unrealized appreciation on
investments:
Beginning of period - - - -
End of period 78,079 256,370 18,251 182,301
Increase in net unrealized
appreciation on investments 78,079 256,370 18,251 182,301
Net gain on investments 90,139 270,742 27,242 143,217
Increase in net assets resulting
from operations $ 116,861 $ 286,897 $ 58,985 $ 159,512
</TABLE>
See accompanying Notes to Financial Statements.
STATEMENTS OF CHANGES
IN NET ASSETS
Period from June 3, 1997 (inception)
to March 31, 1998
<TABLE>
<CAPTION>
BALANCED EQUITY HIGH YIELD USA GLOBAL
FUND FUND FUND FUND
</CAPTION>
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income $ 26,722 $ 16,155 $ 31,743 $ 16,295
Net realized gain (loss) from
investment transactions 12,060 14,372 8,991 (39,084)
Net unrealized appreciation of
investments during the period 78,079 256,370 18,251 182,301
Net increase in net assets
resulting from operations 116,861 286,897 58,985 159,512
DISTRIBUTIONS TO SHAREHOLDERS FROM:**
Net investment income (24,099) (11,184) (29,227) (11,095)
Net realized gain from
investment transactions (3,374) (14,372) (139) -
In excess of realized gains - (927) - (264)
Total distributions to shareholders (27,473) (26,483) (29,366) (11,359)
INCREASE FROM CAPITAL SHARE
TRANSACTIONS:*
Proceeds from shares sold 1,510,881 3,321,890 1,244,279 2,825,803
Net asset value of shares issued for
reinvestment of distributions 25,275 26,084 26,676 11,160
1,536,156 3,347,974 1,270,955 2,836,963
Cost of shares repurchased (20,492) (116,625) (5,047) (139,999)
Net increase from capital share
transactions 1,515,664 3,231,349 1,265,908 2,696,964
Total increase in net assets 1,605,052 3,491,763 1,295,527 2,845,117
NET ASSETS:
Beginning of period 100,053 100,053 100,053 100,053
End of period (including undistributed
net investment income of $2,676,
$5,024, $2,569, and $5,253,
respectively) $ 1,705,105 $ 3,591,816 $ 1,395,580 $ 2,945,170
*Shares issued and repurchased:
Number of shares sold 139,198 303,234 119,303 265,844
Number of shares issued for
reinvestment of distributions 2,331 2,466 2,558 1,116
Number of shares repurchased (1,871) (10,557) (484) (13,256)
Net increase 139,658 295,143 121,377 253,704
**Distributions to shareholders:
Income dividends per share $ .2343 $ .0465 $ .3184 $ .0498
Capital gains distribution per share $ .0357 $ .0635 $ .0016 $ .0012
</TABLE>
See accompanying Notes to Financial Statements.
NOTES TO FINANCIAL
STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
The following is a summary of significant accounting
policies consistently followed by the Fund in the preparation of its
financial statements.
A. Security Valuation - Corporate stocks, bonds and options traded on a
national securities exchange or national market are valued at the latest
sales price thereof, or if no sale was reported on that date, the mean
between the closing bid and asked price is used.
Securities which are traded over-the-counter are priced at the mean
between the latest bid and asked price. Securities not currently traded
are valued at fair value as determined by the Board of Directors.
B. Federal and State Taxes - The Fund complied with the requirements of
the Internal Revenue Code applicable to regulated investment companies
and therefore, no provision for federal or state tax is required.
C. Expense Limitation - Jones & Babson, Inc., the underwriter and
distributor of the Fund, has voluntarily agreed to pay certain expenses
of the Fund so that the total annual operating expenses of a portfolio
will not exceed 1.08% of its average daily net assets.
D. Other - Security transactions are accounted for on the date the
securities are purchased or sold. Dividend income and distributions to
shareholders are recorded on the ex-dividend date. Realized gains and
losses from investment transactions and unrealized appreciation and
depreciation of investments are reported on the identified cost basis.
2. MANAGEMENT FEES:
Management fees were paid to AFBA Investment Management Company at the
rate of 1% per annum of the average daily net asset values of the Fund
for services which include administration, and all other operating
expenses of the Fund except the cost of acquiring and disposing of
portfolio securities, the taxes, if any, imposed directly on the Fund
and its shares and the cost of qualifying the Funds' shares for sale in
any jurisdiction.
3. INVESTMENT TRANSACTIONS:
Investment transactions for the period from June 3, 1997 (inception) to
March 31, 1998, (excluding maturities of short-term commercial notes and
repurchase agreements) are as follows:
Balanced Fund
Purchases $ 1,615,896
Proceeds from sales 376,992
Equity Fund
Purchases $ 4,248,905
Proceeds from sales 1,301,197
High Yield Fund
Purchases $ 942,052
Proceeds from sales 127,134
USA Global Fund
Purchases $ 2,700,594
Proceeds from sales 587,005
FINANCIAL HIGHLIGHTS
Period from June 3, 1997 (inception)
to March 31, 1998
Condensed data for a share of capital
stock outstanding throughout the period.
<TABLE>
<CAPTION>
BALANCED EQUITY HIGH YIELD USA GLOBAL
FUND FUND FUND FUND
</CAPTION>
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.01 $ 10.01 $ 10.01 $ 10.01
Income from investment operations:
Net investment income 0.25 0.06 0.34 0.07
Net gains on securities
(both realized and unrealized) 1.40 1.81 0.59 1.14
Total from investment operations 1.65 1.87 0.93 1.21
Less distributions:
Dividends from net investment income (0.23) (0.05) (0.32) (0.05)
Distributions from capital gains (0.04) (0.06) - -
Total distributions (0.27) (0.11) (0.32) (0.05)
Net asset value, end of period $ 11.39 $ 11.77 $ 10.62 $ 11.17
Total return 16.64% 18.81% 9.37% 12.16%
Ratios/Supplemental Data
Net assets, end of period
(in millions) $ 2 $ 4 $ 1 $ 3
Ratio of expenses
to average net assets 1.08% 1.04% 1.08% 1.04%
Ratio of net investment income
to average net assets 4.06% 0.94% 5.51% 1.07%
Ratio of expenses
to average net assets before
voluntary expense reimbursement 1.10% - 1.11% -
Ratio of net investment income
to average net assets before
voluntary expense reimbursement 4.04% - 5.48% -
Portfolio turnover rate 57% 76% 31% 42%
Average commission paid per
equity share traded $ 0.0447 $ 0.0500 $ - $ 0.0498
</TABLE>
Performance ratios are annualized, except total return.
See accompanying Notes to Financial Statements.
REPORT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS
The Board of Directors and Shareholders of
AFBA Five Star Fund, Inc.:
We have audited the accompanying statements of assets and liabilities,
including the statements of net assets, of AFBA Five Star Fund, Inc.
(the Fund) (comprised of the Balanced, Equity, High Yield and Global
portfolios) as of March 31, 1998, the related statements of operations
and changes in net assets, and financial highlights for the period from
June 3, 1997 (inception) to March 31, 1998. These financial statements
and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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. Our procedures included
confirmation of investments owned as of March 31, 1998, by
correspondence with the custodian. As to securities relating to
uncompleted transactions, we performed other auditing procedures. 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 portfolios of the Fund at March 31,
1998, the results of their operations, the changes in their net assets,
and the financial highlights for the period from June 3, 1997
(inception) to March 31, 1998, in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
Kansas City, Missouri
May 8, 1998
This report has been prepared for the information of the Shareholders of
the AFBA Five Star Fund, and is not to be construed as an offering of
the shares of the Fund. Shares of the Fund are offered only by the
Prospectus, a copy of which may be obtained from Jones & Babson, Inc.
AFBA FIVE STAR FUND SM
AFBA Five Star Balanced Fund
AFBA Five Star Equity Fund
AFBA Five Star High Yield Fund
AFBA Five Star USA Global Fund
AFBA Investment Management Company
909 N. Washington Street
Alexandria, Virginia 22314
1-800-243-9865
Shareholder Inquiries 1-888-578-2733
JB17E-2 5/98
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