Prospectus
July 31, 1999
AFBA
Five Star
Fund SM
Shares of the Fund have not been approved or disapproved by the Securities
and Exchange Commission nor has the Commission passed upon the adequacy of
this Prospectus. Any representation to the
contrary is a criminal offense.
100% pure no-load
mutual funds
Prospectus July 31, 1999
AFBA Five Star Fund, Inc.
MANAGER:
AFBA INVESTMENT MANAGEMENT COMPANY
INVESTMENT COUNSEL:
KORNITZER CAPITAL MANAGEMENT, INC.
DISTRIBUTED BY:
JONES & BABSON, INC.
Table of Contents Page
Information About the Funds
Investment Objectives and Principal Investment Strategies 2
Principal Risk Factors 3
Past Performance 4
Fees and Expenses 6
Management and Investment Counsel 7
Financial Highlights 8
Information About Investing
How to Purchase Shares 12
How to Redeem Shares 12
Shareholder Services 13
How Share Price is Determined 13
Distributions and Taxes 14
Additional Policies About Transactions 14
Conducting Business with the AFBA Five Star Fund, Inc. 16
Investment Objectives and Principal Investment Strategies
The investment objectives and the manner in which the AFBA Five Star Funds
will pursue their objectives are as follows:
AFBA Five Star Balanced Fund seeks long-term capital growth and high
current income by investing in common stocks, convertible bonds and
convertible preferred stocks and corporate fixed income securities, many of
which can be high-yielding, high risk securities.
AFBA Five Star Equity Fund seeks long-term capital growth by
investing at least 65% of its assets in common stocks of large
capitalization companies most of which are listed on the New York Stock
Exchange.
Market Capitalization: How much a company is considered to be worth.
It equals the number of outstanding shares times the share price. Large
capitalization companies are those
in excess of $1 billion while small cap companies are valued under that
figure.
AFBA Five Star High Yield Fund seeks high current income with long-
term capital growth as a secondary objective by investing at least 65% of
its assets in high yielding, high risk fixed income securities.
AFBA Five Star USA Global Fund seeks long-term capital growth by
investing in common stocks of companies based in the United States that
receive greater than 40% of their revenues or income from global sales and
operations. The international operations of these U.S. based companies will
represent more than 3 countries.
Each Funds principal investment strategies used are described below:
AFBA Five Star Balanced Fund invests in a combination of common
stocks, high yield, high risk corporate bonds and high yield, high risk
convertible securities. The allocation of assets invested in each type of
security is designed to balance yield income and long-term capital
appreciation with reduced volatility of returns. The Fund expects to change
its allocation mix over time based on the counsels view of economic
conditions and underlying security values. Usually, the counsel will invest
at least 25% of the Funds assets in equity securities and at least 25% in
fixed-income securities.
AFBA Five Star Equity Fund invests in companies that meet specific
cash flow criteria and/or are expected to benefit from long-term industry
and technological trends that are likely to positively impact company
performance. The cash flow criteria used by the counsel focuses on
consistency and predictability of cash generation. Separately, long-term
trends are identified with the purpose of investing in companies that
should have favorable operating environments over the next three to five
years. The final stock selection process includes: 1) ongoing fundamental
analysis of industries and the economic cycle; 2) analysis of company-
specific factors such as product cycles, management, etc.; and 3) rigorous
valuation analysis.
AFBA Five Star High Yield Fund uses extensive fundamental research to
identify potential fixed income investment opportunities among higher risk,
higher yielding securities. Emphasis is placed on relative value and good
corporate management. Specifically, the counsel may look at a number of
past, present and estimated factors such as: 1) financial strength of the
issuer; 2) cash flow; 3) management; 4) borrowing requirements; and 5)
responsiveness to changes in interest rates and business conditions.
AFBA Five Star USA Global Fund identifies companies that exhibit
consistent or predictable cash generation and/or are expected to benefit
from long-term industry or technological trends. The counsel then selects
securities based on: 1) fundamental analysis of industries and the economic
cycle; 2) company-specific analysis such as product cycles, management,
etc.; 3) rigorous valuation analysis; and, 4) the issuer must have
substantial international operations.
Temporary Investments. The Funds intend to hold a small percentage of
cash or high quality, short-term debt obligations for reserves to cover
redemptions and unanticipated expenses. There may be times, however, when
the Funds may respond to adverse market, economic, political or other
considerations by investing up to 100% of its assets in bonds or other
defensive investments for temporary investment purposes. Keep in mind that
a temporary defensive strategy still has the potential to lose money.
The objectives and policies that determine how the Funds are managed as
described above can only be changed with the corresponding Funds
shareholders approval.
Principal Risk Factors
Market Risks. Equity securities are subject to market, economic and
business risks that will cause their prices to fluctuate over time. Since
the Funds (except AFBA Five Star High Yield) are normally invested in
equity securities, the value of these Funds will go up and down. As with
any mutual fund, there is a risk that you could lose money by investing in
the Funds.
Different types of investments shift in and out of favor depending on
market and economic conditions. At various times stocks will be more or
less favorable than bonds, and small company stocks will be more or less
favorable than large company stocks. Because of this, the Funds will
perform better or worse than other types of funds depending on what is in
`favor'.
Fixed Income Risks. The yields and principle values of debt securities
will also fluctuate. Generally, values of debt securities change inversely
with interest rates. That is, as interest rates go up, the values of debt
securities tend to go down and vice versa. Furthermore, these fluctuations
tend to increase as a bond's maturity increases such that a longer term
bond will increase or decrease more for a given change in interest rates
than a shorter term bond.
High Yield Risks. AFBA Five Star Balanced and AFBA Five Star High Yield
Funds invest in lower-rated, high yielding bonds (so-called "junk
bonds"). These bonds have a greater degree of default risk than higher-
rated bonds. Lower-rated securities may be issued by companies that are
restructuring, are smaller and less credit worthy or are more highly
indebted than other companies. Lower-rated securities also tend to have
less liquid markets than higher-rated securities. In addition, market
prices of lower-rated bonds tend to react more negatively to adverse
economic or political changes, investor perceptions or individual corporate
developments than higher-rated bonds.
Default risk: The possibility that the issuer will fail to make timely
payments of principal
or interest to the Funds.
International Risks. International investing poses additional risks such
as currency fluctuation and political instability. However, AFBA Five Star
USA Global Fund limits these risks by investing only in U.S. companies
traded in the U.S. and denominated in U.S. dollars. While this eliminates
direct foreign investment, the companies the Fund invests in will
experience these risks in their day-to-day business dealings. These risks
are inherently passed on to the company's shareholders and in turn, to the
Fund's shareholders.
Year 2000 Risks. Computer systems that cannot process and calculate date-
related information as of and after January 1, 2000 are a concern for
financial and business organizations around the world. We are taking steps
to address the Year 2000 issue with respect to the computers we use, and
have asked that our major service providers take comparable steps. Also,
the Fund's Investment Counsel is using its best efforts to evaluate any
potential adverse effects from the Year 2000 issue that may affect
companies whose securities may be purchased by the Funds. However, there is
no assurance that these steps will completely protect the Funds from being
affected.
Past Performance
The tables below and on the following page provide an indication of the
risks of investing in the Funds. The tables on the left side show the total
returns generated by the respective Fund for each calendar year. The tables
on the right show how each Fund's average annual returns for certain
periods compare with those of a relevant, widely recognized benchmark.
Each table reflects all expenses of the respective Fund and assumes that
all dividends and capital gains distributions have been reinvested in new
shares of the Fund. Past performance is not necessarily an indication of
how a Fund will perform in the future.
AFBA Five Star Balanced Fund
Annual Total Return as of December 31 of Each Year
CHART
Year-to-Date Return (through June 30, 1999) = 9.6%
Best Quarter Ended June 30, 1999 = 9.7%
Worst Quarter Ended September 30, 1998 = -11.9%
CHART
Average Annual Total Return as of December 31, 1998
1 Year Since
Inception*
AFBA Five Star Balanced Fund (0.4%) 5.7%
S&P 500 Index 28.6% 26.4%
S&P 500 Index and Merrill Lynch Bond
Fund Weighted Average 17.0% 16.6%
*Inception Date = June 3, 1997
AFBA Five Star Equity Fund
Annual Total Return as of December 31 of Each Year
CHART
Year-to-Date Return (through June 30, 1999) = 10.8%
Best Quarter Ended December 31, 1998 = 16.5%
Worst Quarter Ended September 30, 1998 = -16.4%
CHART
Average Annual Total Return as of December 31, 1998
1 Year Since
Inception*
AFBA Five Star Equity Fund 6.4% 10.3%
S&P 500 Index 28.6% 26.4%
*Inception Date = June 3, 1997
AFBA Five Star High Yield Fund
Annual Total Return as of December 31 of Each Year
CHART
Year-to-Date Return (through June 30, 1999) = 4.1%
Best Quarter Ended September 30, 1997 = 4.4%
Worst Quarter Ended September 30, 1998 = -6.3%
CHART
Average Annual Total Return as of December 31, 1998
1 Year Since
Inception*
AFBA Five Star High Yield Fund (6.0%) 0.2%
Merrill Lynch High Yield Bond Index 3.7% 7.4%
*Inception Date = June 3, 1997
AFBA Five Star USA Global Fund
Annual Total Return as of December 31 of Each Year
CHART
Year-to-Date Return (through June 30, 1999) = 13.6%
Best Quarter Ended December 31, 1998 = 13.9%
Worst Quarter Ended September 30, 1998 = -10.3%
CHART
Average Annual Total Return as of December 31, 1998
1 Year Since
Inception*
AFBA Five Star USA Global Fund 8.1% 7.1%
S&P 500 Index 28.6% 26.4%
*Inception Date = June 3, 1997
Fees & Expenses
The following tables describe the fees and expenses that you may pay if you
buy and hold shares of each AFBA Five Star Fund.
AFBA AFBA AFBA AFBA
Five Star Five Star Five Star Five Star
Balanced Equity High Yield USA Global
Fund Fund Fund Fund
Shareholder Fees
(fees paid directly from
your investment)
Maximum Sales Charge (Load)
Imposed on Purchases None None None None
Maximum Deferred Sales
Charge (Load) None None None None
Maximum Sales
Charge (Load) Imposed
on Reinvested Dividends None None None None
Redemption Fee None* None* None* None*
Exchange Fee None None None None
*A $10 fee is imposed for redemptions by wire.
Annual Fund Operating Expenses
(expenses that are deducted
from Fund assets)
Management Fees 1.00% 1.00% 1.00% 1.00%
Distribution (12b-1) fees None None None None
Other Expenses .33% .23% .46% .30%
Total Annual Fund
Operating Expenses** 1.33% 1.23% 1.46% 1.30%
**The actual expenses paid by the Funds were 1.08% due to a fee
assumption arrangement whereby Jones & Babson, Inc. voluntarily assumes
Fund expenses in excess of that amount. Generally, as Fund assets increase
expense ratios tend to decrease since fixed costs are spread over a larger
asset base.
The expense percentages set forth above are based on each
Fund's operations from April 1, 1998 through the fiscal year ended March
31, 1999.
Fee Examples
The following examples are intended to help you compare the cost of
investing in each AFBA Five Star Fund with the cost of investing in other
mutual funds. The examples assume that you invest $10,000 in the Fund for
the time periods indicated and then redeem all of your shares at the end of
those periods. The examples also assume that your investment has a 5%
return each year and that the Fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
AFBA Five Star
Balanced Fund $135 $421 $729 $1,601
AFBA Five Star
Equity Fund $125 $390 $676 $1,489
AFBA Five Star
High Yield Fund $149 $462 $797 $1,746
AFBA Five Star
USA Global Fund $132 $412 $713 $1,568
Management and Investment Counsel.
AFBA Investment Management Company acts as manager of the Funds and is a
registered investment adviser under the Investment Advisors Act of 1940. It
organized the Funds in 1997, and it acts as the Funds' investment and
business manager. Pursuant to the current Management Agreement for each
portfolio of the AFBA Five Star Fund, the Manager is responsible for
providing or obtaining all management, supervisory and administrative
services required in the normal operation of the Fund. This includes
investment management and supervision; fees of the custodian, independent
auditors and legal counsel; officers, directors and other personnel; rent;
shareholder services; and other items incidental to corporate
administration.
Operating expenses not required in the normal operation of the Funds are
payable by the Funds. These expenses include taxes, interest, governmental
charges and fees, including registration of the Funds with the Securities
and Exchange Commission and the various States, brokerage costs, dues, and
all extraordinary costs including expenses arising out of anticipated or
actual litigation or administrative proceedings.
The Manager employs at its own expense Kornitzer Capital Management, Inc.
to assist in the investment counseling function for the Funds. Kornitzer
Capital Management, Inc. is an independent investment counseling firm
founded in 1989. It serves a broad variety of individual, corporate and
other institutional clients by maintaining an extensive research and
analytical staff. It has an experienced investment analysis and research
staff which eliminates the need for the Manager, Jones & Babson, Inc. or
the Fund to maintain an extensive duplicate staff. The AFBA Five Star Funds
are managed by a team of four individuals. John Kornitzer has over 28 years
of investment experience. He managed money at several Fortune 500 companies
prior to founding Kornitzer Capital Management, Inc. Kent Gasaway is a
Chartered Financial Analyst with 17 years of research and management
experience. He holds a BS in Business Administration from Kansas State
University. Tom Laming is an experienced aerospace engineer and research
analyst. He holds a BS in Physics from the University of Kansas, an MS in
Aeronautics and Astronautics from MIT, and an MBA from Indiana University.
Bob Male is a Chartered Financial Analyst with more than 10 years of
investment research experience. He holds a B.S. in Business Administration
from the University of Kansas and an MBA from Southern Methodist
University.
For its services, each Fund pays the Manager a fee at the annual rate of
one percent (1.00%) of the Fund's average daily net assets. From this
amount the Manager pays Kornitzer Capital Management a fee of one third of
one percent (0.33%) and also pays Jones & Babson a fee of one third of one
percent (0.33%). The Management Agreement limits the liability of the
Manager or its Investment Counsel, as well as their officers, directors and
personnel, to acts or omissions involving willful malfeasance, bad faith,
gross negligence or reckless disregard of their duties.
AFBA Investment Management Company is located at 909 N. Washington Street,
Alexandria, VA 22314. Jones & Babson serves as transfer agent and principal
underwriter for the Funds and is located at BMA Tower, 700 Karnes Blvd.,
Kansas City, MO 64108-3306. Kornitzer Capital Management is located at 7715
Shawnee Mission Parkway, Shawnee Mission, KS 66202.
Financial Highlights
The financial highlights tables are intended to help you understand each
Fund's financial performance since inception. Certain information reflects
financial results for a single share of a Fund. The total returns in the
tables represent the rate that an investor would have earned on an
investment in a Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by Ernst & Young LLP,
whose report, along with the Fund's financial statements, are included in
the annual report, which is available upon request.
AFBA Five Star
Balanced Fund Year Ended June 3, 1997
March 31, (Inception Date)
1999 to March 31, 1998*
Net asset value, beginning of period $11.39 $10.01
Income (loss) from investment operations:
Net investment income 0.42 0.25
Net gains or losses on securities
(both realized and unrealized) (1.17) 1.40
Total from investment operations (0.75) 1.65
Less distributions:
Dividends (from net investment income) (0.40) (0.23)
Distributions (from capital gains) (0.02) (0.04)
Total distributions (0.42) (0.27)
Net asset value, end of period $10.22 $11.39
Total return (6.53%) 16.64%
Ratios/Supplemental Data
Net assets, end of period (in millions) $5 $2
Ratio of expenses to average net assets 1.08% 1.08%
Ratio of net income to average net assets 4.76% 4.06%
Ratio of expenses to average net assets
before voluntary expense reimbursement 1.33% 1.10%
Ratio of net investment income to average
net assets before voluntary expense
reimbursement 4.51% 4.04%
Portfolio turnover rate 53% 57%
*Ratios for this initial period of operations are annualized, except total
return.
The Fund was capitalized on May 16, 1997 with $100,000, representing 10,000
shares at a net asset value of $10.00 per share. Initial public offering
was made on June 3, 1997, at which time net asset value was $10.01 per
share.
AFBA Five Star
Equity Fund
Year Ended June 3, 1997
March 31, (Inception Date)
1999 to March 31, 1998*
Net asset value, beginning of period $11.77 $10.01
Income (loss) from investment operations:
Net investment income (loss) 0.05 0.06
Net gains or losses on securities
(both realized and unrealized) (0.22) 1.81
Total from investment operations (0.17) 1.87
Less distributions:
Dividends (from net investment income) (0.06) (0.05)
Distributions (from capital gains) - (0.06)
Total distributions (0.06) (0.11)
Net asset value, end of period $11.54 $11.77
Total return (1.43%) 18.81%
Ratios/Supplemental Data
Net assets, end of period (in millions) $7 $4
Ratio of expenses to average net assets 1.08% 1.04%
Ratio of net income to average net assets 0.61% 0.94%
Ratio of expenses to average net assets
before voluntary expense reimbursement 1.23% -
Ratio of net investment income to average
net assets before voluntary expense
reimbursement 0.46% -
Portfolio turnover rate 64% 76%
*Ratios for this initial period of operations are annualized, except total
return.
The Fund was capitalized on May 16, 1997 with $100,000, representing 10,000
shares at a net asset value of $10.00 per share.
Initial public offering was made on June 3, 1997, at which time net asset
value was $10.01 per share.
AFBA Five Star
High Yield Fund
Year Ended June 3, 1997
March 31, (Inception Date)
1999 to March 31, 1998*
Net asset value, beginning of period $10.62 $10.01
Income (loss) from investment operations:
Net investment income (loss) 0.60 0.34
Net gains or losses on securities
(both realized and unrealized) (1.49) 0.59
Total from investment operations (0.89) 0.93
Less distributions:
Dividends (from net investment income) (0.58) (0.32)
Distributions (from capital gains) (0.03) -
Total distributions (0.61) (0.32)
Net asset value, end of period $9.12 $10.62
Total return (8.45%) 9.37%
Ratios/Supplemental Data
Net assets, end of period (in millions) $4 $1
Ratio of expenses to average net assets 1.08% 1.08%
Ratio of net income to average net assets 7.47% 5.51%
Ratio of expenses to average net assets before
voluntary expense reimbursement 1.46% 1.11%
Ratio of net investment income to average net
assets before voluntary expense reimbursement 7.09% 5.48%
Portfolio turnover rate 11% 31%
*Ratios for this initial period of operations are annualized, except total
return.
The Fund was capitalized on May 16, 1997 with $100,000, representing 10,000
shares at a net asset value of $10.00 per share.
Initial public offering was made on June 3, 1997, at which time net asset
value was $10.01 per share.
AFBA Five Star
USA Global Fund
Year Ended June 3, 1997
March 31, (Inception Date)
1999 to March 31, 1998*
Net asset value, beginning of period $11.17 $10.01
Income (loss) from investment operations:
Net investment income (loss) 0.05 0.07
Net gains or losses on securities
(both realized and unrealized) (0.11) 1.14
Total from investment operations (0.06) 1.21
Less distributions:
Dividends (from net investment income) (0.05) (0.05)
Distributions (from capital gains) - -
Total distributions (0.05) (0.05)
Net asset value, end of period $11.06 $11.17
Total return (0.52%) 12.16%
Ratios/Supplemental Data
Net assets, end of period (in millions) $6 $3
Ratio of expenses to average net assets 1.08% 1.04%
Ratio of net income to average net assets 0.67% 1.07%
Ratio of expenses to average net assets before
voluntary expense reimbursement 1.30% -
Ratio of net investment income to average net
assets before voluntary expense reimbursement 0.45% -
Portfolio turnover rate 19% 42%
*Ratios for this initial period of operations are annualized, except total
return.
The Fund was capitalized on May 16, 1997 with $100,000, representing 10,000
shares at a net asset value of $10.00 per share.
Initial public offering was made on June 3, 1997, at which time net asset
value was $10.01 per share.
How to Purchase Shares
No Load Funds
There are no sales commissions or Rule 12b-1 distribution fees
How to Buy Shares (see chart on page 16 for details)
By phone, mail or wire
Through Automatic Monthly Investments
Minimum Initial Investment
$500 (unless you use our Automatic Investment Plan)
$100 with an Automatic Monthly Investment Plan
$250 for IRA and Uniform Transfer (Gift) to Minors accounts
Minimum Additional Investment
$100 by mail ($500 for wire purchases)
$100 by telephone (ACH)
$500 by wire
$50 for Automatic Monthly Investments
Minimum Account Size
You must maintain a minimum account value equal to the current minimum
initial investment (usually $500). If your account falls below this amount
due to redemptions (not market action) we may ask you to increase the
account to the minimum. If you do not bring the account up to the minimum
within 60 days after we contact you, we will close the account and send
your money to you.
How to Redeem Shares
You may withdraw from your account at any time in the following amounts:
any amount for redemptions requested by mail, phone or telegraph
$1,000 or more for redemptions wired to your account ($10 fee)
$50 or more for redemptions by a systematic redemption plan (there may be
a fee)
$100 or more for redemptions by automatic monthly exchange to another
fund
$100 or more via ACH; there is no fee but funds may take 4 days to reach
your account
Shareholder Services
The following services are also available to shareholders. Please call 1-
800-243-9865 for more information:
Uniform Transfers (Gifts) to Minors accounts
Accounts for corporations or partnerships
Sub-Accounting Services for Keogh, tax qualified retirement plans, and
others
Prototype Retirement Plans for the self-employed, partnerships and
corporations
Traditional IRA accounts
Roth IRA accounts
Simplified Employee Pensions (SEPs)
How Share Price is Determined
Shares of each Fund are purchased or redeemed at its net asset value per
share next calculated after your purchase order and payment or redemption
order is received by the Fund in good order. In the case of certain
institutions which have made satisfactory payment or redemption
arrangements with the Funds, orders may be processed at the net asset value
per share next effective after receipt by that institution.
The net asset value is calculated by subtracting from the Fund's total
assets any liabilities and then dividing into this amount the total
outstanding shares as of the date of the calculation. The net asset value
per share is computed once daily, Monday through Friday, at 4:00 p.m.
(Eastern Time) on days when the Funds are open for business (generally the
same days that the New York Stock Exchange is open for trading). The Funds
are generally closed on weekends, national holidays and Good Friday.
Each security owned by a Fund that is listed on an Exchange is valued at
its last sale price on that Exchange on the date as of which assets are
valued. Where the security is listed on more than one Exchange, the Fund
will use the price of that Exchange which it generally considers to be the
principal Exchange on which the stock is traded. Lacking sales, the
security is valued at the mean between the last bid and asked prices. An
unlisted security for which over-the-counter market quotations are readily
available is valued at the mean between the last bid and asked prices. When
market quotations are not readily available, any security or other asset is
valued at its fair value as determined in good faith by the respective
Board of Directors.
Distributions and Taxes
The AFBA Five Star Balanced Fund and the AFBA Five Star High Yield Fund pay
distributions from net investment income quarterly, usually in March, June,
September and December. The AFBA Five Star Equity Fund and the AFBA Five
Star USA Global Fund pay distributions from net investment income semi-
annually, usually in June and December. Distributions from net capital
gains realized on the sale of securities will be declared by the AFBA Five
Star Balanced Fund annually on or before December 31 and by the AFBA Five
Star Equity Fund, AFBA Five Star High Yield Fund and AFBA Five Star USA
Global Fund semi-annually, usually in June and December. Your distributions
will be reinvested automatically in additional shares of the Fund, unless
you have elected on your original application, or by written instructions
filed with the Fund, to have them paid in cash. We automatically reinvest
all dividends under $10.00 in additional shares of the Fund. There are no
fees or sales charges on reinvestments.
Tax Considerations. In general, distributions from a Fund are taxable to
you as either ordinary income or capital gains. This is true whether you
reinvest your distributions in additional shares of a Fund or receive them
in cash. Any capital gains a Fund distributes are taxable to you as long-
term capital gains no matter how long you have owned your shares.
When you sell your shares of a Fund, you may have a capital gain or loss.
For tax purposes, an exchange of your Fund shares for shares of a different
AFBA Five Star Fund or a Babson Money Market Fund is the same as a sale.
The individual tax rate on any gain from the sale or exchange of your
shares depends on how long you have held your shares.
Fund distributions and gains from the sale or exchange of your shares will
generally be subject to state and local income tax. Non-U.S. investors may
be subject to U.S. withholding and estate tax. You should consult your tax
advisor about the federal, state, local or foreign tax consequences of your
investment in a Fund.
Backup Withholding. By law, the Funds must withhold 31% of your taxable
distributions and proceeds if you do not provide your correct taxpayer
identification number (TIN) or certify that your TIN is correct, or if the
IRS instructs the Funds to do so.
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
Additional Policies About Transactions
We cannot process transaction requests that are not complete and in good
order as described in this section. We may cancel or change our transaction
policies without notice. To avoid delays, please call us if you have any
questions about these policies.
Purchases. We may reject orders when not accompanied by payment or when in
the best interest of the Funds and their shareholders.
Redemptions. We try to send proceeds as soon as practical. In any event,
we send proceeds by the third business day after we receive a request in
good order. We cannot accept requests that contain special conditions or
effective dates. We may request additional documentation to ensure that a
request is genuine. Under certain circumstances, we may pay you proceeds in
the form of portfolio securities owned by the Fund being redeemed. If you
receive securities instead of cash, you will incur brokerage costs when
converting into cash.
If you request a redemption within 15 days of purchase, we will delay
sending your proceeds until we have collected unconditional payment, which
may take up to 15 days from the date of purchase. For your protection, if
your account address has been changed within the last 30 days, your
redemption request must be in writing and signed by each account owner,
with signature guarantees. The right to redeem shares may be temporarily
suspended in emergency situations only as permitted under federal law.
Signature Guarantees. You can get a signature guarantee from most banks,
credit unions, savings & loans or securities broker/dealers, but not a
notary public. For your protection, we require a guaranteed signature if
you request:
A redemption check sent to a different payee, bank or address than we
have on file.
A redemption check mailed to an address that has been changed within the
last 30 days.
A redemption for $10,000 or more in writing.
A change in account registration or redemption instructions.
Corporations, Trusts and Other Entities. Additional documentation is
normally required for corporations, fiduciaries and others who hold shares
in a representative or nominee capacity. We cannot process your request
until we have all documents in the form required. Please call us first to
avoid delays.
Exchanges to Another Fund. You must meet the minimum investment
requirement of the AFBA Five Star Fund you are exchanging into. The names
and registrations on the two accounts must be identical. Your shares must
have been held in an open account for 15 days or more and we must have
received good payment before we will exchange shares. You should review the
prospectus of the fund being purchased. Call us for a free copy.
Telephone Services. During periods of increased market activity, you may
have difficulty reaching us by telephone. If this happens, contact us by
mail or telegraph. We may refuse a telephone request, including a telephone
or telegraph redemption request. We will use reasonable procedures to
confirm that telephone instructions are genuine. If such procedures are
followed and we reasonably believe the instructions are genuine, the Funds
are not liable for losses due to unauthorized or fraudulent instructions.
At our option, we may limit the frequency or the amount of telephone
redemption requests. Neither the Funds nor Jones & Babson, Inc. assumes
responsibility for the authenticity of telephone redemption requests.
Conducting Business with the AFBA Five Star Fund
BY PHONE
1-888-578-2733
You must authorize each type of telephone transaction on your account
application or the appropriate form, available from us. All account owners
must sign. When you call, we may request personal identification and tape
record the call.
How to Open an Account
If you already have an account with us and you have authorized telephone
exchanges, you may call to open an account in another AFBA Five Star Fund
by exchange ($500 minimum). The names and registrations on the accounts
must be identical.
How to Add to an Account
You may make investments ($100 minimum) by telephone. After we have
received your telephone call, we will deduct from your checking account the
cost of the shares.
Availability of this service is subject to approval by the Funds and
participating banks.
How to Sell Shares
Not applicable.
How to Exchange Shares
You may exchange shares ($1,000 minimum or the initial minimum fund
requirement) for shares in another AFBA Five Star Fund. The shares being
exchanged must have been held in open account for 15 days or more.
BY MAIL
Initial Purchases
and all Redemptions:
AFBA Five Star Fund, Inc.
P.O. Box 419757
Kansas City, MO 64141-6757
Subsequent Purchases:
AFBA Five Star Fund, Inc.
P.O. Box 419779
Kansas City, MO 64141-6779
How to Open an Account
Complete and sign the application which accompanies this Prospectus. Your
initial investment must meet the minimum amount. Make your check payable to
UMB Bank, c/f AFBA Five Star Fund, Inc.
How to Add to an Account
Make your check ($100 minimum) payable to UMB Bank, n.a. c/f AFBA Five Star
Fund, Inc. and mail it to us. Always identify your account number or
include the detachable reminder stub (from your confirmation statement).
How to Sell Shares
In a letter, include the genuine signature of each registered owner
(exactly as registered), the name of each account owner, the account number
and the number of shares or the dollar amount to be redeemed. We will send
funds only to the address of record.
How to Exchange Shares
In a letter, include the genuine signature of each registered owner, the
account number, the number of shares or dollar amount to be exchanged
($1,000 minimum) and the Babson Money Market
or AFBA Five Star Fund, Inc. Fund into which the amount is being
transferred.
BY WIRE
UMB Bank, n.a.,
Kansas City, Missouri, ABA #101000695
For AFBA _________________ Fund
AC=9870871061
OBI = (your account number and
account name)
How to Open an Account
Call us first to get an account number. We will require information such as
your Social Security or Taxpayer Identification Number, the amount being
wired ($500 minimum), and the name and telephone number of the wiring bank.
Then tell your bank to wire the amount. You must send us a completed
application as soon as possible or payment of your redemption proceeds will
be delayed.
How to Add to an Account
Wire share purchases ($500 minimum) should include the names of each
account owner, your account number and the AFBA Five Star Fund in which you
are purchasing shares. You should notify us by telephone that you have sent
a wire purchase order to UMB Bank, n.a.
How to Sell Shares
Redemption proceeds ($1,000 minimum) may be wired to your pre-identified
bank account. A $10 fee is deducted. If we receive your written request
before 4:00 P.M. (Eastern Time) we will normally wire funds the following
business day. If we receive your written request later in the day, we will
normally wire funds on the second business day. Contact your bank about the
time of receipt and availability.
How to Exchange Shares
Not applicable.
THROUGH AUTOMATIC TRANSACTION PLANS
You must authorize each type of automatic transaction on your account
application or complete an authorization form, available from us upon
request. All registered owners must sign.
How to Open an Account
Not applicable.
How to Add to an Account
Automatic Monthly Investment:
You may authorize automatic monthly investments in a constant dollar amount
($50 minimum) from your checking account. We will draft your checking
account on the same day each month in the amount you authorize.
How to Sell Shares
Systematic Redemption Plan:
You may specify a dollar amount ($50 minimum) to be withdrawn monthly or
quarterly or have your shares redeemed at a rate calculated to exhaust the
account at the end of a specified period. A fee of $1.50 or less may be
charged for each withdrawal. You must own shares in an open account valued
at $10,000 when you first authorize the systematic redemption plan. You may
cancel or change your plan or redeem all your shares at any time. We will
continue withdrawals until your shares are gone or until the Fund or you
cancel the plan.
How Exchange Shares
Monthly Exchanges:
You may authorize monthly exchanges from your account ($100 minimum) to
another AFBA Five Star Fund or a Babson Money Market Fund. Exchanges will
be continued until all shares have been exchanged or until you terminate
the service.
AFBA Five Star Fund
AFBA Five Star Balanced Fund
AFBA Five Star Equity Fund
AFBA Five Star High Yield Fund
AFBA Five Star USA Global Fund
Additional Information
The Statement of Additional Information (SAI) contains additional
information about the Funds and is incorporated by reference into this
Prospectus. The Fund's annual and semi-annual reports to shareholders
contain additional information about the Fund's investments. In the Fund's
annual report, you will find a discussion of the market conditions and
investment strategies that significantly affected the Fund's performance
during its last fiscal year.
You may obtain a free copy of these documents by calling, writing or e-
mailing the Fund as shown below. You also may call the toll free number
given below to request other information about the Fund and to make
shareholder inquiries.
You may review and copy the SAI and other information about the Funds by
visiting the Securities and Exchange Commission's Public Reference Room in
Washington, DC (1-800-SEC-0330) or by visiting the Commission's Internet
site at http://www.sec.gov. Copies of this information also may be
obtained, upon payment of a duplicating fee, by writing to the Public
Reference Section of the Commission, Washington, DC 20549-6009.
AFBA
Five Star
Fund SM
AFBA Investment Management Company
909 N. Washington Street
Alexandria, Virginia 22314
1-800-243-9865
www.afba.com
Shareholder Inquiries 1-888-578-2733
JB17D (7/99) 811-8035
PART B
AFBA FIVE STAR FUND, INC.
Consisting of:
AFBA FIVE STAR BALANCED FUND
AFBA FIVE STAR EQUITY FUND
AFBA FIVE STAR HIGH YIELD FUND
AFBA FIVE STAR USA GLOBAL FUND
STATEMENT OF ADDITIONAL INFORMATION
July 31, 1999
This Statement is not a Prospectus but should be
read in conjunction with the current Prospectus
of the Funds' dated July 31, 1999. To obtain the
Prospectus or any Annual or Semi-Annual Report to
shareholders, please call the Fund toll-free at
1-888-578 - 2733.
TABLE OF CONTENTS Page
Introduction 2
Information About the Funds' Investments 2
Objectives and Principal Investment Strategies 2
Risk Factors 4
Fundamental Investment Policies and Restrictions 6
Non-Fundamental Investment Policies and Restrictions 7
Fund Transactions 7
Performance Measures 8
Total Return 9
Performance Comparisons 9
Purchasing and Selling Shares 10
Purchases 10
Sales (Redemptions) 11
Signature Guarantees 11
How Share Price Is Determined 11
Additional Purchase and Redemption Policies 12
Management of the Company and Fund 12
Directors and Officers 12
Compensation 14
Manager and Investment Counsel 14
Custodian 14
Independent Auditors 15
Underwriter, Distributor and Transfer Agent 15
Distributions and Taxes 15
Financial Statements 16
General Information and History 16
Appendix-Credit Ratings 17
INTRODUCTION
AFBA Five Star Balanced Fund, AFBA Five Star Equity Fund, AFBA Five
Star High Yield Fund, AFBA Five Star Small Cap Fund and AFBA Five Star
USA Global Fund (hereafter, the "Funds") are each an open-end
diversified management investment company under the Investment Company
Act of 1940, as amended (the "1940 Act"). This classification means
that the assets of the Funds are invested in a diversified portfolio of
securities and the Funds operate as mutual funds, allowing shareholders
to buy and sell shares at any time (as described in the Prospectus).
This Statement of Additional Information supplements the information
contained in the Prospectus of the Funds.
INFORMATION ABOUT THE FUNDS' INVESTMENTS
Objectives and Principle Investment Strategies. Each Fund's objectives
and policies as described in this section will not be changed without
approval of a majority of the Fund's outstanding shares.
AFBA Five Star Balanced Fund - seeks both long-term capital growth and
high current income. Long-term capital growth is intended to be
achieved primarily by the Fund's investment in common stocks and
secondarily by the Fund's investment in convertible bonds and
convertible preferred stocks. High current income is intended to be
achieved by the Fund's investment in corporate bonds, government bonds,
mortgage-backed securities, convertible bonds, preferred stocks and
convertible preferred stocks.
It is expected that the majority of common stocks purchased by the Fund
will be large capitalization companies with most, if not all, listed on
the New York Stock Exchange. Large capitalization stocks are
considered to be those with capitalization in excess of $1 billion. It
is not the manager's intention to make wide use of Nasdaq-traded,
smaller capitalization common stocks (capitalization of less than $1
billion). The Fund may invest up to 75% of its assets in corporate
bonds, convertible bonds, preferred stocks and convertible preferred
stocks. The manager expects that generally these securities may be
rated below investment grade (BBB) or its equivalent by the major
rating agencies.
Securities rated below Baa by Moody's or BBB by Standard & Poor's are
commonly known as junk bonds and are considered to be high risk.
Yields on such bonds will fluctuate over time, and achievement of the
Fund's investment objective may be more dependent on the Fund's own
credit analysis than is the case for higher rated bonds. Up to 20% of
the Fund's assets may be invested in debt securities which are rated
less than B or are unrated. The Fund will not invest in securities
that, at the time of initial investment, are rated less than B by
Moody's or Standard & Poor's. Securities that are subsequently
downgraded in quality below B may continue to be held by the Fund, and
will be sold only at the Fund adviser's discretion. In addition, the
credit quality of unrated securities purchased by the Fund must be, in
the opinion of the Fund's adviser, at least equivalent to a B rating by
Moody's or Standard & Poor's. Securities rated less than Baa by
Moody's or BBB by Standard & Poor's are classified as non-investment
grade securities. Such securities carry a high degree of risk and are
considered speculative by the major credit rating agencies. (See "Risk
Factors Applicable to High Yielding Debt Securities.")
AFBA Five Star Equity Fund - seeks long-term capital growth by
investing primarily in common stocks. Realization of dividend income
is a secondary consideration. Buffalo Equity Fund will normally invest
in a broad array of common stocks, in terms of companies and
industries. It is expected that the majority of common stocks purchased
in the Fund will be large capitalization companies with most, if not
all, listed on the New York Stock Exchange.
AFBA Five Star High Yield Fund - primarily seeks a high level of
current income and secondarily, capital growth. The Fund invests
primarily in a diversified portfolio of high-yielding fixed income
securities. High current income is intended to be achieved by the
Fund's investment in fixed income securities, without restriction, such
as corporate bonds, government bonds, convertible bonds, preferred
stocks and convertible preferred stocks. The Fund may not invest in
foreign government bonds. Capital growth is intended to be achieved by
the appreciation of fixed income and equity investments held in the
Fund.
The Fund may invest up to 100% of its assets in fixed income
securities, including without limitation, corporate bonds, convertible
bonds, preferred stocks and convertible preferred stocks. These
securities may be rated below investment grade by the major rating
agencies or, if unrated, are in the opinion of the manager of similar
quality. Securities rated Baa and below by Moody's or BBB and below by
Standard & Poor's are commonly known as "junk bonds" and are considered
to be high risk (see "Risk Factors Applicable to High Yielding Debt
Securities"). Yields on such bonds will fluctuate over time, and
achievement of the Fund's investment objective may be more dependant on
the Fund's own credit analysis than is the case for higher rated bonds.
Up to 20% of the Fund's assets may be invested in debt securities which
are rated less than B at the time of purchase or if unrated are in the
opinion of the manager of similar quality. Securities rated B or
higher at the time of purchase, which are subsequently downgraded, will
not be subject to this limitation. The lowest rating that may be held
in the Fund is D, or that of defaulted securities. The Fund will not
purchase obligations that are in default, but may hold in the portfolio
securities that go into default subsequent to acquisition by the Fund.
The proportion of the Fund invested in each type of security is
expected to change over time in accordance with the investment
manager's interpretation of economic conditions and underlying security
values. However, it is expected that a minimum of 65% of the Fund's
total assets will always be invested in fixed income securities and
that a maximum of 10% of its total assets will be invested in equity
securities. The Fund's flexible investment policy allows it to invest
in securities with varying maturities; however, it is anticipated that
the average maturity of securities acquired by the Fund will not exceed
15 years. The average maturity of the Fund will be generally ten years
or less.
Sometimes the manager may believe that a full or partial temporary
defensive position is desirable, due to present or anticipated market
or economic conditions. To achieve a defensive posture, the manager
may take any one or more of the following steps with respect to assets
in the Fund's portfolio: (1) shortening the average maturity of the
Fund's debt portfolio; (2) holding cash or cash equivalents; and (3)
emphasizing high-grade debt securities. Use of a defensive posture by
the Fund's manager may involve a reduction in the yield on the Fund's
portfolio
AFBA Five Star USA Global Fund - seeks capital growth by investing in
common stocks of companies based in the United States that receive
greater than 40% of their revenues or income from international
operations; measured as of the preceding four completed quarters of
business or the respective company's most recently completed fiscal
year. The Fund will invest in common stocks considered by the manager
to have above average potential for appreciation; income is a secondary
consideration. Under normal circumstances, the Fund will invest in a
majority of its assets in common stocks listed on the New York Stock
Exchange.
Cash Management. For purposes including, but not limited to, meeting
redemptions and unanticipated expenses, the Funds may invest a portion
of their assets in cash or high-quality, short term debt obligations
readily changeable into cash. In addition, the Funds may invest up to
100% of their respective assets in such securities for temporary,
emergency purposes. Such high quality, short-term obligations
include: money market securities, commercial paper, bank certificates
of deposit, and repurchase agreements collateralized by government
securities. Investments in commercial paper are restricted to
companies in the top two short-term rating categories by Moody's
Investment Service, Inc. (Moody's) and Standard & Poor's Corporation.
Repurchase Agreements. The Funds may invest in issues of the United
States Treasury or a United States government agency subject to
repurchase agreements. A repurchase agreement involves the sale of
securities to the Fund with the concurrent agreement by the seller to
repurchase the securities at the Fund's cost plus interest at an agreed
rate upon demand or within a specified time, thereby determining the
yield during the Fund's period of ownership. The result is a fixed rate
of return insulated from market fluctuations during such period. Under
the 1940 Act, repurchase agreements are considered loans by the
respective Fund.
The Funds will enter into repurchase agreements only with United States
banks having assets in excess of $1 billion which are members of the
Federal Deposit Insurance Corporation, and with certain securities
dealers who meet the qualifications set from time to time by the Board
of Directors of the Company. The term to maturity of a repurchase
agreement normally will be no longer than a few days. Repurchase
agreements maturing in more than seven days and other illiquid
securities will not exceed 15% of the net assets of the Fund.
Covered Call Options. Each Fund is authorized to write (i.e. sell)
covered call options on the securities in which it may invest and to
enter into closing purchase transactions with respect to certain of
such options. A covered call option is an option where the Fund in
return for a premium gives another party a right to buy specified
securities owned by the Fund at a specified future date and price set
at the time of the contract. (See "Risk Factors Applicable to Covered
Call Options.") Covered call options are intended to serve as a
partial hedge against any declining price of the underlying securities.
Money Market Securities. Investments by the Funds in money market
securities shall include government securities, commercial paper, bank
certificates of deposit and repurchase agreements collateralized by
government securities. Investment in commercial paper is restricted to
companies in the top two rating categories by Moody's and Standard &
Poor's.
Asset-Backed Securities. The AFBA Five Star High Yield Fund may invest
in asset-backed securities. Asset-backed securities are collateralized
by short maturity loans such as automobile receivables, credit card
receivables, other types of receivables or assets. Credit support for
asset-backed securities may be based on the underlying assets and/or
provided through credit enhancements by a third party. Credit
enhancement techniques include letters of credit, insurance bonds,
limited guarantees (which are generally provided by the issuer),
senior-subordinated structures and over-collateralization.
ADRs. AFBA Five Star Equity Fund may gain international exposure
through investing in American Depository Receipts (ADRs). ADRs, which
are issued by domestic banks, are publicly traded in the United States
and represent ownership in underlying foreign securities. The Fund
does not intend to invest directly in foreign securities or foreign
currencies. (See "Risk Factors Applicable to ADRs.")
The Funds' investments are selected by Kornitzer Capital Management,
Inc.
RISK FACTORS
Risk Factors Applicable to High Yielding Securities. AFBA Five Star
Balanced Fund and AFBA Five Star High Yield Fund invest in high-
yielding, high-risk debt securities (so-called "junk bonds"). These
lower rated bonds involve a higher degree of credit risk, the risk that
the issuer will not make interest or principal payments when due. In
the event of an unanticipated default, a Fund would experience a
reduction in its income, and could expect a decline in the market value
of the securities so affected. More careful analysis of the financial
condition of each issuer of lower grade securities is therefore
necessary. During an economic downturn or substantial period of rising
interest rates, highly leveraged issuers may experience financial
stress which would adversely affect their ability to service their
principal and interest payment obligations, to meet projected business
goals and to obtain additional financing.
The market prices of lower grade securities are generally less
sensitive to interest rate changes than higher rated investments, but
more sensitive to adverse economic or political changes or, in the case
of corporate issuers, individual corporate developments. Periods of
economic or political uncertainty and change can be expected to result
in volatility of prices of these securities. Since the last major
economic recession, there has been a substantial increase in the use of
high-yield debt securities to fund highly leveraged corporate
acquisitions and restructurings, so past experience with high-yield
securities in a prolonged economic downturn may not provide an accurate
indication of future performance during such periods. Lower rated
securities also may have less liquid markets than higher rated
securities, and their liquidity as well as their value may be adversely
affected by adverse economic conditions. Adverse publicity and
investor perceptions, as well as new or proposed laws, may also have a
negative impact on the market for high- yield/high-risk bonds.
Credit quality of lower-rated securities can change suddenly and
unexpectedly and even recently issued credit ratings may not fully
reflect the actual risks posed by a particular high-yield/high-risk
security. For these reasons, it is the Funds' policy not to rely
primarily on ratings issued by established credit rating agencies, but
to utilize such ratings in conjunction with the investment adviser's
own independent and ongoing review of credit quality. As a mutual fund
investing in fixed income securities, each of the Funds is subject
primarily to interest rate, income and credit risk. Interest rate risk
is the potential for a decline in bond prices due to rising interest
rates. In general, bond prices vary inversely with interest rates.
When interest rates rise, bond prices generally fall. Conversely, when
interest rates fall, bond prices generally rise. The change in price
depends on several factors, including the bond's maturity date. In
general, bonds with longer maturities are more sensitive to interest
rates than bonds with shorter maturities.
The Funds are also subject to income risk, which is the potential for a
decline in the respective Fund's income due to falling market interest
rates. In addition to interest rate and income risks, each Fund is
subject to credit risk as defined above. The credit risk of a Fund
depends on the quality of its investments. Reflecting their higher
risks, lower-quality bonds generally offer higher yields (all other
factors being equal).
Risk Factors Applicable to Small Capitalization Securities.
Investments in common stocks in general are subject to market, economic
and business risks that will cause their price to fluctuate over time.
Investment in smaller company securities may involve greater price
volatility than securities of larger, more established companies. AFBA
Five Star Equity Fund and AFBA Five Star Balanced Fund may occasionally
invest in equity securities of such smaller companies, therefore
investments in these Funds may be more suitable for long-term investors
who can bear the risk of these fluctuations.
Risk Factors Applicable to ADRs. Up to 25% of AFBA Five Star Equity
Funds total assets may be invested in ADRs. Most ADRs are traded on a
U.S. stock exchange and can be sponsored or unsponsored. Issuers of
unsponsored ADRs are not contractually obligated to disclose material
information in the U.S. and, therefore, there may not be a correlation
between such information and the market value of the unsponsored ADR.
ADRs do not involve the same direct currency and liquidity risks as
securities denominated in foreign currency. However, their value will
generally be affected by currency fluctuations that alter the value of
the security underlying the ADRs with respect to the U.S. dollar.
Risk Factors Applicable to Covered Call Options. Each of the AFBA Five
Star Funds may engage in covered call option transactions as described
herein. Up to 25% of a Fund's total assets may be subject to covered
call options. By writing covered call options, the Fund gives up the
opportunity, while the option is in effect, to profit from any price
increase in the underlying security above the option exercise price.
In addition, a Fund's ability to sell the underlying security will be
limited while the option is in effect unless the Fund effects a closing
purchase transaction. A closing purchase transaction cancels out a
Fund's position as the writer of an option by means of an offsetting
purchase of an identical option prior to the expiration of the option
it has written. Upon the termination of a Fund's obligation under a
covered call option other than through exercise of the option, the Fund
will realize a short-term capital gain or loss. Any gain realized by a
Fund from the exercise of an option will be short- or long-term
depending on the period for which the stock was held. The writing of
covered call options creates a straddle that is potentially subject to
the straddle rules, which may override some of the foregoing rules and
result in a deferral of some losses for tax purposes.
Risk Factors Applicable to Repurchase Agreements. The Funds may enter
into repurchase agreements. The use of repurchase agreements involves
certain risks. For example, if the seller of the agreement defaults on
its obligation to repurchase the underlying securities at a time when
the value of these securities has declined, a Fund may incur a loss
when the securities are sold. If the seller of the agreement becomes
insolvent and subject to liquidation or reorganization under the
Bankruptcy Code or other laws, disposition of the underlying securities
may be delayed pending court proceedings. Finally, it is possible that
a Fund may not be able to perfect its interest in the underlying
securities. While the Fund management acknowledges these risks, it is
expected that they can be controlled through stringent security
selection criteria and careful monitoring procedures.
Fundamental Investment Policies and Restrictions. The following
policies have been adopted by the Fund and are fundamental. These
policies cannot be changed without the approval of a "majority of the
outstanding voting securities" of the respective Fund. Under the 1940
Act, a "majority of the outstanding voting securities" of a Fund
means the vote of: (i) more than 50% of the outstanding voting
securities of the Fund; or (ii) 67% or more of the voting securities of
the Fund present at a meeting, if the holders of more than 50% of the
outstanding voting securities are present or represented by proxy,
whichever is less. In cases where the current legal or regulatory
limitations are explained, such explanations are not part of the
fundamental restriction and may be modified without shareholder
approval to reflect changes in the legal and regulatory requirements.
Each portfolio within the AFBA Five Star Fund, Inc. will not:
(1) purchase the securities of any one issuer, except the United States
government, if immediately after and as a result of such purchase
(a) the value of the holding of the Fund in the securities of such
issuer exceeds 5% of the value of the Funds' total assets, or (b)
the Fund owns more than 10% of the outstanding voting securities, or
any other class of securities, of such issuer;
(2) engage in the purchase or sale of real estate (unless acquired as a
result of ownership of securities or other instruments and provided
that this restriction does not prevent the Fund from investing in
issuers which invest, deal or otherwise engage in transactions in
real estate or interests therein, or investing in securities that
are secured by real estate or interests therein), commodities
(unless acquired as a result of ownership of securities or other
instruments and provided that this restriction does not prevent the
Fund from engaging in transactions in securities secured by physical
commodities) or futures contracts;
(3) underwrite the securities of other issuers (except that the Fund may
engage in transactions involving the acquisition, disposition or
resale of its portfolio securities, under circumstances where it may
be considered to be an underwriter under the Securities Act of
1933);
(4) make loans to any of its officers, directors or employees, or to its
manager, general distributor or officers or directors thereof;
(5) make any loan (the purchase of a security subject to a repurchase
agreement or the purchase of a portion of and issue of publicly
distributed debt securities is not considered the making of a loan);
(6) invest in companies for the purpose of exercising control of
management;
(7) purchase securities on margin, or sell securities short, except that
the Fund may write covered call options;
(8) purchase shares of other investment companies except in the open
market at ordinary broker's commission or pursuant to a plan of
merger or consolidation;
(9) invest in the aggregate more than 5% of the value of its gross
assets in the securities of issuers (other than federal, state,
territorial, or local governments, or corporations, or authorities
established thereby), which, including predecessors have not had at
least three years' continuous operations;
(10) except for transactions in its shares or other securities through
brokerage practices which are considered normal and generally
accepted under circumstances existing at the time, enter into
dealings with its officers or directors, its manager or underwriter,
or their officers or directors, or any organization in which such
persons have a financial interest;
(11) borrow or pledge its assets under normal circumstances, except up
to 10% of its total assets (computed at the lower of fair market
value or cost) temporarily for emergency or extraordinary purposes,
and not for the purpose of leveraging its investments, and provided
further that any borrowing in excess of the 5% of the total assets
of the Fund shall have asset coverage of at least 3 to 1;
(12) make itself or its assets liable for the indebtedness of others;
(13) invest in securities which are assessable or involve unlimited
liability; or
(14) purchase any securities which would cause 25% or more of the
assets of the Fund at the time of purchase to be invested in any one
industry. In applying this restriction, it is a matter of non-
fundamental policy that investment in certain categories of
companies will not be considered to be investments in a particular
industry. For example: (i) financial service companies will be
classified according to the end users of their services, for
example, automobile finance, bank finance and diversified finance
will each be considered a separate industry; (ii) technology
companies will be divided according to their products and services,
for example, hardware, software, information services and
outsourcing, or telecommunications will each be a separate industry;
(iii) asset-backed securities will be classified according to the
underlying assets securing such securities; and (iv) utility
companies will be divided according to their services, for example,
gas, gas transmission, electric and telephone will each be
considered a separate industry.
Non-Fundamental Investment Policies and Restrictions. In addition to
the fundamental policies and investment restrictions described above,
and the various general investment policies described in the
Prospectus, the Fund will be subject to the following investment
restrictions, which are considered non-fundamental and may be changed
by the Board of Trustees without shareholder approval.
Other Investment Companies. The AFBA Five Star Fund is permitted to
invest in other investment companies, including open-end, closed-end or
unregistered investment companies, either within the percentage limits
set forth in the 1940 Act, any rule or order thereunder, or SEC staff
interpretation thereof, or without regard to percentage limits in
connection with a merger, reorganization, consolidation or other
similar transaction. However, the Fund may not operate as a fund of
funds which invests primarily in the shares of other investment
companies as permitted by Section 12(d)(1)(F) or (G) of the 1940 Act,
if its own shares are utilized as investments by such a fund of funds.
Under current legal and regulatory requirements, the Fund may invest up
to 5% of its total assets in the securities of any one investment
company, but may not own more than 3% of any investment company or
invest more than 10% of its total assets in the securities of other
investment companies.
Fund Transactions. Decisions to buy and sell securities for the Funds
are made by AFBA Investment Management Company, Inc. pursuant to
recommendations by Kornitzer Capital Management, Inc. Officers of the
Funds and AFBA Investment Management Company, Inc. are generally
responsible for implementing and supervising these decisions, including
allocation of portfolio brokerage and principal business and the
negotiation of commissions and/or price of the securities. In
instances where securities are purchased on a commission basis, the
Funds will seek competitive and reasonable commission rates based on
circumstances of the trade involved and to the extent that they do not
detract from the quality of the execution. Following is information on
the amount of brokerage commissions by the Funds during the periods
indicated:
Name of Fund Fiscal Year Ended Fiscal Year Ended
March 31, 1998 March 31, 1999
AFBA Five Star Balanced Fund $1,304 $7,330
AFBA Five Star Equity Fund $5,507 $11,456
AFBA Five Star High Yield Fund $124 $313
AFBA Five Star USA Global Fund $3,052 $6,980
The level of brokerage commissions generated by a Fund is directly
related to the number and size of buy and sell transactions into which
the Fund enters. The frequency and size of these transactions are
affected by various factors such as cash flows into and out of the
Fund, the manager's interpretation of the market or economic
environment, etc. The Funds, in purchasing and selling portfolio
securities, will seek the best available combination of execution and
overall price (which shall include the cost of the transaction)
consistent with the circumstances which exist at the time.
The Funds do not intend to solicit competitive bids on each
transaction. Portfolio turnover ratios for time periods indicated are
as follows:
Name of Fund
Fiscal Year Ended Fiscal Year Ended
March 31, 1998* March 31, 1999
AFBA Five Star Balanced Fund 57% 53%
AFBA Five Star Equity Fund 76% 64%
AFBA Five Star High Yield Fund 31% 11%
AFBA Five Star USA Global Fund 42% 19%
* Percentages are annualized.
The Funds believe it is in their best interest to have a stable and
continuous relationship with a diverse group of financially strong and
technically qualified broker-dealers who will provide quality
executions at competitive rates. Broker-dealers meeting these
qualifications also will be selected for their demonstrated loyalty to
the respective Fund, when acting on its behalf, as well as for any
research or other services provided to the respective Fund. The Funds
may execute a substantial portion of the portfolio transactions through
brokerage firms which are members of the New York Stock Exchange or
through other major securities exchanges. When buying securities in
the over-the-counter market, the Funds will select a broker who
maintains a primary market for the security unless it appears that a
better combination of price and execution may be obtained elsewhere.
The Funds will not normally pay a higher commission rate to broker-
dealers providing benefits or services to it than it would pay to
broker-dealers who did not provide such benefits or services. However,
the Funds reserve the right to do so within the principles set out in
Section 28(e) of the Securities Exchange Act of 1934 when it appears
that this would be in the best interests of the shareholders.
No commitment is made to any broker or dealer with regard to placing of
orders for the purchase or sale of Fund portfolio securities, and no
specific formula is used in placing such business. Allocation is
reviewed regularly by both the Boards of Directors of the Funds and
Jones & Babson, Inc.
Since the Funds do not market their shares through intermediary brokers
and dealers, it is not the Funds' practice to allocate brokerage or
principle business on the basis of sales of their shares which may be
made through such firms. However, they may place portfolio orders with
qualified broker-dealers who recommend the Funds to their clients, or
who act as agent in the purchase of the Funds' shares for their
clients.
Research services furnished by broker-dealers may be useful to the
Funds' manager and its investment counsel in serving other clients, as
well as the respective Funds. Conversely, the Funds may benefit from
research services obtained by the manager or its investment counsel
from the placement of portfolio brokerage of other clients.
When the manager in its fiduciary duty believes it to be in the best
interest of the shareholders, the Funds may join with other clients of
the manager and its investment counsel in acquiring or disposing of a
portfolio holding. Securities acquired or proceeds obtained will be
equitably distributed among the Funds and other clients participating
in the transaction. In some instances, this investment procedure may
affect the price paid or received by a Fund or the size of the position
obtained by a Fund.
PERFORMANCE MEASURES
The Funds may advertise "average annual total return" over various
periods of time. Such total return figures show the average percentage
change in value of an investment in the Fund from the beginning date of
the measuring period to the end of the measuring period. These figures
reflect changes in the price of each Fund's shares and assume that any
income dividends and/or capital gains distributions made by the Funds
during the period were reinvested in shares of the Funds. Figures will
be given for recent one-, five- and ten-year periods (if applicable),
and may be given for other periods as well (such as from commencement
of the Fund's operations, or on a year-by-year basis). When considering
"average" total return figures for periods longer than one year, it is
important to note that a Fund's annual total return for any one year in
the period might have been greater or less than the average for the
entire period.
Total Return. The Funds' "average annual total return" figures
described and shown below are computed according to a formula
prescribed by the Securities and Exchange Commission. The formula can
be expressed as follows:
P(1+T)n = ERV
Where: P = a hypothetical initial payment
of $1000
T = average annual total return
n = number of years
ERV = Ending Redeemable Value of a hypothetical $1000 payment
made at the beginning of the 1, 5 or 10 year (or other)
periods at the end of the 1, 5 or 10 year (or other)
periods (or fractional portions thereof).
From time to time, AFBA Five Star Balanced Fund and AFBA Five Star High
Yield Fund may quote its yield in advertisements, shareholder reports
or other communications to shareholders. Yield is calculated according
to the following standardized SEC formula.
Current yield reflects the income per share earned by the Fund's
investments.
Current yield is determined by dividing the net investment income per
share earned during a 30-day base period by the maximum offering price
per share on the last day of the period and annualizing the result.
Expenses accrued for the period include any fees charged to all
shareholders during the base period.
The SEC standardized yield formula is as follows:
Yield = 2[(a-b+1) - 1]
--------------
cd
Where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
that were entitled to receive income distributions
d = the maximum offering price per share on the last day of the
period.
Performance Comparisons. In advertisements or in reports to
shareholders, a Fund may compare its performance to that of other
mutual funds with similar investment objectives and to stock or other
relevant indices. For example, it may compare its performance to
rankings prepared by Lipper Analytical Services, Inc. (Lipper), a
widely recognized independent service which monitors the performance of
mutual funds. The Fund may compare its performance to the Standard &
Poor's 500 Stock Index (S&P 500), an index of unmanaged groups of
common stocks, the Dow Jones Industrial Average, a recognized unmanaged
index of common stocks of 30 industrial companies listed on the NYSE,
the Russell 2000 Index, a small company stock index, or the Consumer
Price Index.
Performance rankings, recommendations, published editorial comments
and listings reported in Money, Barron's, Kiplinger's Personal Finance
Magazine, Financial World, Forbes, U.S. News & World Report, Business
Week, The Wall Street Journal, Investors Business Daily, USA Today,
Fortune and Stanger's may also be cited (if the Fund is listed in any
such publication) or used for comparison, as well as performance
listings and rankings from Morningstar Mutual Funds, Personal Finance,
Income and Safety, The Mutual Fund Letter, No-Load Fund Investor,
United Mutual Fund Selector, No-Load Fund Analyst, No-Load Fund X,
Louis Rukeyser's Wall Street newsletter, Donoghue's Money Letter, CDA
Investment Technologies, Inc., Wiesenberger Investment Companies
Service and Donoghue's Mutual Fund Almanac.
The table below shows the average annual return for each of the Funds
for the specified periods.
AFBA FIVE STAR AFBA FIVE STAR AFBA FIVE STAR AFBA FIVE STAR
BALANCED EQUITY HIGH YIELD USA GLOBAL
FUND FUND FUND FUND
For the year
4/1/98 - 3/31/99 -6.53% -1.43% -8.45% -0.52%
From beginning
of operations to 4.85% 9.04% 0.07% 6.18%
3/31/99*
* The AFBA Five Star Fund inception date is June 3, 1997.
PURCHASING AND SELLING SHARES
Purchases. We will not be responsible for the consequences of delays,
including delays in the banking or Federal Reserve wire systems. We cannot
process transaction requests that are not complete and in good order as
described in the prospectus. If you use the services of any other broker
to purchase or redeem shares of the Fund, that broker may charge you a fee.
Each order accepted will be fully invested in whole and fractional shares,
unless the purchase of a certain number of whole shares is specified, at
the net asset value per share next effective after the order is accepted by
the Fund.
Each investment is confirmed by a year-to-date statement which provides the
details of the immediate transaction, plus all prior transactions in your
account during the current year. This includes the dollar amount invested,
the number of shares purchased or redeemed, the price per share, and the
aggregate shares owned. A transcript of all activity in your account
during the previous year will be furnished each January.
By retaining each annual summary and the last year-to-date statement, you
have a complete detailed history of your account which provides necessary
tax information. A duplicate copy of a past annual statement is available
from Jones & Babson, Inc. at its cost, subject to a minimum charge of $5
per account, per year requested.
Normally, the shares which you purchase are held by the Fund in open
account, thereby relieving you of the responsibility of providing for the
safekeeping of a negotiable share certificate. Should you have a special
need for a certificate, one will be issued on request for all or a portion
of the whole shares in your account. There is no charge for the first
certificate issued. A charge of $3.50 will be made for any replacement
certificates issued. In order to protect the interests of the other
shareholders, share certificates will be sent to those shareholders who
request them only after the Fund has determined that unconditional payment
for the shares represented by the certificate has been received by its
custodian, UMB Bank, n.a.
If an order to purchase shares must be canceled due to non-payment, the
purchaser will be responsible for any loss incurred by the Funds arising
out of such cancellation. To recover any such loss, the Funds reserve the
right to redeem shares owned by any purchaser whose order is canceled, and
such purchaser may be prohibited or restricted in the manner of placing
further orders.
The Funds reserve the right in their sole discretion to withdraw all or any
part of the offering made by the prospectus or to reject purchase orders
when, in the judgment of management, such withdrawal or rejection is in the
best interest of the Funds and their shareholders.
The Funds reserve the right to refuse to accept orders for Fund shares
unless accompanied by payment, except when a responsible person has
indemnified the Funds against losses resulting from the failure of
investors to make payment. In the event that the Funds sustain a loss as
the result of failure by a purchaser to make payment, the Funds'
underwriter, Jones & Babson, Inc., will cover the loss.
Sales (Redemptions). We will not be responsible for the consequences of
delays, including delays in the banking or Federal Reserve wire systems.
We cannot process transaction requests that are not complete and in good
order. We must receive an endorsed share certificate with a signature
guarantee, where a certificate has been issued.
The right of redemption may be suspended, or the date of payment postponed
beyond the normal three-day period by the Board of Directors under the
following conditions authorized by the Investment Company Act of 1940: (1)
for any period (a) during which the New York Stock Exchange is closed,
other than customary weekend and holiday closing, or (b) during which
trading on the New York Stock Exchange is restricted; (2) for any period
during which an emergency exists as a result of which (a) disposal by the
Funds of securities owned by it is not reasonably practical, or (b) it is
not reasonably practical for the Funds to determine the fair value of its
net assets; or (3) for such other periods as the Securities and Exchange
Commission may by order permit for the protection of the Funds'
shareholders.
The Funds have elected to be governed by Rule 18f-1 under the Investment
Company Act of 1940 pursuant to which the Funds are obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the Fund's net
asset value during any 90-day period for any one shareholder. Should
redemptions by any shareholder exceed such limitation, a Fund may redeem
the excess in kind. If shares are redeemed in kind, the redeeming
shareholder may incur brokerage costs in converting the assets to cash.
Signature Guarantees. Signature guarantees normally reduce the possibility
of forgery and are required in connection with each redemption method to
protect shareholders from loss. Signature guarantees are required in
connection with all redemptions of $10,000 or more by mail or changes in
share registration, except as provided in the Prospectus. Signature
guarantees must appear together with the signature(s) of the registered
owner(s) on:
(1) a written request for redemption in excess of $10,000;
(2) a separate instrument of assignment, which should specify the total
number of shares to be redeemed (this "stock power" may be obtained from
the Funds or from most banks or stock brokers); or
(3) all stock certificates tendered for redemption.
(4) Requests for redemptions checks to be sent to a different payee, bank
or address then we have on file.
How Share Price is Determined. The net asset value per share is computed
once daily, Monday through Friday, at 4:00 p.m. (Eastern Time) except:
days when the Funds are not open for business; days on which changes in the
value of portfolio securities will not materially affect the net asset
value; days during which no purchase or redemption order is received by the
Funds; and customary holidays.
The Funds do not compute their net asset value on the following customary
holidays:
New Year's Day January 1
Martin Luther King Jr. Day Third Monday in January
Presidents' Holiday Third Monday in February
Good Friday Friday before Easter
Memorial Day Last Monday in May
Independence Day July 4
Labor Day First Monday in September
Thanksgiving Day Fourth Thursday in November
Christmas Day December 25
Additional Purchase and Redemption Policies. We reserve the right to:
Waive or increase the minimum investment requirements with respect to any
person or class of persons, which include shareholders of the Fund's special
investment programs.
Cancel or change the telephone investment service, the telephone/telegraph
exchange service and the automatic monthly investment plan without prior
notice to you where in the best interest of the Funds and its investors.
Begin charging a fee for the telephone investment service or the automatic
monthly investment plan and to cancel or change these services upon 15 days
written notice to you.
Begin charging a fee for the telephone/telegraph service and to cancel or
change the service upon 60 days written notice to you.
Begin charging a fee for the systematic redemption plan upon 30 days written
notice to you.
Waive signature guarantee requirements in certain instances where it appears
reasonable to do so and will not unduly affect the interests of other
shareholders. We may waive the signature guarantee requirement if you
authorize the telephone/telegraph redemption method at the same time you
submit the initial application to purchase shares.
Require signature guarantees if there appears to be a pattern of redemptions
designed to avoid the signature guarantee requirement, or if we have other
reason to believe that this requirement would be in the best interests of the
Funds and their shareholders.
MANAGEMENT OF THE COMPANY AND FUNDS
Directors and Officers. The Funds are managed by AFBA Investment Management
Company subject to the supervision and control of the Board of Directors of
the Company. The following lists the officers and directors of the Company,
their age, address and principle occupation.
* John A. Johnson (62), President and Director. 909 North Washington Street,
Alexandria, Virginia 22314. President, Chief Executive Officer, Director,
Armed Forces Benefit Services, Inc.; President, Chief Executive Officer,
Director, AFBA Life Insurance Company; President, Chief Executive Officer,
Director, AFBA Investment Management Company; AFBA Administrators, Inc.
* Larry D. Armel (56), President and Director. Director of AFBA Five Star
Fund, Inc.; President and Director, Jones & Babson, Inc., President and
Director (or Trustee) of the nine investment companies within the Babson
Mutual Fund Group; President and Director of the nine investment companies
within the UMB Scout Funds group; President and Director of the five
investment companies within the Buffalo Group of Mutual Funds; President
and Director of Investors Mark Series Fund, Inc.
* John C. Kornitzer (53). 7715 Shawnee Mission Parkway, Shawnee Mission,
Kansas 66202. President, Kornitzer Capital Management, Inc; formerly Vice
President of Investments, Employers Reinsurance Corp.
* Lieutenant General C.C. Blanton (69), USAF (Ret.), Director and Chairman.
909 North Washington Street, Alexandria, Virginia 22314. President, Chief
Executive Officer, Armed Forces Benefit Association; Chairman, Armed Forces
Benefit Services, Inc.; Chairman, AFBA Industrial Bank; Chairman, AFBA Life
Insurance Company; Chairman, AFBA Investment Management Company.
General Monroe W. Hatch, Jr. (65), USAF (Ret.), Director. 8210 Thomas
Ashleigh Lane, Clifton, Virginia, 20124. President, Professional Services,
Consultant to Industry; formerly Executive Director, Air Force Association.
Brigadier General Henry J. Sechler (67), USAF (Ret.), Director. 3190
Fairview Park Drive, Falls Church, Virginia 22030. Vice President, General
Dynamics Corp.
General Louis C. Wagner, Jr. (67), USA (Ret.), Director. 6309 Chaucer
Lane, Alexandria, Virginia 22304. Private Consultant.
P. Bradley Adams (38), Vice President and Treasurer. Vice President and
Chief Financial Officer, AFBA Five Star Fund, Inc.; Vice President and
Treasurer, Jones & Babson, Inc.; Vice President and Treasurer of the nine
investment companies within the Babson Mutual Fund Group; Vice President
and Treasurer of the nine investment companies within the UMB Scout Funds
group; Vice President and Treasurer of the five investment companies within
the Buffalo Group of Mutual Funds; and Principal Financial Officer,
Investors Mark Series Fund, Inc.
W. Guy Cooke (38), Vice President and Chief Compliance Officer. Vice
President and Chief Compliance Officer, AFBA Five Star Fund, Inc.; Chief
Compliance Officer, Jones & Babson, Inc.; Vice President and Chief
Compliance Officer of the nine investment companies within the Babson
Mutual Fund Group; Vice President and Chief Compliance Officer of the nine
investment companies within the UMB Scout Funds group; Vice President and
Chief Compliance Officer of the five investment companies within the
Buffalo Group of Mutual Funds Mr. Cooke joined Jones & Babson in March
1998 and previously was Director of Compliance at American Century
Companies.
Martin A. Cramer (49), Vice President and Secretary. Assistant Vice
President, AFBA Five Star Fund, Inc.; Vice President and Secretary, Jones &
Babson, Inc.; Vice President and Secretary of the nine investment companies
within the Babson Mutual Fund Group; Vice President and Secretary of the
nine investment companies within the UMB Scout Funds group; Vice President
and Secretary of the five investment companies within the Buffalo Group of
Mutual Funds; Secretary and Secretary, Investors Mark Series Fund, Inc.
Dionne D. McNamee (42), Treasurer. 909 North Washington Street, Alexandria,
Virginia 22314. Chief Financial Officer, AFBA Life Insurance Company; AFBA
Investment Management Company. Formerly, Director, Price Waterhouse, LLP;
Senior Technical Manager, American Institute of CPAs.
_______________________________________
* Directors who are interested persons as that term is defined in the
Investment Company Act of 1940, as amended.
Compensation. None of the officers or directors will be remunerated by the
Funds for their normal duties and services. Their compensation and expenses
arising out of normal operations will be paid by the Manager under the
provisions of the Management Agreement.
Messrs. Hatch, Wagner and Sechler have no financial interest in, nor are they
affiliated with AFBA Investment Management Company, Jones & Babson, Inc. or
Kornitzer Capital Management, Inc.
The Audit Committee of the Board of Directors is composed of Messrs. Hatch,
Wagner and Sechler.
The officers and directors as a group own less than 1% of any of the funds.
Manager and Investment Counsel. AFBA Investment Management Company acts as
manager of the Fund and is a registered investment advisor under the
Investment Advisors Act of 1940. It organized the Fund in 1997 and employs at
its own expense Kornitzer Capital Management, Inc. to serve as its investment
counsel and Jones & Babson, Inc. to serve as Underwriter, Distributor and
Transfer Agent..
For its services as manager, the Funds pay AFBA Investment Management Company
a fee at the annual rate of one percent (1%) of average daily net assets.
From these management fees AFBA Investment Management Company pays all the
Funds' expenses except those directly payable by the Funds. For instance,
from these management fees AFBA Investment Management Company pays Kornitzer
Capital Management, Inc. a fee of 33/100 of 1% (.33%) and Jones & Babson,
Inc. a fee of 33/100 of 1% (.33%) of average net daily assets. AFBA
Investment Management, Inc. received the following management fees from the
respective Funds for the time periods indicated:
Name of Fund
Fiscal Year Ended Fiscal Year Ended
March 31, 1998 March 31, 1999
AFBA Five Star Balanced Fund $6,582 $40,019
AFBA Five Star Equity Fund $17,203 $56,947
AFBA Five Star High Yield Fund $5,759 $29,036
AFBA Five Star USA Global Fund $15,266 $43,588
Kornitzer Capital Management, Inc. was founded in 1989. It is a private
investment research and counseling organization serving individual, corporate
and other institutional clients. Kornitzer Capital Management, Inc. also
serves as investment adviser to the Buffalo Group of Mutual Funds. The
following amounts were paid to Kornitzer Capital Management, Inc. for its
services from AFBA Investment Management, Inc.:
Name of Fund
Fiscal Year Ended Fiscal Year Ended
March 31, 1998 March 31, 1999
AFBA Five Star Balanced Fund $2,172 $13,339
AFBA Five Star Equity Fund $5,677 $18,965
AFBA Five Star High Yield Fund $1,900 $ 9,679
AFBA Five Star USA Global Fund $5,038 $14,555
Custodian. The Funds' assets are held for safe-keeping by an independent
custodian, UMB Bank, n.a. This means UMB Bank, n.a., rather than Funds, has
possession of the Funds' cash and securities. UMB Bank, n.a. is not
responsible for the Funds' investment management or administration. But, as
directed by the Funds' officers, it delivers cash to those who have securities
to a Fund in return for such securities, and to those who have purchased
securities from a Fund, it delivers such securities in return for their cash
purchase price. It also collects income directly from issuers of securities
owned by a Fund and holds this for payment to shareholders after deduction of
a Fund's expenses. The custodian is compensated by the manager. There is no
charge to the Funds.
Independent Auditors. The Funds' financial statements are audited by
independent auditors approved by the directors each year, and in years in
which an annual meeting is held the directors may submit their selection of
independent auditors to the shareholders for ratification. Ernst & Young LLP,
One Kansas City Place, 1200 Main Street, Suite 2000, Kansas City, Missouri
64105, is the present auditor for the Funds.
Underwriter, Distributor and Transfer Agent. The manager employs at its own
expense, Jones & Babson, Inc. as the Funds' underwriter, distributor and
transfer agent. The following amounts were paid to Jones & Babson, Inc. for
its services from AFBA Investment Management, Inc.:
Fiscal Year Ended Fiscal Year Ended
Name of Fund March 31, 1998 March 31, 1999
AFBA Five Star Balanced Fund $2,172 $ 3,120
AFBA Five Star Equity Fund $5,677 $10,224
AFBA Five Star High Yield Fund $1,900 $ 0
AFBA Five Star USA Global Fund $5,038 $ 4,071
Jones and Babson, Inc. also sponsors and manages, in association with its
investment counsel, David L. Babson & Co. Inc., nine no-load funds comprising
the Babson Mutual Fund Group.
Jones & Babson, Inc. also sponsors eleven mutual funds which especially seek
to provide services to customers of affiliate banks of UMB Financial
Corporation which are known as the UMB Scout Funds.
Jones & Babson, Inc. also manages and sponsors the Buffalo Group of Mutual
Funds.
DISTRIBUTIONS AND TAXES
Distributions of net investment income. A Fund receives income generally in
the form of dividends and interest on its investments. This income, less
expenses incurred in the operation of a Fund, constitutes a Fund's net
investment income from which dividends may be paid to you. Any distributions
by a Fund from such income will be taxable to you as ordinary income, whether
you take them in cash or in additional shares.
Distributions of capital gains. A Fund may derive capital gains and losses
in connection with sales or other dispositions of its portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be
taxable to you as long-term gain, regardless of how long you have held your
shares in a Fund. Any net capital gains realized by a Fund generally will be
distributed once each year, and may be distributed more frequently, if
necessary, in order to reduce or eliminate excise or income taxes on a Fund.
Information on the tax character of distributions. A Fund will inform you of
the amount of your ordinary income dividends and capital gains distributions
at the time they are paid, and will advise you of their tax status for federal
income tax purposes shortly after the close of each calendar year. If you
have not held Fund shares for a full year, a Fund may designate and distribute
to you, as ordinary income or capital gain, a percentage of income that is not
equal to the actual amount of such income earned during the period of your
investment in a Fund.
Election to be taxed as a regulated investment company. Each Fund intends to
elect to be treated as a regulated investment company under Subchapter M of
the Internal Revenue Code. As a regulated investment company, a Fund
generally pays no income tax on the income and gains it distributes to you.
The Board reserves the right not to maintain the qualification of a Fund as a
regulated investment company if it determines such course of action to be
beneficial to shareholders. In such case, a Fund will be subject to federal,
and possibly state, corporate taxes on its taxable income and gains, and
distributions to you will be taxed as ordinary dividend income to the extent
of a Fund's earnings and profits.
Excise tax distribution requirements. To avoid federal excise taxes, the
Internal Revenue Code requires a Fund to distribute to you by December 31 of
each year, at a minimum, the following amounts: 98% of its taxable ordinary
income earned during the calendar year; 98% of its capital gain net income
earned during the twelve month period ending October 31; and 100% of any
undistributed amounts from the prior year. Each Fund intends to declare and
pay these amounts in December (or in January that are treated by you as
received in December) to avoid these excise taxes, but can give no assurances
that its distributions will be sufficient to eliminate all taxes.
Redemption of Fund shares. Redemptions and exchanges of Fund shares are
taxable transactions for federal and state income tax purposes. If you redeem
your Fund shares, or exchange your Fund shares for shares of a different AFBA
Five Star Fund, the IRS will require that you report a gain or loss on your
redemption or exchange. If you hold your shares as a capital asset, the gain
or loss that you realize will be capital gain or loss and will be long-term or
short-term, generally depending on how long you hold your shares. Any loss
incurred on the redemption or exchange of shares held for six months or less
will be treated as a long-term capital loss to the extent of any long-term
capital gains distributed to you by a Fund on those shares.
All or a portion of any loss that you realize upon the redemption of your Fund
shares will be disallowed to the extent that you buy other shares in the Fund
(through reinvestment of dividends or otherwise) within 30 days before or
after your share redemption. Any loss disallowed under these rules will be
added to your tax basis in the new shares you buy.
U.S. government obligations. Many states grant tax-free status to dividends
paid to you from interest earned on direct obligations of the U.S. government,
subject in some states to minimum investment requirements that must be met by
the Fund. Investments in Government National Mortgage Association or Federal
National Mortgage Association securities, bankers acceptances, commercial
paper and repurchase agreements collateralized by U.S. government securities
do not generally qualify for tax-free treatment. The rules on exclusion of
this income are different for corporations.
Dividends-received deduction for corporations. If you are a corporate
shareholder, you should note that the Funds anticipate that some percentage of
the dividends they pay will qualify for the dividends-received deduction. In
some circumstances, you will be allowed to deduct these qualified dividends,
thereby reducing the tax that you would otherwise be required to pay on these
dividends. The dividends-received deduction will be available only with
respect to dividends designated by a Fund as eligible for such treatment. All
dividends (including the deducted portion) must be included in your
alternative minimum taxable income calculation.
FINANCIAL STATEMENTS
The audited financial statements of the Fund which are contained in the March
31, 1999 Annual Report to Shareholders are incorporated herein by reference.
Unaudited reports to shareholders will be published at least semiannually.
GENERAL INFORMATION AND HISTORY
The AFBA Five Star Fund, Inc. is incorporated in the State of Maryland and
registered as an investment company under the Investment Company Act of 1940.
All shares issued by each portfolio within the Fund are of same class with
like rights and privileges as other shares issued by the same portfolio. Each
full and fractional share, issued and outstanding, has (1) equal voting rights
with respect to matters that affect the Funds, and (2) equal dividend,
distribution and redemption rights to the assets of the Fund. Shares when
issued are fully paid and non-assessable. The Funds may create other series
of stock but will not issue senior securities. Shareholders do not have pre-
emptive or conversion rights.
Non-cumulative voting - Shares of the Fund have non-cumulative voting rights,
which means that the holders of 50% of the shares voting for the election of
directors can elect 100% of the directors, if they choose to do so, and in
such event, the holders of the remaining less than 50% of the shares voting
will not be able to elect any directors.
The Fund will not hold annual meetings except as required by the Investment
Company Act of 1940 and other applicable laws. The Fund is a Maryland
corporation. Under Maryland law, a special meeting of shareholders of the Fund
must be held if the Fund receives the written request for a meeting from the
shareholders entitled to cast at least 25% of all the votes entitled to be cast
at the meeting.
The Fund has undertaken that its Directors will call a meeting of shareholders
if such a meeting is requested in writing by the holders of not less than 10%
of the outstanding shares of the Fund.
FIXED INCOME SECURITIES
DESCRIBED AND RATINGS
Description of Bond Ratings:
Standard & Poor's Corporation (S&P).
AAA Highest Grade. These securities possess the ultimate degree of
protection as to principal and interest. Marketwise, they move with
interest rates, and hence provide the maximum safety on all counts.
AA High Grade. Generally, these bonds differ from AAA issues only in a
small degree. Here too, prices move with the long-term money market.
A Upper-medium Grade. They have considerable investment strength, but
are not entirely free from adverse effects of changes in economic and
trade conditions. Interest and principal are regarded as safe. They
predominately reflect money rates in their market behavior but, to
some extent, also economic conditions.
BBB Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection
parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay principal and
interest for bonds in this category than for bonds in the A
category.
BB, B, CCC, CC Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the
obligations. BB indicates the lowest degree of speculation and CC the
highest degree of speculation. While such bonds will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
Moody's Investors Service, Inc. (Moody's).
Aaa Best Quality. These securities carry the smallest degree of
investment risk and are generally referred to as "gilt-edge."
Interest payments are protected by a large, or by an exceptionally
stable margin, and principal is secure. While the various protective
elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such
issues.
Aa High Quality by All Standards. They are rated lower than the best
bonds because margins of protection may not be as large as in Aaa
securities, fluctuation of protective elements may be of greater
amplitude, or there may be other elements present which make the
long-term risks appear somewhat greater.
A Upper-medium Grade. Factors giving security to principal and
interest are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have predominantly speculative
elements; their future cannot be considered as well assured. Often
the protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good and bad
times over the future. Uncertainty of position characterizes bonds
in this class.
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments
or maintenance of other terms of the contract over any long period of
time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked shortcomings.
Description of Commercial Paper Ratings:
Moody's . . . Moody's commercial paper rating is an opinion of the ability
of an issuer to repay punctually promissory obligations not having an
original maturity in excess of nine months. Moody's has one rating -
prime. Every such prime rating means Moody's believes that the commercial
paper note will be redeemed as agreed. Within this single rating category
are the following classifications:
Prime - 1 Highest Quality
Prime - 2 Higher Quality
Prime - 3 High Quality
The criteria used by Moody's for rating a commercial paper issuer under
this graded system include, but are not limited to the following factors:
(1) evaluation of the management of the issuer;
(2) economic evaluation of the issuer's industry or industries and an
appraisal of speculative type risks which may be inherent in certain
areas;
(3) evaluation of the issuer's products in relation to competition and
customer acceptance;
(4) liquidity;
(5) amount and quality of long-term debt;
(6) trend of earnings over a period of ten years;
(7) financial strength of a parent company and relationships which
exist with the issuer; and
(8) recognition by the management of obligations which may be present
or may arise as a result of public interest questions and
preparations to meet such obligations.
S&P . . .Standard & Poor's commercial paper rating is a current assessment
of the likelihood of timely repayment of debt having an original maturity
of no more than 270 days. Ratings are graded into four categories, ranging
from "A" for the highest quality obligations to "D" for the lowest. The
four categories are as follows:
A Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are
further refined with the designations 1, 2, and 3 to indicate the
relative degree of safety.
A-1 This designation indicates that the degree of safety regarding
timely payment is very strong.
A-2 Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as over-
whelming.
A-3 Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations
carrying the higher designations.
B Issues rated "B" are regarded as having only an adequate capacity
for timely payment. Furthermore, such capacity may be damaged by
changing conditions or short-term adversities.
C This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D This rating indicates that the issuer is either in default or is
expected to be in default upon maturity.
